16 May 2019 by Peter Swabey
The joint discussion paper has prompted the industry to rethink the meaning of stewardship
I promised last month that I would consider the Financial Conduct Authority and the Financial Reporting Council’s joint discussion paper on Building a regulatory framework for effective stewardship. This was a very interesting exercise as it made us think quite hard about what we mean when we talk about stewardship by investors, beginning with the definition.
Both the discussion paper and the new stewardship code define stewardship as “the responsible allocation and management of capital across the institutional investment community, to create sustainable value for beneficiaries, the economy and society. Stewardship activities include monitoring assets and service providers, engaging issuers and holding them to account on material issues, and publicly reporting on the outcomes of these activities”. This is rather different from the definition of stewardship in the previous stewardship code which was simply that “Stewardship aims to promote the long-term success of companies in such a way that the ultimate providers of capital also prosper. Effective stewardship benefits companies, investors and the economy as a whole”.
On balance, I think the increased focus on the way in which an asset manager deals with assets on behalf of its clients or, to put it simply, its fiduciary duty is a good thing. It ties in well with the dictionary meaning of the term ‘stewardship’, but it is different from the pure focus on oversight of management in the previous code – a focus on what is now defined as the ‘stewardship activity’ of ‘engaging issuers and holding them to account on material issues’. The conflation of these two meanings and the attempt to address them both in the same code has, in my view, created a risk that investors will focus more on reporting to their clients and less on active engagement with investee companies.
This is exacerbated by the increased scope of stewardship to cover other asset classes, and indeed investment classes in which investors do not have the same control rights that they have for investments in share capital, and the increased focus on ESG factors. From the perspective of the allocation and management of client capital, the latter makes absolute sense as these are a key consideration in an asset owners’ risk assessment, but although they are also enormously important to companies, companies have to remember that investors have as many different views on ESG matters as they do on remuneration issues or on company strategy.One size does not fit all.
I would have preferred a greater focus on engagement – for example that investors should be required actively to engage with a company prior to voting against the board recommendation on any resolution at a General Meeting and explain in advance, in writing, their reasons for their decision.
This will also support the company’s compliance with its UK Corporate Governance obligation to understand the reasons for shareholder dissent.
Another very interesting piece of work is our report on Organisational culture in academy trusts: When to celebrate and when to act which was launched at the Confederation of School Trusts conference on 28 March. This followed our earlier work on cultural ‘red flags’ in other sectors. This is another of those situations in which it can be very helpful to consider what has worked, and what has not worked, in other sectors and consider whether these tools are appropriate and in my view the cross-sectoral perspective that ICSA brings to the table can be very valuable.
Culture is so important in all organisations and I think the output from this roundtable of participants from the academy and charity sectors and from the wider governance world offers great insights on indicators that might help the trustees and senior leadership team of an academy trust to assess its culture and either celebrate success or decide to take action. By the time that you read this magazine, we will also have launched a piece of thought leadership on the future of sports governance – of which more next month. Both documents, and our responses to the consultations on stewardship, can be downloaded from our website.
Finally, I have written elsewhere about the new Government consultation on corporate transparency and regulatory reform. This is an important consultation which will have significant impacts on the work of company secretaries and governance professionals, particularly in areas like the verification
of directors and significant shareholders and the potential cap on the number of directorships and I urge all those who submit documents to consider the Government proposals and let us know
what you think.