Political and regulatory news

Stewardship Code for institutional investors

The FRC is seeking views on the content, operation and oversight of a new Stewardship Code for institutional investors.

Following the recent banking crisis, the role of institutional shareholders has been under scrutiny (see previous article).  A review carried out last year by Sir David Walker on the governance of the banking sector included recommendations on communication and engagement by institutional investors.  As a result of this, the Financial Reporting Council was asked to take on responsibility for a new Stewardship Code which will set out standards of good engagement practice for institutional shareholders.

The FRC intends to use the ‘Code on the Responsibilities of Institutional Investors’ published by the Institutional Shareholders’ Committee (made up of the AIC, ABI, IMA and NAPF) as a starting point for its own measures.  It believes this will “help to promote a sense of ownership among investors which will encourage wider adoption of the Code”.  The ISC Code is based on seven principles, each of which is supplemented with further guidance.  These seven principles are that institutional investors should:

• publicly disclose their policy on how they will discharge their stewardship responsibilities
• have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed
• monitor their investee companies
• 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
• have a clear policy on voting and disclosure of voting activity, and
• report periodically on their stewardship and voting activities.

The FRC is also considering moving the recommendations for institutional shareholders currently included in the Combined Code into the new Stewardship Code.  This will extend the reach of its provisions as the ISC Code does not contain the Combined Code recommendation that investors should set out their reasons in writing where they do not accept explanations provided by the company.  Furthermore, the Combined Code recommends that major shareholders attend AGMs ‘where appropriate and practicable’ but AGM attendance is not an issue covered in the ISC Code.

The new Stewardship Code will be ‘comply or explain’, much like the Combined Code, and the FRC is considering how this should work in practice.  All UK institutional investors will be encouraged to apply and report on the Code regardless of any regulatory requirements.  The Walker Review recommended that authorised asset managers should be required by the FSA to disclose on their website whether and, if so, how they commit to the Stewardship Code.  The FSA intends to consult on this issue.  The FRC is also considering whether agents, such as voting services agencies and investment consultants, should be encouraged to commit to the spirit of the Code and whether foreign investors would be willing to voluntarily sign up to it.

The FRC is exploring ways to monitor application and reporting against the Code.  It is considering a number of options, including direct oversight by the FRC and extending the scope of surveys on engagement practice carried out by the IMA.

The FRC’s consultation ends on 16 April 2010 and a further report is expected in May or June.  Once the Stewardship Code has been published, the FRC intends to review its effectiveness every two or three years. 

The AIC will be responding to this consultation in due course.

To view the FRC’s ‘Consultation on a Stewardship Code for Institutional Investors’, click here.

To view the Institutional Shareholders’ Committee’s ‘Code on the Responsibilities of Institutional Investors’, click here.

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Back to Issue 1 - 26 February 2010