Investment Association publishes fifth report on institutional investor adherence to the FRC’s Stewardship Code

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03 Jun, 2015

The Investment Association (IA) has today published its fifth report (“the report”) looking at how institutional investors demonstrate adherence to the Financial Reporting Council’s (FRC’s) Stewardship Code ("the Code").

The Stewardship Code (link to FRC website) operates on a ‘comply or explain’ basis and is aimed at institutional investors, asset owners and asset managers. It sets out good practice on engagement with investee companies, which includes monitoring companies, entering into dialogue with boards and voting at general meetings.  The aim of the Code is to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.

The report summaries the responses to a questionnaire by 130 (out of a total of 288) signatories to the Code as at 30 September 2014.  The respondents consisted of 92 asset managers, 30 asset owners and eight service providers.

Key findings from the report show:

  • There are an increasing number of signatories to the Code – 288 up from 274 in 2013.
  •  All respondents have a public policy statement on how they discharge their stewardship responsibilities under the Code (Principal 1 of the Code) and 88 per cent also have a public conflicts of interest policy (Principal 2 of the Code).
  • That 83 per cent of respondents reviewed their policy statements in 2014 and 45 per cent updated them.  This is a decrease from 90 per cent and 67 per cent in 2013 respectively where respondents were making changes as a result of the 2012 revisions to the UK Corporate Governance Code.
  • The proportion of asset managers where mandates refer to stewardship decreased to 74 per cent from 83 per cent in 2013. 
  • Engagement and voting by “most respondents” is conducted in-house.  Where engagement is external, those external providers are monitored.
  • There was a “significant increase” in respondents’ resource for engagement.  The headcount responsible for engagement increased to 2,090 in 2014 from 1,703 in 2013.
  • There are a wide variety of ways that respondents monitor their investee companies.  35 per cent of respondents engage with all of their UK holdings (2013: 34 per cent) whilst a number of respondents (22 per cent) prioritise engagement to those where there are “significant issues” (2013: 26 per cent).  The report highlights that board remuneration was considered to be the most important for engagement “which reflected the introduction of the binding vote in 2014”.  This was followed by corporate performance and then board leadership.  In 2013 business strategy, board leadership and board composition were the three issues respondents considered to be most important for engagement, followed by board remuneration.
  • There was an increase in overseas engagement particularly in Western Europe and the US and Canada but a decrease in Central and Eastern Europe and Japan.  However engagement with asset classes other than equities decreased.
  • In terms of the quality of the dialogue with companies, respondents indicated that this was at a similar level to 2013.  Over 80 per cent of respondents indicated that direct contact and one-to-one meetings are the most effective means of communication.  89 per cent of respondents were “fully or mostly satisfied” with the outcome of their engagement.
  • That less respondents give advance notice when they intend to abstain or vote against a resolution (39 per cent in 2014, 47 per cent in 2013). Voting records are disclosed publicly by 68 per cent of respondents, an increase from 66 per cent in 2013.
  • That “nearly all” of respondents report on their stewardship activities to clients or beneficiaries.  However this figure has fallen from 94 per cent in 2013 to 90 per cent in 2014. 

Along with these results, the report also provides practical examples of how respondents engage with companies with responses ranging from areas such as bribery allegations and culture, directors’ remuneration and governance and board independence. 

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