UK: disclosure of commitment to the UK Stewardship Code

The latest consultation paper published by the Financial Services Authority - available here (pdf) - outlines a proposed amendment to the Conduct of Business Sourcebook which will require disclosure in respect of the FRC's Stewardship Code. The proposed amendment provides:

A firm, other than a venture capital firm, which manages investments for a professional client that is not a natural person must disclose clearly on its website, or if it does not have a website in another accessible form:

• the nature of its commitment to the Financial Reporting Council’s Stewardship Code; or
• where it does not commit to the Code, its alternative business model".

UK: the first Stewardship Code published

The Financial Reporting Council has today published the UK Stewardship Code: see here (pdf). Operating on the 'comply or explain' basis, the code contains seven principles and accompanying guidance. For example, Principle 1 provides that "Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities". The Stewardship Code accompanies the revised corporate governance code published earlier this year.

The purpose of the code, as explained in its preface, is "to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities". Further information concerning the Code and its implementation is available here (pdf). This document also explains:

... there were a number of significant issues raised by the consultation which are not addressed in the Code and which merit further consideration. These include, for example, whether institutional investors should disclose their policies on stock lending, arrangements for voting pooled funds, and the nature of the information to be disclosed on voting records. The FRC will carry out further work on these issues in advance of the monitoring exercise planned for the second half of 2011".

UK: the FRC's annual report and work programme

The Financial Reporting Council has published its annual report for 2009/10 and its work programme for 2010/11: see, respectively, here (pdf) and here (pdf).

Plans include the introduction of the Stewardship Code for Institutional Investors and work exploring the ways in which the usefulness of information in audit reports can be enhanced from the perspective of investors and other users.

UK: revised Corporate Governance Code published

The Financial Reporting Council has today published a revised edition of the UK's Corporate Governance Code (formerly known as the Combined Code): see here (pdf). The new Code applies to financial years beginning on or after 29 June 2010.

A short summary of some of the changes included in the new edition is provided in the accompanying press release and more detailed information is available in the report on the consultation process leading to the publication of the new Code: see here (pdf).

The changes include a new provision (B.7.1) concerning directors' election: "All directors of FTSE350 companies should be subject to annual election by shareholders". With regard to gender diversity, a new supporting principle provides that "[t]he search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender".

In its press release, the FRC states that it intends to publish its Stewardship Code for Institutional Investors by the end of next month. Further background on the review leading to the new Code is available here.

UK: stewardship code consultation - responses published

The Financial Reporting Council has published the responses received in respect of its consultation on the stewardship code for institutional investors: see here.

UK: the IoD on takeover rule reform and the stewardship code

The Institute of Directors is calling for reform of the UK takeover rules: see here. The Institute argues, amongst other things, that a greater role should be given to the shareholders of the bidding company and advocates a rule that would require hostile takeovers to be approved by a two-thirds majority of shareholders in the target and bidding companies.

The Institute has also published its submission to the FRC's consultation on the stewardship code for institutional investors - see here - and has called for much greater engagement between institutional investors and boards where the investor holds more than one per cent of the company's market capitalisation. The Institute also argues that the stewardship code should deal explicitly with share lending and that it should recognise that it is bad practice to borrow shares for the purpose of shareholder voting.

UK: GC100 responses - FRC stewardship code consultation and ICSA Higgs review

GC100 - the Association for the General Counsel and Company Secretaries of FTSE100 companies - has published its submissions to the FRC's stewardship code consultation and ICSA's Higgs guidance review: see, respectively, here (pdf) and here (pdf).

UK: ICSA response to FRC stewardship code consultation

The Institute of Chartered Secretaries and Administrators (ICSA) has published its response to the Financial Reporting Council consultation on the stewardship code for institutional investors: see here (pdf). ICSA supports the policy objectives identified by the FRC in its consultation paper (here, pdf) and is, in general, supportive of the principles in the code.

UK: FRC consults on its priorities for 2010/11

The Financial Reporting Council has published, for consultation, its priorities for 2010/11: see its draft plan (pdf). Major activities include implementing changes to the Combined Code (to become known as the the UK Corporate Governance Code); supporting the introduction of a Stewardship Code for institutional investors; considering whether the need remains for updated guidance for directors and audit committees arising from the financial crisis; and continuing work to improve narrative reporting, including disclosures concerning business models.

