City veteran Sir Win Bischoff, who has been chairman of the Financial Reporting Council for just under six months, does not mince his words when reflecting on the success of the UK Stewardship Code, which was created four years ago as a result of 2009’s Walker Review into bank governance.
It built on the existing ‘Code on the Responsibilities of Institutional Investors’ developed by the Institutional Shareholders’ Committee.
“The Stewardship Code is not yet a success,” he says to Responsible Investor. “It is not yet had the great success of the UK Corporate Governance Code but we are working on it and I believe we will get there.”
Sir Win defines stewardship broadly as engagement with companies, and reporting on that engagement. He says that while the FRC has had big success in getting people to sign up to the code – it currently has over 300 signatories – it has not yet being successful in checking whether organisations are actually doing stewardship in practice.
“Do people sign up so they can show owners of assets when they are pitching for business that they are engaging with those companies? We have suspicions that there is quite a lot of that which is not taking place properly.” See RI Story.
Sir Win says the FRC will know the Stewardship Code is a success when asset managers and owners take it as seriously as the Governance Code. “We are well short of that yet,” he says.
Recently the Institute of Directors (IOD) business lobby group suggested that there should be penalties for organisations that signed up to the stewardship code, but did not follow its principles.
Sir Win does not feel this is the right approach, instead saying ‘naming and shaming’ would be more effective: “That is a big penalty for most people. One would have to be quite thoughtful and consider that it will be more difficult for a small fund management firm to engage, but if one wants to embed this more strongly there has to be a little bit of stick and a carrot, it shouldn’t just be voluntary.”
He says the Corporate Governance Code has a ‘stick’: the comply or explain rule. He suggests fuller accountability in the reporting of asset managers on what they’ve done and how they’ve engaged could be useful: “And then always an example of very good stewardship activity by a particular fund manager or asset owner. Emulation is a big, big factor in this.”For now, to improve engagement with the Stewardship Code, Sir Win says the FRC is working with the Investment Management Association (IMA). Each year the IMA conducts the stewardship survey, which tracks adherence to the code. Last year, the survey, which is self-selective, found a significant increase in respondents’ resource for engagement and nearly all respondents reported to clients on beneficiaries on stewardship activities.
The FRC is also trying to instil into shareholders and their advisors that board directors listen most assiduously to two lots of people; one the regulator, the other the shareholder.
“When I was a chairman, if a shareholder wrote to me and said I am a two per cent shareholder and I want to see you, quite honestly your office makes sure you see that person as quickly as possible: “Shareholders have a very, very powerful position.”
He concedes however that this sort of activity is harder for smaller shareholders that have small percentages invested in a group of companies, and may lack the staff and resources to engage with all the companies they are invested in: “You probably sign up to the code because you won’t get assets under management otherwise, but do you actually have the personnel to engage with companies?”
He also admits that a company may not act as quickly to see a 0.0001% shareholder compared with a 2 or 3% shareholder. “There are some practical difficulties but that also applies to the governance code, where FTSE companies and smaller companies do it.”
Sir Win says leaders in effective stewardship are Legal and General, Fidelity, Blackrock, Schroders, Aberdeen and Standard Life.
Thinking more about successful engagement, he feels it is important that shareholders engage with companies before there is a vote, reflecting that in recent months this has not been happening, especially on the issue of remuneration: “I think it is much better to debate those things before you get to the vote and then have to vote against, which is not good for the company. Sometimes you have to do that because the company simply won’t engage, but I think there is this dialogue which underlies the Stewardship Code which is very important.”
But does stewardship actually work? And even if it does how do you prove this?
“I know stewardship works from the point of view of companies as they respond to shareholders,” says Sir Win.
“Then, the question is do shareholders bother to make their voice heard on issues which they consider to be important?”
He says the recent noise from big shareholders publicly around remuneration, golden hellos and succession shows they are increasingly engaging, thanks in part to the Stewardship Code.
The mix of signatories to the stewardship code is another lacking element, he says. Out of around 300+ signatories 215 are asset managers and about 70 are asset owners. Twenty of the mix is international. Almost no hedge funds have engaged.
Sir Win admits there is more to do to make the stewardship code more global, especially considering London’s status as an “international financial asset management centre”.
He adds that another constituency the FRC must engage with more in relation to the Stewardship Code is sovereign wealth funds, but he says this has cultural problems.
“Sovereign wealth funds don’t like disclosing much of anything. They just aren’t that transparent. But over a period of time I would hope that sovereign wealth funds that invest in London will start to embrace this more.”
He says the FRC is engaging with a number of sovereign wealth funds on stewardship, but says they are some way from signing up.Citing Norges Bank, Sir Win says they feel that the London market is already well regulated and would rather direct their resources to markets where corporate governance is less developed: “I understand their point of view. They want to focus on stewardship in other markets rather than London, which is already well taken care of.
Sir Win works two days a week as chairman of the FRC. His other high-profile roles include a chairmanship with JPMorgan Securities. He was also founder chairman of the 30% Club, the new high-profile group headed by Newton Investment Management chief Helena Morrissey which is urging boards to have 30% female representation.
Explaining why he set up the group, Sir Win says that in his experience a good mix of gender on boards improves performance. “Women think somewhat differently, they are in some areas more risk adverse, and are more concerned about the customer; the mindset is different.”
Looking more broadly at diversity on corporate boards, Sir Win says ethnicity, geography and experience are other things that make up a good board. He says the next stage is to get 25% to 30% female representation on the management committee of UK boards. While the Stewardship Code may not yet have had the success of the Corporate Governance Code, it has been emulated, with Japan and more recently Europe making moves to develop their own versions.