An opportunity for UK institutional investors to practice what they preach?

UK institutional investors should no longer feel left out when it comes to rules about corporate governance and transparency. Now, with the publication of The UK Stewardship Code, institutional investors and their asset managers have a set of guidelines of their own.

The Stewardship Code, which is complimentary to the Corporate Governance Code, ‘aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.’ To begin with, the Financial Reporting Council hopes that it will be taken up by ‘firms who manage assets on behalf of institutional shareholders such as pension funds, insurance companies, investment trusts and other collective investment vehicles.’

Similar to the Corporate Governance Code (and the Combined Code before it), the Stewardship Code is meant to be applied on a comply or explain basis, but as yet there is no regulatory need for asset managers to comply or explain, and perhaps not much peer pressure either.

The Stewardship Code is based on seven principles:

‘Institutional investors should:

• publicly disclose their policy on how they will discharge their stewardship responsibilities.
• have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.
• monitor their investee companies.
• establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value.
• be willing to act collectively with other investors where appropriate
• have a clear policy on voting and disclosure of voting activity.
• report periodically on their stewardship and voting activities.’

A full version of the Code can be found here.

The FRC hopes to see some reporting coming out of the adoption of the Code, and we expect that certain asset managers will take up this challenge faster than others. It could be a way for some asset managers to set themselves apart from the competition, as a commitment to the principles of the Code may well appeal to their clients.

An example of this type of reporting can be found at the website of F&C Asset Management. Their Responsible Investment Report and Responsible Engagement Overlay report detail engagement, voting activities, and how these fit in with their broader investment strategies. It will be interesting to see how many other institutional investors follow this lead.