

The final report on UK corporate governance in banks and financial institutions by Sir David Walker, former chairman of Morgan Stanley, has proposed that fund managers doing business in the UK sign up to a new set of Principles of Stewardship, or explain why not. The findings of the review, which the UK government has said it will quickly adopt into law, also oblige fund managers to vote their shares and then disclose their voting record. The review, commissioned by UK Prime Minister, Gordon Brown, in February this year in response to the banking crisis, looks at issues of shareholder rights, company executive standards and remuneration. Its main recommendation in the area of shareholder engagement is the creation of the Stewardship Code, which lays out a series of best practices for engagement, put together earlier this month by the Institutional Shareholders Committee (IRC), jointly run by the Association of British Insurers, the Association of Investment Companies, the Investment Management Association and the National Association of Pension Funds (see link at foot of article). In the final review, Walker proposes that the ISC stewardship code should be ‘ratified’ by the independent Financial Reporting Council (FRC). Walker said the status of the Stewardship Code should be akin to that of the Combined Code that governs corporate best practice, with observance on a similar “comply or explain” basis.
Walker stopped short of recommending that all fund managers should adopt some form of stewardshipapproach, aside from obligatory share voting and reporting. He said fund managers had lobbied against an “implicit proposition” in his July consultation paper that active engagement represented best practice for major shareholders as against other ownership or trading strategies. Instead, Walker said fund managers must signify on their websites or in another accessible form whether they commit to the Stewardship Code, and if not it should give a clear explanation of their alternative business model and the reasons for not committing to Stewardship. Fund managers committing to Stewardship will have to disclose how their mandates from life assurance, pension fund and other major clients set out the desired engagement activity. The review said the FRC should review the Stewardship Code on a regular basis in close consultation with institutional shareholders, and fund managers. It also recommended that fund managers indicating commitment to engagement should participate in a survey to monitor adherence to the Stewardship Code. On engagement, Walker also recommended that institutional investors “actively seek opportunities” for collective corporate lobbying where it has the potential to promote sustainable improvement in performance. He said an initiative should also be taken by the FRC, major UK fund managers and institutional investors to invite major foreign institutional investors, such as sovereign wealth funds, public sector pension funds and endowments, to commit to the Stewardship Code.
Link to Walker Report
Link to Stewardship code