The UK’s Financial Reporting Council watchdog today published its first Stewardship Code for institutional investors.
The Code will be studied both within and outside the UK as it represents one of the first regulatory attempts to codify how investors interact with their investee companies. It is likely to feed into the European Commission’s deliberations as it consults on its own Corporate Governance proposals.
The new non-binding “comply or explain” 10-page code is largely based on the existing Institutional Shareholder Code and features seven principles:
- Disclose policy on stewardship
- Robust policy on conflicts of interest
- Monitor investee companies
- Guidelines on “escalating” to protect/enhance shareholder value
- Willingness to act collectively
- Policy on voting and disclosure of voting
- Report periodically on stewardship/voting
All institutional investors including pension funds are “strongly encouraged” to report – by the end of September – on whether and how they comply with the Code; the FRC will publish their names on its website.
Funds are asked to disclose how they use proxy voting providers, with the providers themselves again “encouraged” to disclose how they carry out clients’ wishes.Among the points included in the guidance for the Code is the fact that investor intervention should be considered regardless of active or passive investment strategy – and that being underweight a stock “is not, of itself, a reason for not intervening”. The FRC also says shareholders should seek to vote all the shares they hold – and not automatically support the board.
But the FRC stresses that the Code “does not constitute a requirement to engage”. It says pension funds who don’t want to be directly involved in engagement can contribute by mandating their fund managers – and scrutinise “with care” their engagement reports.
And it hopes the Code helps investors interested in collective engagement to identify like-minded institutions.
Colin Melvin, chief executive of Hermes Equity Ownership Services, said the Code could be stronger, particularly in allowing pooled account managers’ clients to vote the shares attributable to them.
“We hope this new Code will be a catalyst for better engagement between shareholders and companies and create a stronger link between governance and the investment process,” said FRC chairman Baroness Hogg.
FRC will carry out “further work” on issues not addressed by the code such as stock lending, voting for pooled funds and the nature of voting record disclosure. It will start monitoring the take-up of the Code from the second half of 2011. Link