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The Financial Reporting Council (“FRC”) published The UK Stewardship Code yesterday. The declared purpose of the Code is “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”.

The FRC sees the UK Stewardship Code as complementary to the UK Corporate Governance Code for listed companies and, like that Code, it should be applied on a “comply or explain” basis.

The Code is addressed in the first instance to firms who manage assets on behalf of institutional shareholders such as pension funds, insurance companies, investment trusts and other collective investment vehicles. The FRC expects those firms to disclose on their websites how they have applied the Code, and the Financial Services Authority will shortly begin consultation on proposals to introduce a mandatory requirement for authorised asset managers to disclose whether or not they comply with the Code, details of which will be added when available. Institutions that manage several types of fund need only make one statement.

Broadly speaking the financial sector is supportive of the concept of the Stewardship Code as a means of promoting long-term engagement between shareholders and boards. The fact is that whilst is has been easy to blame the directors of banks and other financial institutions for the present crisis the real blame should be laid at the door of most institutional shareholders who failed to engage properly – if at all – with the companies in which they had invested their clients’ money.

I know from my own experience as a director of a listed company that the vast majority of shareholders just don’t respond to information sent to them and don’t bother voting on issues that are laid before them at Annual or Extraordinary General Meetings. That doesn’t stop them complaining, or blaming the directors when things go wrong.

Institutional shareholders should have done more to provide an effective governance counterweight to the culture of excessive risk taking, which in no small part led to the current financial crisis. If this Code can encourage them to establish an ongoing dialogue with the companies in which they have significant shareholdings it will be a success.

Small investors, and that includes members or pension schemes, should ensure that the managers of their assets or funds are complying with the Code by checking on the manager’s website. If they don’t comply that is the time to start asking awkward questions.

The fact is that institutional shareholders have a key role to play in the corporate governance system. This Code should be a catalyst for them to rethink how they can fulfil this role effectively.
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Category: Guide to City Jargon

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