UK: election 2010 - the Labour Party manifesto

The Labour Party published its election manifesto today: see here (pdf). Chapter 1, page 8, sets out several proposals under the heading of corporate governance reform:

To build strong businesses we need skilled managers, accountable boards, and committed shareholders – all with a culture of long-term commitment. We will strengthen the 2006 Companies Act where necessary better to reflect these principles. The UK’s Stewardship Code for institutional shareholders should be strengthened and we will require institutional shareholders to declare how they vote and for banks to put their remuneration policies to shareholders for explicit approval.

Too many takeovers turn out to be neither good for the acquiring company or the firm being bought. The system needs reform. Companies should be more transparent about their long-term plans for the business they want to acquire. There needs to be more disclosure of who owns shares, a requirement for bidders to set out how they will finance their bids and greater transparency on advisers’ fees.

There should be a higher threshold of support – two-thirds of shareholders – for securing a change of ownership and the case for limiting votes to those on the register before the bid should be examined".

These proposals are, inevitably, vague and imprecise in places and they raise many questions, particularly concerning the manner in which the proposed takeover reforms will be achieved. Despite the statement that the takeover process requires reform, there is nothing to suggest that a future Labour Government would be prepared to challenge the shareholders' central position in the UK corporate governance framework. Can changes to the rules regarding takeovers be made without also considering the wider governance framework?

A greater role for shareholders regarding banks' remuneration policy is envisaged in the manifesto although it is not clear how the proposal for "banks to put their remuneration policies to shareholders for explicit approval" would be different from the advisory vote currently required by Section 439 of the Companies Act (2006). What does explicit approval mean in this regard?

Elsewhere there is a clear commitment - "we will require institutional shareholders to declare how they vote" - which suggests that a future Labour Government would exercise the power available to it under Section 1277 of the Companies Act (2006). With regard to institutions, the manifesto refers to strengthening the UK's Stewardship Code, although the consultation on the content of this Code has not yet been completed by the Financial Reporting Council. The FRC is considering whether the Stewardship Code should be based on the Code on the Responsibilities of Institutional Investors issued by the Institutional Shareholders’ Committee (ISC). The manifesto reference to strengthening the Stewardship Code may well mean the ISC Code, but this would be to pre-empt the results of the FRC's consultation.

UK: ICGN conference - a couple of speeches

At last week's ICGN corporate governance conference, speeches were delivered by, amongst others, Lord Myners, the Financial Services Secretary at HM Treasury, and Sir Christopher Hogg, chairman of the Financial Reporting Council: see, respectively, here (html) and here (pdf).

Lord Myners used his speech to repeat the point that he has long made - "Shareholders have duties as owners; and they should fulfill them" - and questioned the reluctance expressed by some for further changes in the governance framework.

Sir Christopher Hogg's speech concerned the FRC's work on the proposed Stewardship Code for Institutional Investors. He recognised that it was appropriate for the FRC to undertake this work but warned that it represented a considerable challenge in terms of difficulty and reputational risk. Sir Christopher also observed:

In the years since the Cadbury Committee Code was published in 1992 a great deal has been achieved in corporate governance. However, the monitoring of corporates by their shareholders is being profoundly affected by some major trends in the investment industry ... The FRC is acutely aware of the impact of these trends, which has been indicated by many consultations in recent years and brought to a head by the financial crisis ... There is scope and time for the FRC to remedy this. But success in doing so cannot be taken for granted, will take years, not months, and will require changed attitudes, practices and policies on both sides of the engagement process".

UK: the Walker Review of bank governance - final recommendations published

Sir David Walker has this morning published his final recommendations following his review of the governance of banks and other financial institutions. An overview is available in the accompanying press release. Amongst Sir David's 38 recommendations are the following:

