This document summarizes a study conducted by Marco Becht, Julian Franks, and Hannes Wagner on the corporate governance practices of Standard Life Investments (SLI), a large UK asset manager. The study analyzes SLI's stewardship activities like engagement with portfolio companies, issuing of governance health warnings, and influence of internal analyst recommendations on fund manager decisions. The results show that SLI has significant stewardship engagement, governance health warnings correlate with more active voice and eventual exit, and negative voting by SLI tends to precede increased likelihood of exit from investments.

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“Corporate Governance Through Voice and Exit:
Evidence from Standard Life Investments”
Marco Becht
Solvay Brussels School, Université Libre de Bruxelles, CEPR and ECGI
Julian Franks
London Business School, CEPR and ECGI
Hannes Wagner
Bocconi University
3 October 2017
The research is supported by a grant from the Norwegian Finance Initiative (NFI).
The NFI’s support is gratefully acknowledged.

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The decline of the public corporation
Source: Franks, Mayer and Wagner (2015), Journal of Applied Corporate
Finance

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Kay Review (2012)
• “Asset managers can contribute more to the
performance of British business (and in consequence to
overall returns to their savers) through greater
involvement with the companies in which they invest.”
» Principle 3, pg. 12
• “The price of diversification and liquidity is a loss of
information and control. […] Shareholders provided
with liquidity have reduced incentive to engage with
the companies in which their funds are invested: there
is less need for voice when exit is available.”
» Equity markets & listed companies 2.2, pg. 22

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What is active ownership?
• Engagement with the company
• To bring about change to improve performance
• To make improved recommendations on buy, hold and
sell decisions
• Liaise with other owners to exchange views and to co-
ordinate (s.t. regulatory constraints such as concert
party rules)

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Evidence from Academic Research
“[W]e have little direct knowledge regarding how
institutional investors engage with portfolio companies,
as many of these interactions occur behind the scenes—
unless institutions publicly express their approval or
disapproval of a firm’s activities or management, their
preferences and private engagements with portfolio
firms are not observable.”
Source: McCahery, Sautner and Starks (2016), Journal of Finance

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A Study of SLI an Active Asset Manager
• SLI is an asset manager, not a focus fund (or hedge fund
activist)
» SLI holds 500-700 stocks, Cevian holds 11-16
• SLI has a broader set of responsibilities than many
activist funds
• SLI engagement programme has unique features
» E. g. Governance Health Warnings (GHW)
• SLI is an active manager – opportunity to analyze
liquidity, voice and exit

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SLI equity funds with UK holdings
Statistics are shown at the beginning of that year. Every fund existing during a given calendar quarter is
included in the computation of that quarter’s average returns, even if the fund does not survive past the
end of that quarter. Quarterly buy-and-hold returns are averaged across all funds existing during that
quarter, using each fund’s total assets (TA) at the beginning of that quarter as that fund’s weight. TA-
averaged quarterly returns are compounded to give the quarterly rebalanced annual returns reported.
Year Number of
funds
TA-Averaged Gross
Return (%/year)
Median TA
($ millions)
Aggregate
Average Stake
Aggregate TA
($bn)
2003 61 2.9 79.2 1.9% 44.9
2004 62 17.1 86.0 1.7% 45.9
2005 68 26.5 119.4 1.9% 46.4
2006 81 22.4 177.0 1.9% 51.8
2007 87 5.5 225.0 2.2% 65.5
2008 96 -30.9 199.8 2.3% 61.4
2009 102 40.2 70.3 2.2% 28.8
2010 95 18.7 117.0 2.2% 41.0
2011 91 -5.2 100.0 2.1% 44.4
2012 86 19.9 86.2 2.9% 40.1
2013 85 29.0 95.6 2.8% 42.2
2014 108 1.3 60.1 3.0% 49.4
2015 123 5.9 63.7 3.0% 53.8
2003-2015 191 11.8 - 2.2% 47.3

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SLI UK Equity Team Roles
Portfolio
Company
SLI Fund
Manager
SLI Equity
Analyst
SLI G&S
Team

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Stylized Allocation of Engagement Responsibilities
Item G&S Team Fund Manager/Analysts
Remuneration X i
CSR X i
Chairman X i
Non-Executive Directors X i
CEO appointment x x
Voluntary Delisting Vote i X
Rights Issues i X
Divestiture Vote i X
Class 1/Schemes i X
Sell decision i X
i = input; X – lead decision maker; x – joint decision

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Stewardship activity – issues raised w/board and
management
Note: Excludes CSR

