Asset owners need to think hard about stewardship and mandates – UK watchdog

Financial Reporting Council ratchets up pressure on asset owners

The head of the UK’s Financial Reporting Council has issued the watchdog’s strongest plea so far on the need for asset owners to incorporate stewardship into their mandates with asset managers.

It was vital that shareholders “pay their part” said Stephen Haddrill, the FRC’s chief executive, who observed that stewardship as it is currently defined remains far too focused on executive remuneration at companies – at the expense of a discussion around more strategic issues.

“We’d like to see the engagement broadened,” he told a seminar on boards and shareholders hosted by the London Stock Exchange last week.

He went on: “We would like asset owners to think very hard about the mandates they give to asset managers. Without that our system has a fundamentally flaw.” But the FRC acknowledges that it doesn’t have the power to force asset owners to take stewardship on board.

Last month, as reported by RI, the FRC signaled that it planned to assess which asset owner mandates explicitly refer to stewardship amid fears that some institutions have signed up to the four-year-old Stewardship Code “in name only”.It said it would look at the percentage of mandates awarded by asset owners to asset managers that explicitly refer to stewardship.

“Without that our system has a fundamentally flaw.”

The latest comments are important because the UK is seen as an incubator of governance best practice.

An FRC spokesperson told RI: “We acknowledge that asset owners are an important part of the system, as, if they are asking for stewardship, their asset managers have a financial imperative to provide it.

“The Shareholder Rights Directive from Europe includes a requirement for asset owners to comply or explain on an ‘engagement policy’, with headings that essentially mirror those in the stewardship code. We encourage such transparency.

“There is no ‘sanction’ we can impose on asset owners for not signing up. But we are looking at how better to incentivise asset owners to sign up, including whether further education is needed.”