The UK Stewardship Code 2020: simply redundant bureaucracy?

Introduction

The first version of the UK Corporate Governance Code (the Code) was published in 1992 by the Cadbury Committee. It defined corporate governance as ‘the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.’ This remains true today, but the environment in which companies, their shareholders and wider stakeholders operate continues to develop rapidly.………………….

…………………Over the years the Code has been revised and expanded to take account of the increasing demands on the UK’s corporate governance framework……………….

…………….At the heart of this Code is an updated set of Principles that emphasise the value of good corporate governance to long-term sustainable success. By applying the Principles, following the more detailed Provisions and using the associated guidance, companies can demonstrate throughout their reporting how the governance of the company contributes to its long-term sustainable success and achieves wider objectives……………….

………………In line with their responsibilities under the UK Stewardship Code, investors should engage constructively and discuss with the company any departures from recommended practice. In their consideration of explanations, investors and their advisors should pay due regard to a company’s individual circumstances. While they have every right to challenge explanations if they are unconvincing, these must not be evaluated in a mechanistic way. Investors and their advisors should also give companies sufficient time to respond to enquiries about corporate governance…….

Board leadership & company purpose

Principles

A    a successful company is led by an effective & entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society

B    The board should establish the company’s purpose, values & strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture

C    the board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed

D    in order for the company to meet its responsibilities to shareholders & stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties

E    the board should ensure that workforce policies are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern.

Division of responsibilities

Composition, succession & evaluation

Audit, risk & internal control

Remuneration

A framework of best practice for member companies

1    Introduction

1. 1. Purpose of the AIC Code

The purpose of the AIC Code of Corporate Governance© (AIC Code) is to provide boards of our member companies with a framework of best practice in respect of the governance of investment companies………….

2    Endorsements and statements of support

2.1    Financial Reporting Council Endorsement…………..

3    Background to the AIC Code

Corporate governance does not exist in a vacuum and the AIC encourages shareholders to engage with boards where and when appropriate and to give careful consideration to boards’ proposals.

The AIC Code is built around an understanding of what shareholders want or expect to achieve by holding shares in investment companies and the role boards play in delivering these objectives…………….

4    Reporting on the Code

The following is an extract from the UK Code which also applies to the AIC Code……………….

5    Board leadership and purpose

5.1 Principles

1. A successful company is led by an effective board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. (Incorporates relevant content from UK Code Principle A)
2. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture. (UK Code Principle B)
3. The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed. (UK Code Principle C)
4. In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties. (UK Code Principle D)
5. [Intentionally left blank]

5.2    Provisions

6    Division of responsibilities

7    Composition, succession & evaluation

8    Audit, risk & internal control

9    Remuneration 

Introduction

Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society…………..

……………Environmental, particularly climate change, and social factors, in addition to governance, have become material issues for investors to consider when making investment decisions and undertaking stewardship. The Code also recognises that asset owners and asset managers play an important role as guardians of market integrity and in working to minimise systemic risks as well as being stewards of the investments in their portfolios.

How to report

All Principles are supported by reporting expectations. These indicate the information that organisations should include in their Stewardship Report and will form the basis of assessment of reporting quality.

When applying the Principles, signatories should consider the following, among other issues:

• the effective application of the UK Corporate Governance Code and other governance codes;
• directors’ duties, particularly those matters to which they should have regard under section 172 of the Companies Act 2006;
• capital structure, risk, strategy and performance
• diversity, remuneration and workforce interests;
• audit quality;
• environmental and social issues, including climate change; and
• compliance with covenants and contracts

Principles for asset owners and asset managers

Purpose & governance

Principle 1

Signatories’ purpose, investment beliefs, strategy, and culture enable stewardship that creates long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society

Reporting expectations

Context

• the purpose of the organisation and an outline of its culture, values, business model and strategy; and
• their investment beliefs, i.e. what factors they consider important for desired investment outcomes and why

Activity…..

Outcome…..

Principle 2 

Signatories’ governance, resources and incentives support stewardship

Reporting expectations

Activity

Signatories should explain how:

• their governance structures and processes have enabled oversight and accountability for effective stewardship within their organisation and the rationale for their chosen approach;
• they have appropriately resourced stewardship activities, including:
• • their chosen organisational and workforce structures;
  • their seniority, experience, qualifications, training and diversity;
  • their investment in systems, processes, research and analysis;
  • the extent to which service providers were used and the services they provided; and
  • performance management or reward programmes have incentivised the workforce to integrate stewardship and investment decision-making

Outcome ……..

Principle 3

Signatories manage conflicts of interest to put the best interests of clients and beneficiaries first

Reporting expectations

Context

Signatories should disclose their conflicts policy and how this has been applied to stewardship.

Activity……

Outcome…..

Principle 4

Signatories identify and respond to market-wide and systemic risks to promote a well-functioning financial system.

