The Financial Reporting Council (FRC) has announced details of the 125 successful signatories – representing £20 tn ($28 tn) in assets under management – to its new UK Stewardship Code.
Following a review process that considered organizations’ investment styles, sizes and types, 125 out of 189 applications made the FRC’s list – the regulator’s first since the stewardship code was revised in 2020.
The FRC received applications from 147 asset managers, 28 asset owners – including pension funds and insurers – and 14 service providers, including data and information providers and investment consultants. The successful asset managers include AXA Investment Managers, BlackRock, BlueBay Asset Management and Legal & General Investment Management.
David Styles, director of corporate governance and stewardship at the FRC, said in a recent FRC podcast that the regulator looks for evidence of good stewardship across the investment process.
‘It’s the decision to invest in the asset, it’s the monitoring of the asset, it’s the engagement with the company or other assets – either on a regular basis or when there’s an issue that needs to be solved – and it’s the exercise of rights,’ he said.
He also noted the importance of highlighting the outcome of stewardship processes. ‘Engagement with stewardship assets would hopefully drive an outcome and those are the types of information, the types of evidence we’re looking for,’ he said.
Evolution of the code
The UK Stewardship Code, which is voluntary, sets high standards of stewardship for those investing money on behalf of UK savers and pensioners. The FRC published its first code in July 2010 in response to a 2009 report by Sir David Walker on the governance of banks and other financial institutions.
A revised version of the code was published in September 2012. Changes included the clarification of the respective responsibilities of asset managers and asset owners for stewardship, clearer explanations on conflicts of interest and requirements for greater assurance of stewardship activities to be provided.
In October 2019 a substantially revised and strengthened UK Stewardship Code was published, which took effect on January 1, 2020. The revised version lists 12 ‘apply and explain’ principles for asset managers and asset owners and a separate set of six principles for service providers.
Under the revised version of the code, the FRC asks signatories to apply a set of stewardship principles that relate to their purpose and governance, investment approach, engagement and exercising rights, among other things. Through disclosure, the signatories have to explain how they have enacted these principles.
‘One of the big changes we made to the new code was [to] emphasize the reporting of activities and outcomes over the reporting period to demonstrate effective stewardship,’ explained Styles in the podcast.
Global growth of stewardship codes
The revised code follows other countries creating their own stewardship codes. In 2014 then prime minister Shinzo Abe introduced a Japanese Stewardship Code, which is overseen by Japan’s Financial Services Agency.
The Korea Stewardship Code, published by the Korea Stewardship Code Council on December 16, 2016, outlines seven detailed principles and guidelines that institutional investors holding the shares of publicly listed companies in South Korea should follow.
In addition, in the US, the Investor Stewardship Group (ISG), an investor-led effort that includes some of the largest US-based institutional investors and global asset managers along with several of their international counterparts, has published a set of corporate governance principles. The members include more than 70 US and international institutional investors with combined assets in excess of $32 tn.
Rejected companies disgruntled
Following the publication of the FRC’s signatories, representatives of some of the unsuccessful applicants have expressed concern and frustration.
Schroders, a British multinational asset management company that failed to make the list, says it is ‘frustrated not to be a signatory’ and has been told by the FRC that this is due to ‘the format rather than the substance of our submission,’ reports the Financial Times.
In a press statement, Neil Robson, financial services partner at Katten Muchin Rosenman, expresses his frustrations on behalf of his clients regarding the apply-and-explain process.
‘The fact that many firms that were formerly stewardship code signatories have had the FRC reject their submissions is enormously frustrating,’ he says. ‘Many of these firms, Katten clients included, sent draft submissions to the FRC in February 2021, then received detailed feedback from the FRC, which they acted on, revising their submissions in line with the FRC’s guidance and commentary.
‘To be rejected now because the firms in question didn’t include enough description of actions taken and outcomes achieved, despite describing processes and procedures, is disappointing.’
Unsuccessful applicants are encouraged by the FRC to consider the individual feedback provided along with the upcoming annual review of reporting, which is to be published in November. Unsuccessful applicants can also reapply in future application windows. The next opportunities are October 31, 2021 and April 30, 2022.