Governance Explainer The Stewardship Code

All Change!

The term ‘Stewardship’ is used in this context to describe the responsible allocation, management and oversight of capital by the institutional investment community. The Stewardship Code aims to nudge investors towards an ownership approach that emphasizes long-term value creation for clients, beneficiaries and society – rather than a myopic focus on trading and short-term financial gain.

This revision of the Code, the first since 2020, is designed to alleviate the burdens previously expressed by signatories regarding the reporting framework.

The main adjustments, which will come into effect from October 31st, include eliminating the need for annual updates of contextual information unless there are new reports or significant alterations, and also removing the obligation to disclose annually against ‘Activity’ and ‘Outcome’ for certain Principles.

The FRC also revealed it currently has 289 signatories representing an eye-watering £50.3tn assets under management. The diverse range of signatories comprises 196 asset managers, 72 asset owners, and 19 service providers, reflecting the Code’s widespread adoption across the financial sector.

The Code is as an important feature of the UK’s investment ecosystem and is replicated worldwide. Good stewardship – encompassing allocation, management and oversight of capital – is generally viewed as a crucial underpinning of the UK’s reputation as a world-leading financial centre, which has had a tough time recently as it has lost some ground to rivals in the US and Europe.

However, the extent to which the Stewardship Code has exerted a material impact on the investment behaviour of institutional investors and asset managers (many of which are not UK-based) remains a matter of ongoing debate.

Richard Moriarty, chief executive of the FRC, said: “The next stages of the review … are designed to encourage the alignment of the Code with the UK’s well-deserved reputation as an attractive investment destination for global capital.

“It is our ambition that pension holders and savers better understand contributing to their pensions and savings to how stewardship activity and decisions are undertaken to their benefit, by the asset managers and owners investing on their behalf.”

What’s Next?

The Stewardship Code was introduced in 2010 after the financial crisis and was strengthened in 2012. Asset managers are required to either comply with it or to explain why they do not.

This current revision of the Code is part of a broader effort by the FRC, which regulates auditors, accountants, and actuaries in addition to setting the UK Corporate Governance Code, to reduce the overall reporting burden for UK Plc.

The FRC’s move comes after plans to reform it and create a new regulator, the Auditing, Reporting and Governance Authority (ARGA), were revived in the King’s Speech by Sir Keir Starmer’s new government.

The ARGA was shelved last November by the previous government in order to focus on “growth and the UK’s competitiveness”.

The Five Ps

The FRC will now focus on five themes in a new phase of revision to the Code:

1. The purpose of the Code and whether it prioritises creating sustainable value and supports growth;
2. The principles, notably those relating to how parties engage with each other.
3. The process and whether it encourages high quality stewardship outcomes without adding undue burden;
4. The positioning of the Code within the broader stewardship regulatory and policy space;
5. The role of proxy advisers – given the shift in capital markets toward index and passive investing – holds greater significance than when the Code was first developed. There is a question as to whether the Code should reflect, in a proportionate way, the importance of proxy advisors by setting minimum expectations.

The FRC has discussed and explored these topics in more detail with users and stakeholders  in a series of roundtables throughout August and September, prior to putting forward formal proposals in a consultation later this year.