On 20 April 2012, the Financial Reporting Council (FRC) published a consultation paper proposing changes to the UK Stewardship Code (the Code). The Code was first published in 2010 and, at the time, was subject to criticism in certain areas. The Financial Reporting Council have waited for the principles of the Code to be adopted and implemented before making any proposals for change.
Seven principles form the basis for the Code which are directed at institutional investors who hold shares in UK companies. The Code’s principal aim is to ensure institutional investors are active and engage in corporate governance in the interests of their beneficiaries.
Changes to the Code
The FRC stated that the purpose of the proposed changes 3 is not to broaden the scope of or change the seven principles but to reinforce them where necessary. The proposed revisions to the Code include the following:
• Definition of stewardship. Changes have been made to the introductory paragraph of the guidance to the Code to clarify and confirm the meaning of stewardship. The changes provide that stewardship activities include monitoring and engaging with companies on matters such as strategy, performance, risk, remuneration and corporate governance, as well as voting. Engagement is defined as “purposeful dialogue with companies on those matters as well as on issues that are the immediate subject of votes at general meetings”.
• Roles of asset owners/managers. The proposed changes seek to provide clarity on the different roles and responsibilities of asset managers and asset owners. The changes include an explicit recognition that asset owners have a stewardship obligation to their beneficiaries, while recognising that the specific stewardship activities carried out by owners and managers will vary depending on their circumstances.
• Conflict of interest policies. Changes have been made to principle 2 to encourage institutional investors to prepare, implement and disclose a policy which sets out the process adopted to deal with conflicts of interest. The proposed changes recognise that the interests of clients may vary.
• Collective engagement. Principle 5 was initially introduced to establish whether the signatory is willing and able to join forces with other investors. However, the FRC feels that the principle, as originally drafted, has not fully achieved its purpose. The revisions to this principle are therefore designed to encourage investors to provide an indication on the sorts of circumstances in which the investors may participate in collective engagement.
• Use of proxy voting or other voting advisory services. Revisions are proposed to the guidance to principle 6 to encourage disclosure on the extent to which signatories use, rely upon and follow the recommendations of their advisors.
• Stock lending. The proposals include the insertion of a reference to stock lending to the guidance to principle 6. The revisions seek for disclosure by signatories of their policy on stock lending and specifically whether signatories recall lent stock for voting purposes.
• Other asset classes. The changes proposed to the introductory section to the Code are to encourage disclosure of whether the signatory applies its stewardship approach to other asset classes including overseas equities. The initial focus of the Code has been on UK equities but the FRC acknowledge that such equities may only be a small part of an institutional investor’s portfolio and certain clients and beneficiaries may wish to apply the Code to other sections of the portfolio.
• Assurance reports. The FRC is seeking to strengthen the language in principle 7 by proposing that managers ‘should obtain’ assurance reports rather than consider obtaining such reports. In addition, if requested, clients should also be provided access to such assurance reports.
• Policy updates. The proposed changes to the Code provide that signatories review their policy statements annually, update them as necessary and indicate the date of the last review.
There are other substantive changes to the Code, including:
• the removal of any suggestion or inference that institutional investors should not become insiders; and
• an emphasis on the role of support providers in promoting stewardship and clarification on the definition of support providers.
The consultation closed on 13 July 2012. The amendments to the Stewardship Code are intended to apply to financial years beginning on or after 1 October 2012.