Financial Reporting Council consults on stewardship code for institutional investors
20 January 2010
The Stewardship Code can contribute to an improvement in the corporate governance of UK listed companies, following Sir David Walker’s report. The potential benefits are large, including greater clarity in the responsibilities of asset managers and asset owners.
The governance standard for UK listed companies is the Combined Code on Corporate Governance (which is to be renamed the UK Corporate Governance Code). This operates on the basis of “comply or explain”, which allows companies the flexibility to deviate from the provisions of the Code provided they explain to their shareholders the reasons for doing so. Shareholders are then expected to judge the explanation on its merits and either accept or challenge it. The effectiveness of this approach depends on sufficient investors being willing, directly or indirectly, to put resources into engaging actively with the companies in which they invest.
The FRC has begun consultation on the content, operation and oversight of a stewardship code that will set out good practice for institutional investors when engaging with the UK listed companies in which they invest.
The FRC agreed to take on responsibility of oversight of the proposed code at the request of the Government, following Sir David Walker’s report on the corporate governance of banks and other financial institutions in November 2009.
The FRC is seeking views on:
- whether the code published by the Institutional Shareholders’ Committee in November 2009 provides a suitable basis for the Stewardship Code, in either its existing or an amended form;
- what the responsibilities for engagement of institutional shareholders and their agents are to the beneficial owners whose money they manage;
- how adoption of the standards in the code by UK and foreign investors can be encouraged;
- what information investors should disclose on their engagement policy and practice; and
- what arrangements should be put in place to monitor how the code is applied.
Policy objectives
- The FRC believes that the Stewardship Code can contribute to a significant improvement in the stewardship of UK listed companies.
- The potential benefits are large. More effective engagement should improve the governance and performance of investee companies, assist the efficient operation of capital markets and increase confidence in business. Greater clarity in the respective responsibilities of asset managers and asset owners and strengthened accountability of institutional shareholders to their clients will also strengthen trust in the financial system. A clear understanding of these responsibilities will also assist beneficial owners in setting the terms of their fund mandates and in holding asset managers accountable.
- These benefits will not be achieved if the Code is ignored. That is why the Walker Review proposed that the FSA consult on a requirement in its rulebook that authorised investment firms should state whether they comply with the Stewardship Code or explain their noncompliance.
- The FRC also looks to the clients of institutional shareholders to support the development of the Stewardship Code, as shareholders have supported the development of the Combined Code over the years. In particular, owners need to consider whether they could better align the performance goals in their mandates with their savers’ longterm interest in market stability.
Consultation ends 16 April 2010. The outcome of the consultation will be announced in May or June.
© FRC
