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ESG and Corporate Governance

Governance is one of the three core pillars of the environmental, social and governance (ESG) framework.

At a company level, corporate governance is the collection of mechanisms, processes and relations by which corporations are controlled and operated. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the Board of Directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and include the rules and procedures for making decisions in corporate affairs. Corporate governance is necessary because of the possibility of conflicts of interest between stakeholders, primarily between shareholders and upper management or among shareholders.

Institutional investors or shareholders, although one step removed from the day to day governance of a company, do have a responsibility to scrutinise the activities of the management of the company around this and other related ESG factors. Exercise of that responsibility can come through ensuring that they vote at important shareholder meetings, etc. In the context of securities lending, it is important that any investor has a clear policy around governance and in particular recalling securities to vote at AGM and other EGM meetings.

Through the development of best practice and operating protocols, it is possible for an institutional investor to still discharge its governance obligations whilst capturing securities lending revenues, as appropriate.

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