• Institutional shareholders to sign up to a Stewardship Code, sponsored by the Financial Reporting Council with compliance monitored by the Financial Services Authority (the Code on the Responsibilities of Institutional Investors prepared by the Institutional Shareholders’ Committee will become the Stewardship Code)
• Annual re-election for the chairman of the board
• The chairman of a major bank should be expected to commit a substantial proportion of his or her time, probably around two-thirds, to the business
• An expanded role for the remuneration committee with regard to firm wide remuneration policy and "high end" employees
• Disclosure, within remuneration bands, of the number of "high end" employees (including executive directors)
• Deferral of incentive payments should provide the primary risk adjustment mechanism to align rewards with sustainable performance for executive board members and “high end” employees
• If the remuneration report receives less than 75% of the votes cast the remuneration committee chair should stand for re-election in the following year
• Greater expectations placed on non-executive directors regarding time commitment and tougher scrutiny by the Financial Services Authority
• Banks should have a board level risk committee chaired by a non-executive director
• The chief risk officer should have a reporting line to the risk committee and his or her removal should require board approval

Sir David proposes that most of his recommendations should be enforced through inclusion in the Combined Code on Corporate Governance or a separate Stewardship Code for institutional investors, both of which operate on a 'comply or explain' basis. The recommendations on pay disclosure will be included in the Financial Services Bill currently before Parliament.

Related video and audio resources: Sir David discussed his recommendations on the Radio 4 Today programme this morning: listen here. The BBC News website has a short video of Sir David discussing remuneration here. A video of Sir David's appearance before the Treasury Committee, where he was questioned on his review, appears here. 

Other materials: FSA statement | FRC statement | Government statement | 

UK: Budget 2010 - financial regulation and governance

The Chancellor delivered his annual budget today and in his speech expressed support for an international systemic tax on banks. Elsewhere in the budget report there is more of interest to note. Chapter 3 of the report - titled "Reforming financial services" - mentions several company law and governance matters, many of which are likely to remain if there is a change of Government later this year. To quote directly from the report (para. 3.24-3.25 and 3.65):

Sir David Walker was commissioned by the Government in 2009 to review governance practices in the financial services sector. The Government, in collaboration with other bodies with a governance remit, will implement Sir David’s recommendations throughout 2010. Consequently, the FSA is consulting on changes to its ‘significant influence controlled functions’ regime. The Financial Reporting Council (FRC) is consulting on revisions to the Corporate Governance Code, and separately on the adoption and coverage of a Stewardship Code for investors. As part of the development of the Stewardship Code on which the FRC is currently consulting, the Government will also consider whether the existing institutional investor voting disclosure regime should become mandatory as provided for in section 1277 of the Companies Act 2006.

On 10 March 2010 the Government published draft Regulations to require enhanced disclosure of remuneration in the financial services sector. After the Financial Services Bill gains Royal Assent, the Government will formally consult on those Regulations. As part of that process, and given the key role that owners should play in managing remuneration contracts, the Government will consult on whether further practical measures can be identified to facilitate the consent, by owners, of executive remuneration in the financial services sector.

The Government proposed in the 2009 Pre-Budget Report the introduction of a specific governance code for building societies and other financial mutuals. It also announced that it would consider the introduction of a regular independent review of financial mutuals’ adherence to the code. HM Treasury has commissioned a working group to take this work forward and to make recommendations to Ministers. The objectives are to ensure that an appropriate code is there for those that need it; the Walker recommendations are appropriately reflected in guidance for mutuals; there is independent input into this process; the governance and ownership characteristics of the mutual model are fully reflected in governance guidance; and the guidance provides a useful resource in promoting good governance among financial mutuals. The Government will update on the group’s work in the Pre-Budget Report".

UK: FRC chief executive on the new governance and stewardship codes

Stephen Haddrill, the chief executive of the Financial Reporting Council, yesterday delivered the keynote speech at ICSA's corporate governance conference. In his speech - available here (pdf) - Mr Haddrill commented on the FRC's recent review of the Combined Code and its work developing the Stewardship Code. He stated that a revised corporate governance code would most likely be published in May. He also made this important point:

No code or regulation can ever be an adequate substitute for an effective board. We have to entrench governance in the spirit of the boardroom, not in compliance with rules. I would even argue that, for some companies and some investors, compliance with the Code provided false comfort that governance was adequate. And this is very damaging if it discourages boards from thinking about governance in the context of the particular challenges facing their company. Compliance with the Code is not a substitute for proper leadership by the board or proper scrutiny by shareholders".

UK: FRC review of the Combined Code - IoD responds to final report

The Institute of Directors has published its response to the final report report published by the Financial Reporting Council as part of its review of the Combined Code on Corporate Governance: see here (pdf).

