Abstract
AbstractJohn Kingman's review of the Financial Reporting Council (FRC) doubted the effectiveness of the UK's Stewardship Code in encouraging informed and engaged stewardship by institutional investors of the companies in which they invest (issuers). Accordingly, the FRC updated the Stewardship Code in 2020 in a final bid to prove its effectiveness and relevance, and, in particular, to enhance issuer‐specific engagement by institutional investors. The update has enhanced the reach and substance of the Code. However, the legal, regulatory, contractual and competitive environment in which institutional investors exist will constantly forestall soft‐law attempts to foster greater issuer‐specific engagement, a point perhaps tacitly acknowledged by the 2020 Stewardship Code with its wider scope. Instead, in relation to engagement, stewardship disclosure should focus on the types of engagement that institutional investors are motivated to exercise in practice, such as engagement in response to hedge fund activism, and engagement on systemic risks.
Highlights
John Kingman’s review of the Financial Reporting Council (FRC) doubted the effectiveness of the UK’s Stewardship Code in encouraging informed and engaged stewardship by institutional investors of the companies in which they invest
The Kingman Review castigated the Stewardship Code’s lack of efficacy in encouraging informed and engaged stewardship of issuers by UK-investors,[13] and suggested that the code acted as a driver of boilerplate reporting due to the FRC focusing on the quality of policy statements by institutional investors, rather than the outcomes and effectiveness of stewardship in practice
The 2020 Code is the first substantial up-date of the Stewardship Code since its genesis in 2010, and it continues its mission in promoting proactive issuer-specific engagement by institutional investors on strategic issues as implored by the Walker Review, and pursuant to the final warning to enhance effective engagement notified by the Kingman Review
Summary
‘The Emperor’s New Clothes’[1] tells the classic tale of an emperor who receives a set of ‘clothes’, described by deceitful weavers to be invisible to the unworthy. The 2020 Code has, for the first time, provided a definition of ‘stewardship’: ‘Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.’[43] Whereas the aims of previous versions of the code, outlined above, were premised on issuerspecific engagement, with an underlying assumption that issuer-specific engagement by institutional investors will improve the prospects of issuers in a manner that will benefit the ultimate beneficiaries of asset owners, the more expansive definition in the 2020 Code recognises that simple issuer-specific engagement is not the only way to exercise ‘good’ stewardship, and that, perhaps, issuer-specific engagement may, in some instances, be superseded by other actions that ‘create long-term value for clients and beneficiaries.’. In the part of this article, the legal, regulatory, contractual and commercial duties of institutional investors to their clients and beneficiaries will be outlined, since those duties will be critical to evaluating the prospects for the 2020 Code to encourage issuer-specific, or other, engagement
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