On 2 July 2010 the Financial Reporting Council, an independent UK regulator responsible for promoting corporate governance and reporting, published the UK Stewardship Code.
This is the first edition of the Stewardship Code and was referred to by Baroness Hogg (FRC Chairman) as “the other side of the hinge” (since it deals with the responsibilities of shareholders, while the UK Corporate Governance Code deals with those of boards). The purpose of the Stewardship Code is to improve the quality of corporate governance through promoting better dialogue between shareholders and company boards, and more transparency about the way in which investors oversee the companies they own. The FRC states that the Stewardship Code is addressed, in the first instance, to firms who manage assets on behalf of institutional investors. However, the FRC encourages all institutional investors to report if and how they have applied the Stewardship Code.
Content of the Stewardship Code
Following the recommendations in the Walker Review, in December 2009, the FRC began a consultation on the content of the Stewardship Code. In line with the feedback received during the consultation the principles of the Stewardship Code are taken from the pre-existing Institutional Shareholders Committee Code. A small number of amendments have been made in order to provide the guidance to institutional investors previously contained in Section E of the Combined Code.
The principles of the Stewardship Code are that institutional investors should:
- Publicly disclose their policy on how they will discharge their stewardship responsibilities
- The guidance to this principle highlights the importance of active dialogue with the company’s board. The disclosure should also include the investor’s strategy on intervention, how stewardship is integrated with the wider investment process and voting policy.
- Have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed
- Monitor their investee companies
- As part of this monitoring, institutional investors are encouraged to:
- satisfy themselves that the company’s board and committee structures are effective and that independent directors provide adequate oversight;
- maintain audit trails, for example records of private meetings and votes cast.
- attend general meetings of companies in which they have a major holding, where appropriate and practicable; and
- consider carefully explanations given for departure from the UK Corporate Governance Code.
- Establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value
- Be willing to act collectively with other investors where appropriate
- The guidance states that collaboration “may be most appropriate at times of significant corporate or wider economic stress or when the risks posed threaten the ability of the company to continue”.
- Have a clear policy on voting and disclosure of voting activity
- The Stewardship Code stresses that institutional investors should seek to vote all shares held and that they should not automatically support the board.
- Report periodically on their stewardship and voting activities
- The guidance states that “transparency is an important feature of effective stewardship” and emphasis is placed on regular reporting to clients or others to whom they are accountable on how they have carried out their responsibilities under the Stewardship Code. Indeed it is recommended that institutional investors consider obtaining an independent audit opinion on their engagement and voting processes.
Application of the Stewardship Code
The FRC states that the Stewardship Code “does not constitute a requirement to engage” and that it is legitimate for some investors to choose not to engage with companies “if it does not form part of their investment strategy”. The Stewardship Code will be applied on a “comply or explain basis”. In practical reporting terms this means institutional investors providing a statement on their website which includes:
- a description of how the principles of the Stewardship Code have been applied; and
- disclosure of the specific information listing under principles 1 (policy on how they will discharge their stewardship responsibilities), 5 (willing to act collectively with other investors where appropriate), 6 (clear policy on voting and disclosure of voting activity) and 7 (periodic reporting on stewardship and voting activities); or
- an explanation if these elements of the Stewardship Code have not been complied with.
Further development
As stated above the Stewardship Code was taken from the current ISC Code with some minor amendments. The FRC explains that this was done due to a keenness to build on the momentum generated by the Walker Review and the changes to the UK Corporate Governance Code. However, there were a number of issues that were raised in consultation which the FRC will consider further. These include whether institutional investors should disclose their policies on stock lending, arrangements for voting pooled funds and the nature of the information to be disclosed on voting records. The FRC plans to carry out further work on these issues in advance of a planned monitoring exercised scheduled for the second half of 2011.
Click here for the Stewardship Code.