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Stewardship activity – voting
Asset manager Number of
meetings
voted
% of meetings voted
against one or more
management
recommendations
% of proposals voted
against management
recommendation
Sample period
SLI (UK holdings) 6,925 8% 0.9% 2003Q4-2015Q4
… pre financial crisis 0.5% 2003Q4-2008Q4
… post financial crisis 1.3% 2009Q1-2015Q4
…"abstain" 6,925 12% 1.8% 2003Q4-2015Q4
… pre financial crisis 1.0% 2003Q4-2008Q4
… post financial crisis 2.6% 2009Q1-2015Q4

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Stylised SLI Buy/Sell Process (Exit)
G&S Team
Screening and
Governance Health
Warnings (GHW)
Internal Analyst
Buy/Sell
Recommendation
Fund Manager Buy/Hold/Sell

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Governance Health Warning Triggers
• Audit-related issues
• Blockholders and conflicts of interest
• Board issues
» Including role assignment, independent directors,
composition, turnover, commitment
• Compensation
• CSR / ESG performance
• Disclosure
• Legal/regulatory/internal control issues
• Resistance to suggestions
• Other

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Governance Health Warnings – Incidence
• Discussions w/Management: G&S Team is in contact with board and/or
management
• Governance Health Warning (GHW): An internal GHW warning is active and
broadcast to fund managers/analysts
Year Number of stocks
held
Discussions
w/Management
Governance Health
Warning
2004 783 23% 0%
2005 780 31% 5%
2006 779 34% 6%
2007 773 39% 7%
2008 720 43% 10%
2009 727 45% 10%
2010 745 43% 11%
2011 730 45% 11%
2012 441 66% 15%
2013 472 63% 14%
2014 525 53% 9%
2015 483 47% 8%

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Voice correlates with GHW “flag”
GHW Mean Contact Count per year
• No GHW 1.2
» Companies without GHW are contacted 1.2 times a year
on average
• GHW 7.6
» Companies with GHW are contacted 7.6 times a year on
average

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Are Governance Health Warnings a proxy for
general ”dissatisfaction”, as measured by negative
votes?

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Buy-Sell Signals by Analysts: Internal vs. External
• External “buys” are 1.1 times as likely as internal “buys”
• External “sells” are 0.6 times as likely as internal “sells”
I/B/E/S source: Jegadeesh, N., & Kim, W. (2006)
External Analysts SLI Internal
US
(1998-2002)
UK
(1998-2002)
UK
(2003Q4-2015)
Buy 62.2% 46.6% 42%
Hold 34.5% 41.7% 38%
Sell 3.3% 11.8% 20%
N 21,413

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How Do Fund Managers React to Buy-Sell Signals?
Percentage point change in target holdings
• BLUE: Aggregate holdings (in %) around Buy/Sell signal changes. Balanced panel,
only holdings that exist throughout -12m to +12m, relative to signal change
• Note: RED - other UK institutional inv. do not react to those same buy-sell
signals
-.50.51
-10 -5 0 5 10
dif_indicHB
(mean) SLI_pheld (mean) io_dom
HoldToBuy; N=707
-.50.51
-10 -5 0 5 10
dif_indicSB
(mean) SLI_pheld (mean) io_dom
SellToBuy; N=526
-1.5-1-.50.5
-10 -5 0 5 10
dif_indicHSindicHS
(mean) SLI_pheld (mean) io_dom
HoldToSell; N=777
-1.5-1-.50.5
(mean)SLI_pheld
-10 -5 0 5 10
dif_indicBS
BuyToSell; N=1154

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Are negative votes associated with more exit?
• Exit is defined as SLI aggregate holdings reduced to zero in a given month, or reduced by 50% over 3 months.
• Yes: negative votes correlated with Compensation, Capital, and M&A

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Conclusion
• Significant stewardship and engagement activity
• Significant increase in remuneration related activity
• High level of negative votes and abstentions
• SLI internal analysts more “hawkish” on sell
recommendations than external analysts
• GHW correlates with buy and sell (vs. hold) & voice
• SLI analyst opinions influence fund managers
• Voting dissent correlates with exit
• What is the influence of voice and exit on company
outcomes?
• How much does active ownership contribute to
performance (including alpha)?

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Acknowledgements
We thank the Norwegian Finance Initiative (NFI) for
financial support and Standard Life/Standard Life
Aberdeen for data access and innumerable valuable
suggestions and discussions.

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Appendix

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Project Governance
• Independent study
» Under sole responsibility of three academic authors
» Targeted for publication in peer-reviewed finance journal
• Non-Disclosure Agreement between authors and SLI
» Authors may not disclose names of individuals or companies
without prior consent, unless information is in the public
domain
» SLI is provided with drafts and has the right to comment
• Funding from the Norwegian Finance Initiative (NFI)
» NFI funded by Norges Bank
» Project selection and funding overseen by independent NFI
scientific committee
» NFI has no influence on contents
» Project ends June 2018