The IoD is broadly supportive of the proposed changes but states that greater attention should be given by policymakers and market participants to the way in which the Code is implemented. With regard to the Stewardship Code for Institutional Investors, the IoD argues that its likely impact should not be overplayed because institutional shareholders' preference for 'exit' rather than 'voice' is likely to persist where holdings in individual companies remains small.

UK: FSA sets out important governance proposals

The Financial Services Authority has published a consultation paper titled Effective corporate governance (significant influence controlled functions and the Walker review): see here (pdf). The consultation paper sets out important changes to the framework governing individuals performing significant influence controlled functions - e.g., directors - and other changes to the approved persons regime.

The paper also contains guidance on the FSA's more intrusive approach and its expectations in relation to non-executive directors of regulated firms and information on how the FSA proposes to implement some of the Walker review recommendations regarding, e.g., the establishment of board risk committees and the appointment of chief risk officers. There is also information concerning the FSA's role with regard to the proposed Stewardship Code.

UK: FRC begins Stewardship Code consultation

The Financial Reporting Council has today published a consultation paper concerning the content, operation and oversight of the proposed Stewardship Code for institutional investors: see here (pdf). More specifically, the FRC is seeking views on the following questions:

• Whether the code published by the Institutional Shareholders’ Committee in November 2009 provides a suitable basis for the Stewardship Code, in either its existing or an amended form.
• What the responsibilities for engagement of institutional shareholders and their agents are to the beneficial owners whose money they manage.
• How adoption of the standards in the code by UK and foreign investors can be encouraged.
• What information investors should disclose on their engagement policy and practice.
• What arrangements should be put in place to monitor how the code is applied.
  

UK: Lord Mandelson on institutional shareholders and the long-term

Lord Mandelson, the Secretary of State for the Department of Business, Innovation and Skills, has contributed a short comment article to the FT.com website titled "Britain needs investors for the long-term". In his article, Lord Mandelson states:

[Today] I am holding a roundtable discussion with senior investors, fund managers, company chairmen and chief executives to ask if London can set a new standard for high-quality, long term engagement between investors and company directors.

... In recent years the UK government has carried out a number of significant reforms to the corporate governance regime to encourage the right kind of long-termism among company directors. We need an equivalent focus on the long term among company owners, especially those represented by institutional shareholders, who should naturally take a long-term view.

... Reviews of corporate governance by Sir Christopher Hogg and Sir David Walker have started to pose the right questions about getting the right balance between the short and long term. The UK’s new Stewardship Code, on which the Financial Reporting Council is about to consult, must address them". 

UK: Lord Mandelson's speech to the Work Foundation

In a speech delivered yesterday at the Work Foundation,  Lord Mandelson, the Secretary of State for the Department of Business, Innovation and Skills, stated that his Department was reviewing whether changes introduced by the Companies Act (2006) - including the introduction of Section 172, which sets out the duty of directors to promote the success of the company - had changed boardroom behaviour. Lord Mandelson had much more to say, including: 

... we need to start a debate about how we build a stronger culture of long term commitment to sustainable company growth in this country, based on a strong compact between institutional shareholders and the corporate sector. On one hand we need a system that enables shareholders to discipline poor management. But we also need to give management some scope to plan and build without the excessive demands for quick returns that characterise too much modern public company ownership.

I don’t have any easy answers. Our reforms of company law made clear the importance of directors taking a long term view. At the same time we have empowered shareholders. We are now evaluating whether this has changed behaviour in the board room – and among investors.

Chris Hogg has played a key role in this debate with his review of corporate governance, and it is time for Britain to take a long hard look at the questions he and others have raised. I attach the highest importance to the new Investor Code and will be meeting investors and companies next week in the run up to the further consultation by the Financial Reporting Council.

Takeovers provide a very clear test here - for all involved. Companies making acquisitions should set out transparently and publicly their long term plans for the assets they propose to acquire, including company headquarters, R&D sites and main plants. Although these remain commercial decisions, firms or investors should expect to brave the court of public opinion if they are motivated only by short term profit.

Surely investment managers should be judged on their long term growth and profitability, not their short term performance – and the same goes for CEOs. How many strategic and effective managers are being hobbled with the quarterly race to please the beauty contest of the markets?