Reporting expectations

Activity

Signatories should explain

• how they have identified and responded to market-wide and systemic risk(s), as appropriate;
• how they have worked with other stakeholders to promote continued improvement of the functioning of financial markets;
• the role they played in any relevant industry initiatives in which they have participated, the extent of their contribution and an assessment of their effectiveness, with examples; and
• how they have aligned their investments accordingly

Outcome………

Principle 5

Signatories review their policies, assure their processes and assess the effectiveness of their activities

Reporting expectations

Activity

Signatories should explain

• how they have reviewed their policies to ensure they enable effective stewardship;
• what internal or external assurance they have received in relation to stewardship (undertaken directly or on their behalf) and the rationale for their chosen approach; and
• how they have ensured their stewardship reporting is fair, balanced and understandable.

Outcome………..

Investment approach

Principle 6

Signatories take account of client and beneficiary needs and communicate the activities and outcomes of their stewardship and investment to them

Reporting expectations

Context

Signatories should disclose:

• the approximate breakdown of:
  • the scheme(s) structure, for example, whether the scheme is a master trust, occupational pension fund, defined benefit or defined contribution, etc;
  • the size and profile of their membership, including number of members in the scheme and the average age of members;

  OR

  • their client base, for example, institutional versus retail, and geographic distribution;
  • assets under management across asset classes and geographies;
• the length of the investment time horizon they have considered appropriate to deliver to the needs of clients and/or beneficiaries and why

Activity…………

Outcome………..

Principle 7

Signatories systematically integrate stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfil their responsibilities.

Reporting expectations

Context…….

Activity

Signatories should explain:

• how integration of stewardship and investment has differed for funds, asset classes and geographies;
• how they have ensured:
  • tenders have included a requirement to integrate stewardship and investment, including material ESG issues; and
  • the design and award of mandates include requirements to integrate stewardship and investment to align with the investment time horizons of clients and beneficiaries

OR

• the processes they have used to:
  • integrate stewardship and investment, including material ESG issues, to align with the investment time horizons of clients and/or beneficiaries; and
  • ensure service providers have received clear and actionable criteria to support integration of stewardship and investment, including material ESG issues

Outcome…………

Principle 8

Signatories monitor and hold to account managers and/or service providers.

Reporting expectations

Activity

Signatories should explain how they have monitored service providers to ensure services have been delivered to meet their needs.

Outcome……….

Engagement

Principle 9

Signatories engage with issuers to maintain or enhance the value of assets

Reporting expectations

Activity

Signatories should explain:

• the expectations they have set for others that engage on their behalf and how;

OR

• how they have selected and prioritised engagement (for example, key issues and/or size of holding);
• how they have developed well-informed and precise objectives for engagement with examples;
• what methods of engagement and the extent to which they have been used;
• the reasons for their chosen approach, with reference to their disclosure under Context for Principle 1 and 6; and
• how engagement has differed for funds, assets or geographies

Outcome……….

Principle 10

Signatories, where necessary, participate in collaborative engagement to influence issuers.

Reporting expectations

Activity

Signatories should disclose what collaborative engagement they have participated in and why, including those undertaken directly or by others on their behalf

Activity……….

Outcome………

Principle 11

Signatories, where necessary, escalate stewardship activities to influence issuers

Reporting expectations

Activity

Signatories should explain:

• the expectations they have set for asset managers that escalate stewardship activities on their behalf;

OR

• how they have selected and prioritised issues, and developed well-informed objectives for escalation;
• when they have chosen to escalate their engagement, including the issue(s) and the reasons for their chosen approach, using examples; and
• how escalation has differed for funds, assets or geographies

Outcome………..

Exercising rights & responsibilities

Principle 12 

Signatories actively exercise their rights and responsibilities.

Reporting expectations

Reporting expectations for listed equity and fixed income investments are below. In addition, signatories should report on how they have exercised their rights and responsibilities across other asset classes they are invested in, where they have the ability to do so, as disclosed in their reporting against Principle 6.

Context

Signatories should:

• state the expectations they have set for asset managers that exercise rights and responsibilities on their behalf;

OR

• explain how they exercise their rights and responsibilities, and how their approach has differed for funds, assets or geographies. In addition, for listed equity assets, signatories should:
• disclose their voting policy, including any house policies and the extent to which funds set their own policies;
• state the extent to which they use default recommendations of proxy advisors
• report the extent to which clients may override a house policy;
• disclose their policy on allowing clients to direct voting in segregated and pooled accounts; and
• state what approach they have taken to stock lending, recalling lent stock for voting and how they seek to mitigate ‘empty voting’.

Activity………..

Outcome……….

Principles for service providers

1    Purpose, strategy & culture

2    Governance, resources & incentives

3    Conflicts of interest

4    Promoting well-functioning markets

5    Supporting client’s stewardship

6    Review & assurance