The Walker Review on Corporate Governance recommended that institutions that are authorised to manage assets for others should be required to disclose clearly their commitment to the UK Stewardship Code. The Financial Services Authority ("FSA") has implemented this recommendation through changes to the FSA Handbook. Accordingly, with effect from today, 6 December 2010, asset managers (other than venture capital firms) are required to disclose on their websites the nature of their commitment to the Stewardship Code or, where they do not so commit, their alternative investment strategy.
The introduction of the new rule follows the FSA Consultation Paper CP10/15. The consultation ended on 6 September 2010, following which the FSA published FSA Handbook Notice 104 (dated 12 November 2010). The Handbook Notice contains details of the rationale behind the introduction of the new rule and a summary of the responses received. To effect the new rule, FSA instrument 2010/57, which comes into force today, amends the FSA Handbook by introducing COBS 2.2.3R.
The Stewardship Code and the accompanying guidance note "Implementation of the UK Stewardship Code" are available on the Financial Reporting Council's ("FRC") website. The Association of Investment Companies has also published a guidance note for investment company boards containing advice when considering the implications of the Stewardship Code.
Compliance with the new rule
Asset managers need to include the statement on their websites. Where firms do not currently have a website, FSA Handbook Notice 104 states that disclosure should be made in another accessible form. The new rules do not prescribe where on a firm's website the statement should be located. However, it must be disclosed clearly and the FSA encourages firms to make clear the linkage between the statement and other relevant investment information.
The Stewardship Code came into effect on 2 July 2010 and outlines good practice with regard to institutional investors' engagement with the boards of firms in which they invest. The Code is overseen by the FRC.
The Code is stated to be addressed to firms who manage assets on behalf of institutional shareholders in addition to the institutional shareholders themselves. Pension funds and other shareholders who do not wish to engage directly with their investee companies are encouraged to contribute by, for example, mandating their fund managers to do so on their behalf.
The purpose of the Code is to improve the quality of corporate governance through promoting better dialogue between investors and investee company boards, and to encourage more transparency about how investors oversee the companies in which they invest.
The Code is made up of seven principles (and accompanying guidance) which encourage disclosure of areas such as the conflicts of interest fund managers face, how investee companies are monitored, under what circumstances a fund manger would "intervene" in corporate activity and how votes are cast at general meetings. Institutions that manage several types of fund need only make one statement.
The seven principles are:
- Principle 1 – publicly disclose their policy on how they will discharge their stewardship responsibilities
- Principle 2 – have a robust policy on managing conflicts of interests in relation to stewardship and this policy should be publicly disclosed
- Principle 3 – institutional investors should monitor their investee companies
- Principle 4 – establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value
- Principle 5 – be willing to act collectively with other investors where appropriate
- Principle 6 – have a clear policy on voting and disclosure of voting activity
- Principle 7 – report periodically on their stewardship and voting activities
The FRC will monitor the take-up and application of the Stewardship Code, and will review individual policy statements in order to monitor the general quality of disclosure.
Corporate Governance issues in general
To assist you in keeping abreast of corporate governance developments, we have prepared a status report on various corporate governance issues which may affect you. To access the document, click here.