The UK has offered a new template for global governance with the introduction of the first formal code of conduct for investors. Under the watchful eye of the Financial Reporting Council, it is hoped that the Stewardship code will, as Chairman Baroness Hogg said: “be a catalyst for better engagement between shareholders and companies and create a stronger link between governance and the investment process”.
The Code itself contains few surprises as the significant majority of it is based on the existing Institutional Shareholders’ Committee. And while there will be some practitioners disappointed that it doesn’t go as far as they would like, as a first release, it offers sound foundations.
Key Principles
Unlike the ERISA guidelines which are generally perceived as a set of firm rules, the Stewardship Code is a series of “comply or explain” principles. The Code is not just aimed at fund managers. For the first time, proxy advisors are brought in to the spotlight and will be encourage to disclose how they have “carried out the wishes of their clients by applying the principles of the Code that are relevant to their activities”.
The Code states that Institutional Investors should:
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Publicly disclose their policy on how they will discharge their stewardship responsibilities.
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Have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.
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Monitor their investee companies.
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Establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value.
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Be willing to act collectively with other investors where appropriate.
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Have a clear policy on voting and disclosure of voting activity.
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Report periodically on their stewardship and voting activities.
Although the remit of the FRC is only within the UK, they are hoping that UK institutions will use their “best efforts to apply its principles to overseas holdings”. Similarly, overseas investors following other national or international governance standards should not feel that they are going to be asked to duplicate their efforts when ” disclosures made in respect of those standards can also be used to demonstrate the extent tow which they have complied with the Code.”
What Next?
The Financial Services Authority will begin consultation on proposals to introduce a requirement for authorised asset managers to disclose whether or not they comply with the Code. The consultation is expected to be published in the second week of July and will last for 2-3 months with a view to final rules being established by the end of the year. Int he meantime, the FRC wants to see all institutional investors prepare voluntary companies statements by the end of September so that they can be included in the FRC’s proposed web-register.
Ongoing monitoring and evolution of corporate governance codes has been a feature of the UK regime since the days of Cadbury; the Stewardship Code is no exception. The Investment Management Association will be part of the initial monitoring process through its annual engagement survey, adapted for Stewardship Code, with the FRC chairing a steering group to oversee the survey.
There is no formal timetable for reviewing the Code, particularly in light of the European Commission’s Green Papers on Corporate Governance, although the FRC has said that it will look into related issues – such as stock lending and voting on pooled funds – ahead of its first stage monitoring in Q3, 2011.
Will it Make a Difference?
Let’s hope so. It’s never been tried before so there is nothing to lose and everything to gain – especially if it keeps prescriptive regulation from the door. But ultimately the Code is seeking to address a cultural problem which may be tougher to crack. Previous attempts at encouraging codified investor ownership led to a self-defeating explosion of box-ticking (ERISA Guidelines).