FRC consultation on the proposed new UK Stewardship Code closed on 19 February. Here is a summary of MM&K’s response

The FRC closed its consultation on the proposed new Stewardship Code on 19 February. MM&K responded as proposals focused on engagement with investors and the role of proxy advisers are matters that affect many of our clients. Here is a summary of our response to the questions posed by the FRC.

1.  Do you support the revised definition of stewardship? (i.e., ‘the responsible allocation, management and oversight of capital to create long-term sustainable value for clients and beneficiaries.’)

Yes. A focus on long-term value creation aligns directly with the principal focus of issuers’ boards of directors

2. Do you support the proposed approach to have disclosures related to policies and contextual information reported less frequently than annually? If yes, do you support the approach set out above?

Separating policy disclosures from actions and outcomes disclosures aligns with the approach in other areas of UK corporate governance, e.g., directors’ remuneration reporting.

A potential issue is consistency in approach to the implementation and application of policy. Non-executive directors who rely on proxy advisors’ voting recommendations need to be confident that the FRC will look for consistency, challenge inconsistency and require explanations of any inconsistency, in the application of policy.

3. Do you agree that the Code should offer ‘how to report’ prompts, supported by further guidance? 

Yes, in principle, with the caveat that the prompts are not intended to be exclusive and should not inadvertently become the ‘boxes’, which if ticked will be deemed to satisfy all disclosure requirements.

‘Comply or explain’, which underpins the UK Corporate Governance Code, means that a clearly thought-through explanation for not complying with the letter of the Code is nonetheless compliance.  The Stewardship principle of ‘Apply and explain’ is a different concept. In relation to both codes, enabling and ensuring constructive engagement is fundamental to achieving a corporate governance environment that works effectively for (i) issuers and (ii) asset owners and managers and their proxy advisors.

4. Do you agree that the updated Code for Asset Owners and Asset Managers should have some Principles that are applied only by those who manage assets directly, and some that are only applied by those who invest through external managers?

This makes sense. The separation should improve reporting clarity. As referred to above, constructive engagement is essential. Integrating stewardship and investment activities should help investment owners and managers communicate consistent messages. Transparent reporting of voting records would demonstrate whether the messages delivered during the engagement process have been acted on consistently.

5. Do the Principles of the updated Code better reflect the different ways that stewardship is exercised between those who invest directly, and those who invest through third parties?

There is a clear intent to recognise the different roles and responsibilities of asset owners and managers (and proxy advisors – see below). See also comments above about (i) integrating stewardship and investment activities, (ii) engagement and (iii) voting records.

6. Do you agree that the updated Service Providers’ Code should have some Principles that are applied only by proxy advisors, and some that are only applied by investment consultants?

This makes sense as proxy advisors and investment consultants fulfil different roles. We and our clients have greater experience of proxy advisors from whom the consistent application of policy, voting disclosures and engagement record are essential to building and maintaining trust.

7. Should signatories be able to reference publicly available external information as part of their Stewardship Code reporting, recognising this means Stewardship Code reports will no longer operate as a standalone source of information?

The proof of that will emerge following implementation of the new Code. However, proposed Code Principles recognise the different roles and responsibilities of asset owners, managers and service providers.

The Principles are clear. The ‘How to report’ prompts should help to provide clarity. However, trust is fundamental to the success of any Code. Clear reporting by signatories is one aspect. Another is that the FRC is seen to deal promptly and consistently with failure to ‘apply and explain’ in relation to reporting on Code Principles.

8. Do the streamlined Principles capture relevant activities for effective stewardship for all signatories to the Code?

This question illustrates the tension between (i) avoiding duplication and reducing the burden of reporting and (ii) providing transparent, intelligible reporting.

Avoiding duplication without risking clarity or accuracy is desirable. Clear signposting and accessibility are essential. Both need to be present for cross-referencing to be viable. To maintain relevance, the cross-referenced information should be information reported in and for the period to which reporting under the Stewardship Code relates. The FRC’s policy in this connection will be key. Compliance with that policy should be part of the Code.

MM&K is neither asset owner, manager nor proxy advisor. However, many of our clients frequently encounter all three. A mutually beneficial partnership between companies and their investors is fundamental to value creation and a strong economy. Corporate governance principles applicable to both should require of each the same level of diligence, rigour and transparency, focusing on engagement. Our view is that the proposed new Stewardship Code is a move in the right direction.

MM&K is an independent firm advising on executive remuneration, performance and related corporate governance. To discuss this article or for more information, please contact paul.norris@mm-k.com.

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