The Stewardship Code for Institutional Investors

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In the aftermath of the financial crisis, the Labour government set up the Walker Review to examine the role of U.K. banks and other financial institutions. One strand of reform recommended by Walker was to improve the extent and effectiveness of shareholder engagement with companies.
The Walker Review recommended that the Financial Reporting Council (FRC) should have responsibility for a new Stewardship Code, setting out best practice in respect of shareholder engagement.
At the start of July 2010 the FRC published its version of the Stewardship Code, which adopted wholesale the principles laid down by the Institutional Shareholders Committee (ISC) in its 2009 document ‘Code on the Responsibilities of Institutional Shareholders and Agents’.
The Fund's Statement of Investment Principles (SIP) (approved by Pensions Committee on 23 March 2010) endorses the ISC Code:
“The ISC Code sets out best practice for institutional investors that choose to engage with the companies in which they invest. The Fund considers that its responsible ownership policy already complies with, and may even exceed, the principles in the ISC Code. However, the Fund believes it has direct relevance for managing its relationships with external investment managers, and will require its managers to state their approach to the ISC Code on a ‘comply or explain’ basis…”
The LGPS Regulations (Investment & Management of Funds) 2009 contain a requirement to abide by guidance from the Secretary of State when producing a SIP. This guidance has taken the form of the CIPFA paper on adapting the revised Myners Principles to the LGPS, which was used in the preparation of the SIP and which makes explicit reference to adopting the ISC Code. Therefore, it can be inferred that adherence to the Stewardship Code is a requirement of the Scheme Regulations.
The Fund has contributed to the development of the Stewardship Code through its participation in the Local Authority Pension Fund Forum (LAPFF). The Forum submitted detailed responses to both the FRC consultation exercise on the Stewardship Code, and to the earlier consultation preceding the Walker Review.

The Code

The Stewardship Code is a set of best practice principles that are intended to frame both shareholder engagement with companies and the disclosure of such activity. It is intended that shareholders adhere to the principles with the same ‘comply or explain’ approach used by U.K. companies in respect of the FRC Corporate Governance Code.
Institutional investors should:
  • Publicly disclose their policy on how they will discharge their stewardship responsibilities.
  • Have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.
  • Monitor their investee companies.
  • Establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value.
  • Be willing to act collectively with other investors where appropriate.
  • Have a clear policy on voting and disclosure of voting activity.
  • Report periodically on their stewardship and voting activities.