Earlier this month, the Institutional Shareholders’ Committee has published a new code on the responsibilities of institutional investors. This Code responds to some of the recommendations in the Walker review of corporate governance (see above) and in Walker’s final recommendations is proposed to be adopted by the Financial Reporting Council as a new “Stewardship Code” alongside the Combined Code.
Although largely based on the June 2007 version of the ISC Statement of Principles, there are a number of additions and changes of emphasis in the Code:
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The Statement of Principles has been reclassified into a comply-or-explain Code to give it greater weight. Institutional investors that do not wish to engage should state publicly that the Code is not relevant to them and explain why. Those that elect to engage should provide a statement on how they implement the principles in the Code in practice and the steps they have taken, or intend to take, to verify compliance.
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Institutional investors that apply the Code will be listed on the ISC's website.
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Principle 1 of the Code specifies the disclosures to be made in the policy statement of institutional investors. These include details of the policy of considering explanations made by companies in relation to the Combined Code and the policy on proxy voting and use of proxy voting services.
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There is more emphasis on collective engagement by institutional investors, particularly at times of significant corporate or wider economic stress (Principle 5).
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Principle 6 provides that institutional investors should publicly disclose their voting records or explain why they have not done so.
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Principle 7 on reporting stewardship and voting activities provides that institutional investors that act as principals, or represent the interests of the end-investor, should report at least annually to those to whom they are accountable on their policy and its execution.
Overseas investors, including sovereign wealth funds, are also “encouraged” to apply the Code and the ISC may also list them on its website.
The ISC states that the Code will be reviewed biennially, in line with the FRC's review process for the Combined Code.
Lord Myners, the Financial Services Secretary and a fierce critic of institutional investors’ failure to engage with investee companies, welcomed the Code but pointed out that it was based on a self-governance model and needed a more independent structure. Walker recommends that the FSA should require institutions that are authorised asset managers to clearly disclose their commitment to the Stewardship Code and the FSA is expected to consult on rules to this effect.
The ISC’s members are the Association of British Insurers, the Association of Investment Companies, the Investment Management Association and the National Association of Pension Funds.
The Code is available here.
