Monitoring versus engagement.

There are significant differences between monitoring and engagement in terms of the context, purpose, and implementation. Both types of activities, however, involve a form of dialogue. The purpose of monitoring is to understand the company, its stakeholders and its performance, and this is typified by detailed and specific questioning.

The dialogue between the steward, that's the fund manager and the investee company management should be direct, honest, and respectful. It should be set in a context of mutual understanding of the fund manager's investment style.

The outcome of monitoring should be that the fund manager has an enhanced understanding of the business enabling him to make investment decisions that deliver on client objectives, such as appropriate risk adjusted returns or preservation, or enhancement of value.

Engagement dialogue on the other hand should take the form of a dialogue with a specific and targeted objective to achieve change at the investee company. This should be typified by a two-way dialogue and expression of opinions. The dialogue should be set in the context of long-term ownership and focus on long-term value preservation. Funds managers should recognize that change is a process and that clear objectives are important. The outcome of engagement is likely to be changed company behaviors and enhanced or at least preserved value. Whilst monitoring involves regular oversight of investee companies to understand their operations, their strategy, and their performance, engagement in which the fund manager calls for a change of investee company policy, actions, or behavior will focus on a specific issue or a set of issues. The issues can include matters relating to company strategy, operational performance, capital structure, risk management systems, or even corporate governance arrangements.

The issues of concern often relate to social or environmental factors. For example, the fund manager may have concerns about the way the investee company is failing to manage a particular environmental risk, such as industrial waste disposal. Or the fund manager may be concerned about the company's lack of preparedness for carbon taxes. Such an issue would be chosen by the fund manager as a topic for discussion with the management team. Other common issues on which fund managers have engaged with companies involve, for example, supply chain risk management.