Corporate Governance: Revised UK Stewardship Code
On 24 October 2019, the Financial Reporting Council (FRC) published the UK Stewardship Code 2020 (2020 Code) which will take effect from 1 January 2020.
The FRC has described the new version as a ‘substantial and ambitious’ revision to the 2012 edition with high expectations of those investing money on behalf of UK savers and pensioners and a much greater focus on the activities and outcomes of stewardship, not just policy statements.
The 2020 Code has been tailored towards 3 main categories of signatories with the aim of aligning the whole investment community:
- Asset owners: institutional investors responsible for protecting and enhancing assets on behalf of underlying beneficiaries;
- Asset managers: individuals or organisations with responsibility for the day-to-day management of assets; and
- Service providers: individuals or organisations that do not manage investments directly or do not have fiduciary responsibility, but play a key role in the investment community (i.e. they provide services that enable clients to deliver quality stewardship).
New definition of ‘stewardship’
‘Stewardship’ is defined as 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’.
The 2020 Code does not prescribe a single approach to effective stewardship. Instead, it allows organisations to meet the expectations in a manner that is aligned with their own business model and strategy.
Revised Structure and Principles
The 2020 Code has been restructured so that it follows a similar structure to that of the 2018 UK Corporate Governance Code published by the FRC last year. The 2020 Code is divided into 4 main sections, which cover the following:
- Purpose and governance;
- Investment approach;
- Engagement; and
- Exercising rights and responsibilities.
Principles and provisions are grouped within these sections with 12 ‘apply and explain’ principles for asset owners and asset managers with reporting expectations, and 6 ‘apply and explain’ principles for service providers with reporting expectations.
Increased focus on environmental, social and governance (ESG) issues
There are new expectations about how investment and stewardship is integrated, including in relation to ESG issues with signatories expected to take ESG factors, including climate change, into account and to ensure their investment decisions are aligned with the needs of their clients.
Investors will need to consider if they have the measures in place to monitor these focus areas.
Categories of asset classes
Signatories are now expected to explain how they have exercised stewardship across asset classes beyond listed equity, such as fixed income, private equity and infrastructure, and in investments outside the UK.
When applying the principles, signatories are required to consider the following, amongst 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.
Focus on purpose, investment beliefs, strategy and culture
Signatories are now required to explain their organisation’s purpose, investment beliefs, strategy and culture and how these enable them to practice stewardship. They are also expected to show how they are demonstrating this commitment through appropriate governance, resourcing and workforce incentives.
Organisations wanting to become signatories to the 2020 Code will be required to produce an annual Stewardship Report explaining how they have applied the 2020 Code in the previous 12 months and what the outcome of their activities was. Reporting will need to describe (amongst other things) engagement activities undertaken and, where relevant, voting policy and practices and records.
The FRC will evaluate Stewardship Reports against its assessment framework, and those that meet the reporting expectations will be listed as signatories to the 2020 Code. To be included in the first list of signatories, organisations must submit a final Stewardship Report to the FRC by 31 March 2021.
The FRC has included more guidance on the content and format of reports stating that Stewardship Reports should be engaging, succinct and in plain English whilst also being fair, balanced and understandable.
UK Stewardship Code 2012
The FRC will accept applications to the UK Stewardship Code 2012 until 31 December 2019.
Organisations will remain signatories to the UK Stewardship Code 2019 until the first list of signatories to the 2020 Code is published. Existing signatories to the UK Stewardship Code 2012 will need to submit a Stewardship Report that meets the FRC’s reporting expectations in the 2020 Code, in order to be listed as signatories to it.