Political and regulatory news
Issue 3 - 22 July 2010
Expectations for investor engagement raised
The Financial Reporting Council has published best practice recommendations for institutional shareholders and their agents.
The Financial Reporting Council has published a Stewardship Code on engagement practices by institutional investors. It seeks to improve dialogue between shareholders and the boards of companies in which they invest and to encourage investors to be more transparent on their engagement activities. The Code is the result of extensive consultation (see previous article) but the final version is heavily based on the Institutional Shareholders’ Committee ‘Code on the Responsibilities of Institutional Investors’.
The FRC wants investors to publish a statement on their engagement activities on their own website. This would explain how they have applied the Code. The FSA is considering whether to make these disclosures compulsory for some market participants. If adopted, this approach would mirror the governance reporting model for public companies. They are required to make a ‘comply or explain’ report against the UK Corporate Governance Code as part of the listing rules (see article).
The adoption of a comply or explain approach is welcome as it allows flexibility in compliance and recognises that different investors have different strategies on engagement.
The FRC will publish a list on its own website of investors which have reported against the Stewardship Code.
Ideally the Stewardship Code will help rebalance the governance and engagement obligations of investors and companies. If effective engagement can be delivered this may help boards in their discussions with their shareholders about issues which uniquely affect investment companies (for example, in relation to board composition and the relationship with external fund managers). The Code says that investors and their agents should give careful consideration to explanations provided by companies where they depart from accepted practice. Investors and others involved in the process should make reasoned judgements in each case. They are also encouraged to give a timely explanation of their standpoint and be prepared to enter into a dialogue with the company if they do not support its approach. Ideally this would encourage a shift away from a ‘tick box’ approach to governance, although it may take some while for market practice to reach these standards.
The chances of securing this outcome will be enhanced if corporate governance and proxy voting agencies are also prepared to live up to the principles set out on engagement. The FRC has encouraged other parties to have regard to the standards set out in the Code, but it remains to be seen what impact this entreaty will have.
Engagement practice is also being considered by the European Commission. It has published a green paper on governance issues for financial institutions (see article) which considers the role of shareholders. It is asking for views on whether disclosure of voting practices should be compulsory, whether institutional investors should be obliged to follow a code of best practice (like the Stewardship Code), and how dialogue between shareholders and companies can be enhanced. The publication of the Stewardship Code is an important step in setting out the UK’s position on shareholder responsibilities.
To view the FRC’s Stewardship Code, click here.
To view the FSA’s consultation on disclosures against the Stewardship Code, click here.
This is the last article in this edition.
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