The Financial Reporting Council (FRC) has published its assessment of signatories’ reporting against the Stewardship Code (the “Code”), which categorises signatories into tiers based on the quality of their Code statements. The tiering exercise was undertaken with the aim of improving the quality of reporting against, and maintaining the credibility of, the Code, and encouraging greater transparency in the market.

Tiering distinguishes between those signatories who report well and display their commitment to stewardship, and those where reporting improvements are necessary. Code signatories were encouraged to improve their statements and thereby reaffirm their commitment to stewardship.

According to the FRC press release, the tiering exercise has improved the quality of reporting against the Code, promoted best practice and resulted in greater transparency in the UK market.

The FRC first published the Code in 2010, with the principal aim of making institutional investors be active and engage in corporate governance in the interests of their shareholders. The Code applies to fund managers, but institutional investors are encouraged to disclose their own level of compliance with the Code’s principles. The Code is complementary to the UK Corporate Governance Code for listed companies and is similarly applied on a ‘comply or explain’ basis.

The seven principles of the Code require signatories to:

  1. publicly disclose their policy on how they will discharge their stewardship responsibilities;

  2. have a robust policy on managing conflicts of interest in relation to stewardship which should be publicly disclosed;

  3. monitor their investee companies;

  4. establish clear guidelines on when and how they will escalate their stewardship activities;

  5. be willing to act collectively with other investors where appropriate;

  6. have a clear policy on voting and disclosure of voting activity; and

  7. report periodically on their stewardship and voting activities.

Tiering under the Stewardship Code

The FRC has tiered the signatories to the Code according to the quality of the reporting in their statements based on the above seven principles and the Code’s supporting guidance. Signatories to the Code are listed in three categories: asset managers, asset owners and service providers. Asset managers have then been categorised into 3 tiers and other signatories into 2 tiers on the following basis:

  • Tier 1: Signatories provide a good quality and transparent description of their approach to stewardship and explanations of an alternative approach where necessary.

  • Tier 2: Signatories meet many of the reporting expectations but report less transparently on their approach to stewardship or do not provide explanations where they depart from provisions of the Code.

  • Tier 3: Significant reporting improvements need to be made to ensure the approach is more transparent. Signatories have not engaged with the process of improving their statements and their statements continue to be generic and to provide no, or poor, explanations where they depart from the provisions of the Code.

The FRC states that the additional tier for asset managers reflects the greater relevance of the Code’s provisions to asset managers, their role as agents and the wide range of reporting quality. The FRC has also indicated that asset managers who have not achieved at least Tier 2 status after six months will be removed from the list of signatories to the Code. The FRC invites contact from signatories, particularly those in Tier 3, to discuss improvements to their reporting.

The FRC stresses that inclusion in these lists does not mean formal endorsement by the FRC of an institution's compliance with the Code; the purpose of the Statements is solely to enable the market to judge the level of commitment and to provide a basis for discussion with relevant parties. Further, the lists do not include organisations which have indicated to the FRC that they wish to explain their alternative investment strategy rather than commit to the Code, or organisations which have informed the FRC that they have produced a policy statement but do not wish to be included in this list.