Considering Stewardship and Corporate Governance in the UK

A recent announcement regarding the UK’s Stewardship Code serves as a reminder of the current similarities and differences between the US and UK corporate governance schemes, as well as their ongoing convergence.

By way of background, the UK Stewardship Code is a product of the UK’s Financial Reporting Council (the “FRC”) that has been around since 2010, though multiple predecessors date back to 2002. The Code sets forth seven basic principles of conduct to be followed by institutional investors and asset managers that are designed to “protect and enhance the value that accrues to the ultimate beneficiary.” Such companies are urged to:

  • publicly disclose their policy on how they will discharge their stewardship responsibilities,
  • have a robust policy on managing conflicts of interest,
  • monitor investee companies,
  • establish clear guidelines on when and how to “escalate” stewardship activities,
  • be willing to act collectively with other investors where appropriate,
  • have a clear policy on voting and disclosure of voting activities, and
  • report periodically on their stewardship and voting activities.

Although compliance with the Code is voluntary, more than two hundred institutional investors and asset managers (for example, BlackRock, J.P. Morgan and Vanguard), as well as service providers (for example, ISS and Glass Lewis) are signatories. Also listed are entities issuing “public letters of support” for the Code (for example, CalPERS). Each signatory is expected to publish on its website a statement that describes how it has applied each of the seven principles or explains why it has not—the so called “comply or explain” method of enforcement. These website “statements of compliance” or “stewardship policies” tend to be two or three pages in length, though some are significantly longer.

The FRC recently announced that, effective July 2016, it will begin assessing Code signatories’ performance using an exceedingly straightforward two-tier system (more or less: Tier 1—meets expectations; Tier 2—does not meet expectations). The FRC noted in its press release that although quality and quantity of stewardship has improved over the last five years, it has not done so “consistently or transparently.” The new tiered system is designed, therefore, to “raise the profile of stewardship” and “promote commitment” to the Code.

The Stewardship Code is complementary to the UK Corporate Governance Code, also a creation of the FRC, which dates back to 1992. The Governance Code applies to companies with a Premium listing on the London Stock Exchange and “aims to deliver high quality corporate governance with in-built flexibility for companies to adapt their practices….” The Governance Code is divided into five sections (Leadership, Effectiveness, Accountability, Remuneration and Relations with Shareholders), each of which includes several related principles. (The FRC, by the way, is a member-supported organization responsible not only for the Governance and Stewardship Codes, but also for setting accounting, auditing and actuarial standards, monitoring compliance with the foregoing and otherwise representing UK interests in international standard setting.)

Perhaps to oversimplify, both Codes set forth mutually agreed, principles-based guidance regarding “best practices” on a variety of big-picture issues common to public companies, institutional investors, asset managers and their service providers. In essence, they are the UK’s alternative to the US’s multi-pronged and evolutionary approach to establishing best practices, which tend distill over time in response to myriad legislation, rulemaking, market demands and individual company initiatives.

In any case, the Codes make for interesting and informative reading, particularly for companies doing business in the UK or otherwise interested in the inevitable convergence of international governance standards.

All the best,

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