The UK Financial Reporting Council have today published the new UK Stewardship Code. The Stewardship Code sits alongside and is complementary to the UK Corporate Governance Code, published in May, and includes principles on:
• The monitoring of investee companies;
• The escalation of activities taken to protect or enhance shareholder value;
• Collective engagement;
• Voting policy;
• Managing conflicts of interest; and
• Public reporting and reporting to clients.
Institutional investors who have been holding their breath about whether they would become subject to a new and different regime can relax. The Stewardship Code is, as predicted, very heavily based on the ISC Code on the Responsibilities of Institutional Investors (with some minor consolidation from parts of the Corporate Governance Code affecting investors). It is acknowledged that the consultation process threw up a number of issues that need further thought, but in the interest of keeping governance momentum going, this "further thought" has been put back until the later part of 2011.
If the content is not a surprise, the change comes in the application. While continuing to be on a "comply or explain" basis, what was a voluntary regime has become a lot less so, with investors "strongly encouraged" to report on their compliance with the Stewardship Code by statements on their website and by confirming to the FRC that they have done so. The FRC will note compliance on its website and will also undertake a monitoring process. However, with a voluntary regime and in the absence of any serious teeth in the way of sanctions, it remains open what the FRC can or will do with those who do not comply, other than name or shame.
You can lead a horse to water, but you cannot make it drink: investors do not have to engage - rather if they choose not to engage they need to be open that that is their considered investment approach.
The Stewardship Code is aimed initially at those on the ownership chain who directly interact with companies/issuers - the asset managers and the proxy voting agencies. However all institutional investors are encouraged to engage with the process and report if and how they have applied the Code, and themselves scrutinise the compliance of their intermediaries. Foreign/overseas investors are also encouraged to comply - as are UK-based asset managers in relation to their overseas holdings.
Issuer companies can expect more proactive and better organised engagement, including potentially collective engagement. The Stewardship Code envisages they can look forward to "purposeful and high quality" dialogue with shareholders.
Compliance (in the form of statements on the websites of institutional investors about their adherence to the new code) is to be in place by the end of September 2010 - some people will be having a busier summer than they originally envisaged.
The FSA do, however, suggest that asset managers and service providers may wish to wait before complying with the requirements on reporting to clients as guidance is still being worked on. There has been some concern over the requirement to obtain an independent audit opinion both from the point of view of time and expense and the value of the assurance and so the guidance will be helpful.
Managers and service providers who have not already done so will need to produce guidelines on collective engagement and ensure that the relevant individuals understand the scope of collective activities which may be engaged in without legal risk.
Overall, the Stewardship Code is welcomed. Although participants in the consultation may feel hard done by that their comments will not be addressed until after the first annual monitoring exercise in the second half of 2011 adopting the existing Code is helpful.
For issuers, we expect that the Stewardship Code will increase the burden on investor relations departments who will, no doubt, need to reach out to proxy service providers to ensure that standard escalation procedures do not get applied when or where they are not appropriate.