UK watchdog assumes investor stewardship role, proposes annual board elections

Set of 24 Stewardship principles outlined in Combined Code review.

The UK’s Financial Reporting Council has said it will take responsibility for a new Stewardship Code for institutional investors as part of its proposed new Corporate Governance Code. The new, extended role for the FRC, which already oversees the Combined Code for corporate governance, was a key recommendation of the Walker Review on UK governance of banks and financial institutions unveiled last week. The FRC said it would assume oversight for the investor stewardship code “subject to consultation to ensure it can be operated effectively”. It said it was also considering options for producing practical guidance on good practice engagement between companies and investors. The FRC issued a set of 24 stewardship proposals in a 38-page final review of the existing Combined Code, which will be renamed the “UK Corporate Governance Code” to clear up any confusion with the new Stewardship Code. These include proposals for companies to annually re-elect the chairman or the whole board – a step further than recommendations in the Walker Review. They also include new principles on the leadership of the chairman, the roles, skills and independence of non-executive directors and their level of time commitment. The proposals suggest that company boards should be externally reviewed at least every three years. Also proposed are new principles on board responsibility for risk and the alignment of performance-related pay to the long-term interest of the company.The FRC said it does not want the new code to be viewed as a “compliance exercise” by companies or investors. It said: “There is scope for further improvement in the quality of communication by companies and engagement between companies and investors. The FRC is willing to play a role in promoting better communication and more constructive shareholder engagement.”
It added that “charges of inadequate communication have been levelled by both companies and investors in the FRC’s extensive contacts with them”. It said there was “certainly scope for an increase in trust which might generate a virtuous upward spiral in attitudes to the Code and in its constructive use”. FRC chairman Sir Christopher Hogg, said: “The Code is not a set of rules to be applied unthinkingly. It demands that boards seriously and self-critically assess their performance and openly explain themselves to shareholders. And their assessments must be considered equally seriously by major shareholders if the board’s efforts are to be sustained.”
The revised Code will apply to accounting periods beginning on or after June 29 2010.
Link to Financial Reporting Council