The Financial Reporting Council (FRC), the UK’s corporate governance regulator, wants to hear from institutional investors in the UK and overseas about its proposals for a new “Stewardship Code” aimed at creating best practice principles for investors when engaging with the UK listed companies.
The Stewardship Code is based on a set of principles originally drafted by the Institutional Shareholders’ Committee, an information alliance of trade associations comprising the Association of British Insurers (ABI), National Association of Pension Funds (NAPF), Association of Investment Companies (AIC) and the Investment Management Association (IMA). The code has now evolved and has been adopted by the FRC following an overwhelming demand for a new and more open approach to investor engagement which would be open to a broader investor base. The demand for a more inclusive approach came to the fore following Sir David Walker’s report on the corporate governance of banks and other financial institutions in November 2009.
Announcing the consultation Sir Christopher Hogg, Chairman of the FRC, said: “The benefits of a code which can help to bring about more effective engagement between companies and shareholders are potentially significant. They should lead to sustainable and enduring improvements in the governance and performance of UK listed companies and greater clarity in the respective responsibilities of asset managers and asset owners, which will assist the ultimate owners to hold to account those acting on their behalf.
“To deliver those benefits the code must set standards of stewardship to which mainstream institutional investors should aspire, and maintain the credibility and quality of these standards. It must foster a proper sense of ownership amongst institutional investors in the interests of their clients, and its success should be based on more effective communication between shareholders and the boards of the companies in which they invest.”
The Seven Stewardship Principles
Principle 1: Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities
Principle 2: Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.
Principle 3: Institutional investors should monitor their investee companies
Principle 4: Institutional investors should establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value
Principle 5: Institutional investors should be willing to act collectively with other investors where appropriate
Principle 6: Institutional investors should have a clear policy on voting and disclosure of voting activity
Principle 7: Institutional investors should report periodically on their stewardship and voting activities
The FRC is now seeking views on the draft code and would like to know:
- 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.
The consultation ends on 16 April 2010 and the outcome of the consultation will be announced in May or June.