Sunday, 4 July 2010

A few points on the Stewardship Code

No big surprises, eh? As expected, the FRC decided to press ahead with the Code rather than doing a radical overhaul. I think that is the right decision since no-one really knows how this will work in practice, so we might as well just get on and give it a try.

All institutional investors will be encouraged to seek to comply, so some work needs to be done to help pension funds think through how to do it. Also proxy voting advisers will be encouraged to report on how they help clients apply the Code.

In terms of monitoring, effectively the FRC is giving institutions a year or so before it takes a proper look, with a formal review of compliance taking place late in 2011. Notably the FRC has decided against simply taking over the IMA's engagement survey, which will continue as before.

Nothing further in the Code itself about either voting disclosure or voting in pooled funds, BUT the FRC says that it will look at these issues (along with stock-lending) ahead of the 2011 review.

This is an interesting new departure for the UK, as the Code formalises what we can expect from the investor side of the owner-manager relationship. The interesting thing to remember is that the Code is basically intended to encourage shareholder/owners to act as the theory underpinning many folks' approach to governance suggests they should.

Now you might think this is necessary because of a collective action problem, and that currently it's rational for well-diversified investors to not care too much about individual equity holdings. But in that case is exhorting shareholders to act more like owners a) the right thing to do and b) likely to work? And if the answer to either question is 'no' then where do we go?

No comments: