Although the code has been instrumental in improving the quantity and quality of engagement between investors and companies since it was first published in 2010, there is widespread recognition that it needs “significant revision” to ensure it is effective.
The new proposals, contained in the discussion paper, Building a Regulatory Framework for Effective Stewardship, were drafted after extensive consultation with 170 members of the investment community and companies. They included the largest UK asset managers, pension funds, international investors and UK listed companies.
The first key change is a redefinition of “stewardship”. The new definition highlights the primary purpose of stewardship as looking after the assets of beneficiaries that have been entrusted to the care of others, but widens the code’s reach to include investment decision-making and investments in assets beyond listed equity.
This broader scope reflects the significant growth in investment in assets other than in listed company shares, such as fixed-income bonds and infrastructure equity.
As the code makes clear, signatories must use the same “resources, rights and influence” to exercise stewardship, wherever the capital is invested.
Signatories will have to embed a stewardship framework for their business, with a strategy, values and culture designed to enable them to meet their stewardship objectives. The code also introduces higher standards for assets owners and managers governing how they embed their stewardship responsibilities into their investment processes.
Another key change is to require signatories to the code to take into account material environmental, social and governance (ESG) factors – including climate change – when carrying out their stewardship responsibilities.
Signatories will also have to report publicly on an annual basis about their stewardship activities and how effective they think they have been in meeting their stewardship objectives.
Improvements to the code could not have happened quickly enough, given the questions that had been raised about its effectiveness. In December last year, Sir John Kingman criticised the FRC’s approach, which “focuses predominantly on checking the content of stewardship reports, not on actual effectiveness or outcomes”.
In his report on the future of the FRC, he recommended a fundamental shift in approach to ensure the code differentiates excellence in stewardship more clearly, and urged the government to consider whether more powers were needed to assess and promote compliance with it. “If the code remains simply a driver of boilerplate reporting, serious consideration should be given to its abolition,” he added.
Kingman’s remarks have clearly chimed with the FRC. Launching the consultation today, FRC chairman Sir Win Bischoff said that the revisions recognise the significant changes in the investment industry and stewardship landscape since the last revision in 2012.
“It sets both higher expectations for stewardship practice and introduces more rigorous public reporting with a focus on outcomes and effectiveness. We believe the changes proposed put it at the forefront of outcomes and effectiveness internationally.”
Initial reaction to the proposed revisions has been positive. Andrew Ninian, the Investment Association’s director of stewardship and corporate governance, said that asset managers were key players in the stewardship process. As such, they have argued for a long time that any new code should require signatories to report against actual stewardship activity, not just the policy that sits behind them.
“[The code] should also reflect the growing range of issues that asset managers engage on, such as diversity and ESG. The new proposed code recognises these key issues and provides a platform for them to be firmly embedded in the final version of the Stewardship Code.”
Elizabeth Richards, ICAEW’s head of corporate governance, also welcomed the consultation. “Kingman didn’t overlook the Stewardship Code in his review of the FRC, and this FRC consultation seems to reflects his recommendation that the code should focus on outcomes and effectiveness, not on policy statements,” she said.
“In fact, Kingman issued a stern warning. Unless the changes put an end to meaningless reporting and boilerplate language, the code’s days are numbered.”
Ninian added that the Association would work with the FRC on the final code with the aim of ensuring “that the UK reclaims the mantle as a global leader in stewardship”.
The deadline for comments is 27th March