The TakeAway: New UK Stewardship Code Helps Investors Act as Owners – Will US Follow Suit?
With all the attention on financial regulatory reform, it’s easy to forget a simple truism: You can’t have good corporate governance without good ownership. While the US is making progress toward better corporate governance, it has a long way to go when it comes to a framework for good stewardship of financial assets, particularly with respect to institutional investors.
Perhaps we can take a cue from the UK, which (again) decided to improve shareowner engagement beginning January 2009, in the wake of the banking crisis.
A few weeks ago, the Financial Reporting Council (FRC) – the UK’s independent regulator responsible for promoting high quality corporate governance and reporting – published the UK’s first Stewardship Code for institutional investors. Its introduction, said Paul Myners, former Financial Services Secretary to HM Treasury, establishes “aspirational standards” through which UK owners should be holding UK companies to account. “It was devised as a UK solution to a UK problem,” he told attendees at the Yale Governance Forum last June. That said, it might serve as a model for other countries seeking to enhance accountability for both investor-owners and corporations.
The aim of the Stewardship Code is to “enhance the quality of engagement between institutional investors and companies”, so that “long term returns to shareholders and the efficient exercise of governance responsibilities” is improved. The Stewardship Code calls upon institutional investors to “comply or explain” – or voluntarily adhere – to seven core principles, which ask them to:
- disclose their policy on stewardship and approach to voting policy;
- monitor and publicly disclose conflicts of interest in relation to stewardship;
- oversee investee companies and decide when to intervene through active dialogue with a company board;
- establish guidelines on when and how to escalate their activities to preserve shareholder value;
- act collectively with other investors when appropriate;
- have a clear policy on proxy voting and disclosure of voting activity; and
- report periodically on their stewardship and voting.
To underscore the connection between good corporate governance and good ownership, the Stewardship Code complements the Corporate Governance Code for listed companies, published last June after extensive revision. A similar set of principles published by UK’s Institutional Shareholders Committee (ISC) last November, the Code on the Responsibilities of Institutional Investors, also served as a model for the Stewardship Code. That initiative flowed directly into the Walker Review of corporate governance in the financial services sector, undertaken in February 2009 and completed in November (the Walker Review proposed creation of an investors’ stewardship code) as well as the FRC’s review of a combined code for corporate governance and investor stewardship.
Meanwhile, things continue to evolve. Yesterday, Responsible Investor reported that the British government is mulling the creation of a single regulatory “governance czar” who would oversee corporate governance, company disclosure, and institutional shareholders’ stewardship of companies. “The idea is to merge the UK Listing Authority (UKLA), the arm of the Financial Services Authority which deals with stock exchange listings, with the Financial Reporting Council [FRC], the body which oversees the Corporate Governance Code and the Stewardship Code,” reported Daniel Brooksbank. The government issued a consultation document titled A New Approach To Financial Regulation: Judgment, Focus, Stability that proposed this merger, as a basis for further discussion.
Even as it struggles with implementation of its new Stewardship Code – last week, Responsible Investor described some hurdles – and tinkers with the regulatory structure, the Brits recognize the importance of shareholder engagement as well as resolving conflicts while seeking common ground. When it comes to money and power, that’s quite an accomplishment.
What’s holding us back from doing the same?