First UK Stewardship Code for institutional shareholders has been published

On 2 July 2010, following a consultation earlier this year, the Financial Reporting Council (FRC) published the first UK Stewardship Code (‘The Code’), which sets out good practice for institutional investors when engaging with UK listed companies.

The Code, which replaces the engagement principles for institutional shareholders contained in the UK Corporate Governance Code and The Combined Code, is based on the Institutional Shareholders Committee’s Code on the Responsibilities of Institutional Investors. It is aimed at asset managers that manage assets for institutional shareholders, institutional investors, service providers and investors based outside the UK. UK-based companies that apply The Code should also try to apply its principles to their overseas holdings.

The Code is to be applied on a “comply or explain” basis and institutional investors can decide whether or not they wish to follow it. However, the FRC is encouraging all institutional investors to publish a statement of compliance, or otherwise, on their website by the end of September 2010 – and to notify the FRC when they have done so. From October 2010, the FRC will publish on its website a list of investors that have published a statement on their compliance.

The Code has seven principles that should be carried out by institutional investors:

Principle 1 (publicly disclose policy on how they will discharge their stewardship responsibilities);

Principle 2  (publicly disclose robust policy on managing conflicts of interest in relation to stewardship);

Principle 3 (monitor investee companies);

Principle 4 (establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value);

Principle 5 (be willing to act collectively with other investors where appropriate);

Principle 6 (clear policy on voting and disclosure of voting activity); and

Principle 7 (report periodically on stewardship and voting activities.)

The next steps

The FRC hopes that The Code will assist companies in gaining a better understanding of the approach and expectations of their major shareholders. To help achieve this, the FRC has said that, from the second half of 2011, it will annually monitor the take-up and application of The Code. The FRC will then decide when to conduct its first review of The Code, which will assess its content and impact, and consider some of the other issues raised during the consultation that were not incorporated into The Code.

Meanwhile, the FSA has launched a consultation on proposals to introduce a mandatory requirement for authorised asset managers to disclose on their website whether or not they comply with The Code. The consultation closes on 6 September 2010.