ShareSoc has made a joint response with UKSA on behalf of individual investors to the consultation from the FRC on the revised Stewardship Code.
We believe that the proposed revisions to the Stewardship Code are a sound attempt to make the Code more meaningful and to give it teeth. However, we have concerns that in some areas the Code is seeking to set expectations on which it will be very difficult to deliver and which could ultimately result in the Code becoming discredited. In particular, we are concerned that there is almost no guidance on how information which demonstrates excellent stewardship can be effectively communicated to those who have most need of the information, namely the end-investors. Our key points are:
- The 2012 Code identified the aim of investor stewardship as delivering long-term value for beneficiaries while recognising that this also benefited the economy as a whole. We are concerned that the proposed new definition of Stewardship loses this important distinction in the motivations of institutional investors. This might be addressed by, for example, including “and hence” between “beneficiaries” and “the economy and society”.
- The long-term health of economies is likely to lead to increases in sustainable value for investors; this should be a guiding principle for asset managers and asset owners; it prompts the view that they should be seeking to engage with and influence governments and policy-makers as well as influencing directors in investee companies and the issuers of other securities.
- The approach to stewardship will vary for different asset classes; the concept of stewardship, however, is relevant to all asset classes. It is perhaps particularly important that it is recognised as of value for debt instruments as well as equities and for asset allocation.
- The definition helpfully encompasses both the long-term financial value sought by beneficiaries and the additional benefits to them of a healthy economy, society and environment and the ability to invest, when they wish, in line with their ESG preferences.
- The Stewardship Code should be renamed the Investor Stewardship Code to better reflect what investors do and to better acknowledge the role of management and Boards in the stewardship of their shareholders’ capital.
- While the Code recognises that not all investors practice Stewardship, it could make it clearer that practices such as short selling may have objectives centred on corporate failure and hence value destruction in ways that may impact other holdings of their own beneficiaries and undermine good stewardship by others. The Code could usefully require signatories to explain whether or not they undertake such practices and, if so, how they justify them and, if not, how they seek to minimise their impact on sustainable value creation. Furthermore, funds that ‘lend out’ stock which may be used for short-selling by others should give details of stock that they have lent out (regardless of the use that the counterparty intends to make of the stock).
- There is plenty of scope to encourage collaborative action by asset managers and asset owners– particularly across geographical borders and when dealing with governments and other key influencers of economic policy.
- We agree that the use of the Code should remain voluntary.
- The introduction of Activities and Outcomes (A&O) reporting is an important innovation which has the scope to ensure that subscription to the Code is meaningful. A&O reporting should be closely monitored following introduction and asset managers should be given whatever help they need to ensure that their A&O reporting meets expectations.
- The Guidance should include examples of what ‘best practice’ in stewardship reporting looks like; for the avoidance of doubt, examples of poor practice should also be given.
- Issues such as asset allocation and the choice of companies within each component of allocation are essentially operational matters. However, good stewards should report on these issues and the contribution that each makes to fund performance to the beneficiaries on an annual basis. This should be an explicit requirement under Provision 15 of the Code.
The consultation document can be read via this link https://www.frc.org.uk/consultation-list/2019/consulting-on-a-revised-uk-stewardship-code
A copy of our full response is here FRC-Stewardship-Code-2019-Revisions-Consultation-response-Final2