Stewardship Code

Question 1

What is the Walker Report?

Answer 1

• A 2009 report on the governance of banks and financial institutions and suggested that banks should have a risk committe.
• As a signatory of the code the following steps should be considered:
  
  • Check the bank annual report for the corporate governance statement and this should explain why there is not a risk committe.
  • Check the audit committe report to establish if the committe has take on some or all of the role of bank risk.
  • Of the explanation is unsatisfactory, then dialogue with the banks to find its point of view.
  • If the reasoning remains unconvinving, encourage the company to fully comply or explain as required by the Code of Corporate Governance.
  • Voting rights can be used to put your position across more formally along with your intention to vote a particular way and the reason why.
  • Finally, consider coordinating actions with other shareholders to find their view point and find a common group with them for a way forward.

Question 2

What are the reasons for lower standards of corporate governance?

Answer 2

• The seperation of ownership and control that is the joint stock company structure and investment management sets the framework for the concept of stewardship.
• Free rider problem:
  
  • Sign up to the code but then contribute little
  • Investors who do not participate in stewardship or a collective engagement will still reap the benefit if the outcome is successful.
  • Their non-participation will make successful outcomes less likely and this is detremental to all.
  • The cost advantage goes to the fund manager that contributes least while the benefits accrue equally to investors
• Principal agent problem:
  
  • Asymmetric information and imperfect oversight, stewardship activites may be inapproprately discharged, which could lead to second-best outcomes and all the while owners will not observes this happening unless effort is take to do so.
  • If fund managers are not pushed by the introduction of a Stewardship code they are likely to underprovide the desired level of stewardship and hence the responsbility for all.

Question 3

What is the shareholders right directive?

Answer 3

• The proposal aims to:
  
  • Identify shareholders, transmission of information and exercise shareholders rights.
  • Transparency of institutional investors asset managers and proxy advisors.
  • Remuneration and related part transactions.
• Stands to empower the wealth management and private client sector, if all shareholder register would take greater note of the wealth management and private sector, they would have great control.
• Greater participation in stewardship would be welcome by many in the sector.
• This is likely to involve standard setters and oversight organisations consciously including the sector to a greater extent than has been the case in the past.

Question 4

What activity can investment stewardship take?

Answer 4

• Monitoring and analysis of company fundamentals which underpin returns in the form of income and growth via dialogue with companies on strategy, performance capital structure and others.
• A willingness to vote on resolutions at company general meetings and to engage on issues that feed into the resolutions with the company general with the aim of an improvement to risk and return.
• Willingness to hold a stock with a view to realising value based on these improvements over times.
• On ESG issues questions may involve energy consumption and land rights and human rights.
• Supporting industry initiatives responding to any public policy consultations.

Question 5

What are the principles of the code?

Answer 5

• Simplicity – comes from the application of the code to shareholder owned companies with a premium listing.
• Accessibility and transparency – the code avoids staying into the specifics of industries. Via the Annual Report, governance information is accessible and transparent to those who wish to read and understand it.
• Accountability – the annual report and AGM allows shareholders to vote and one is required on each significant matter.
• Constructive challenge – comes from the Code’s principles and provisions whose real value lies in the practical challenge placed upon directors as they consider the appropriateness of the principles and provisions within the context of the business.

Question 6

What are the codes drawbacks?

Answer 6

• SC works with the CGC to improve the UK capital market and increase investment in the UK economy and aim is to:
  
  • Many large investors are international in their capital allocation, but the UK code applies to shares held in UK companies.
  • Overseas investors that own UK shares do not come under the Stewardship code limiting applicability.
  • Many large investors are not long only investors and tend to lend stock so their interests may not be to improve companies and the share price.
  • Narrow definition of stewardship – vote and engage directly with companies.
  • Code applies almost exclusively to investment managers and not to their entities in the investment chain.
  • There is not wide agreement of what stewardship is and is a term not recognised in the US
  • Adopted by the FCA but many asset owners are large investors not regulated by the FCA so are not required to produce a stewardship code.