FRC discuss the recent updates to the Stewardship Code review
Published: 22 July 2024
8 minute read
In this episode, Kate O'Neill, Director of Stakeholder Engagement and Corporate Affairs and Richard Moriarty, the FRC's Chief Executive Officer discuss the latest developments in the ongoing UK Stewardship Code review. They discuss the reasons behind the review, its importance for individual investors and the UK economy, and the key themes emerging from stakeholder engagement.
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Transcript
0:09
Hello and welcome to another FRC In Conversations podcast.
0:14
My name is Kate O'Neill.
0:15
I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC.
0:19
And today I'm joined by the FRC's Chief Executive Officer, Richard Moriarty.
0:24
Welcome, Richard.
0:25
We're talking today about our announcement of the next phase of the Stewardship Code review, which has been ongoing since the beginning of 2024.
0:35
So Richard, welcome and we're going to to talk today about the update that we've issued today on the current review of the UK Stewardship go.
0:42
So before we go into the detail of the update that we've put out today, Richard, can you remind us about what's brought us to this point in the review of the stewardship Code journey?
0:53
Thanks, Kate.
0:53
It's great to be here today.
0:55
There are two key reasons why we thought it was important to review the Stewardship Code.
1:02
The first is that actually it hasn't been reviewed for a few years, although it was established in 2010 and we looked at it in 2012 and 2020.
1:11
A lot has changed since then and it's good practise for us to review it and look into it and make sure that it's fit for purpose.
1:19
But the second reason, which is why we were keen to accelerate our review, is during our consultation last year on the UK Corporate Governance Code, we picked up from a number of quarters a appetite for a conversation, particularly related to stewardship.
1:35
And although we weren't consulting on the stewardship code at that point, it clearly gave us added impetus to review the stewardship code.
1:42
I should be clear that I don't think the code is broken.
1:46
It has by all manner of feedback that we've had driven good stewardship outcomes.
1:52
We have something like 273 signatories to the code represented, something like 44 trillion assets under management.
2:01
But it is important that we look at this and it is important that we ask ourselves is it doing what we want to do in terms of driving the right outcomes for stewardship and also supporting the government's mission to improve economic growth and competitiveness in the UK.
2:18
Richard, many people have said stewardship and corporate governance are the two sides of the same coin.
2:24
And we heard through the consultation and through some commentators that a lot of the good that the Stewardship Code brings to capital markets really has to also be focused on what are the right conversations between companies and their investors.
2:39
Do you still convince that that's really what we're trying to explore during this extensive consultation?
2:45
It's really important that we keep a focus on what is the purpose of the Stewardship Code, which is one of the key questions that I'm keen to engage our stakeholders on.
2:56
This is not about a performative of showing that you've done stewardship, it's actually about having the right conversations with the right people at the right time and helping to create sustainable values for the UK and its economy.
3:11
And also, I think Richard, it's fair to say a lot of people forget this is individuals all over the UK savings and pensions that we're talking about investment, particularly in the UKI accept what you said about it being adopted on a global basis, but it isn't just large chunks of money out of the money tree.
3:28
It is all of our pensions and savings.
3:30
Well, this is a really important point, Kate that you've raised that one of the reasons why I'm really keen to make sure the stewardship code is fit for purpose is because it really matters to people in this country.
3:41
If you are someone saving into a pension scheme, stewardship makes a real difference to the value of your portfolio that you will have in retirement.
3:50
So this is something that affects everybody in this country.
3:53
And I think to today, we've really come from the first part of this review, the Stewardship Code, which was about really listening to all of the parts of the ecosystem from corporates to investors, in some cases pensioners.
4:08
On behalf of these people you've just referenced.
4:10
Did anything come out of that part of the review that really surprised you or actually confirmed that we were on the right track for doing this review?
4:18
First of all, a big thank you to everybody that engaged with us in those conversations.
4:23
They were really, really good conversations.
4:25
And what they've done is shape the agenda for us that we will take forward from now.
4:29
And there are a small number of issues that have really dominated those conversations.
4:34
The first is what we mean by the purpose of the code.
4:38
What are we trying to achieve here?
4:40
What is the definition of good stewardship?
4:42
That was the first question that really come through the conversations that we've been having.
4:46
The second is in relation to the principles in the code, and in particular, the principles that go to what is meant by good engagement between investors and boards and the expectations upon them.
4:59
The third issue for me that came through those conversations is the code needing to recognise the importance of passive and index investing, which of course is much more important to our capital markets and economy than was the case 20 years ago when the code was first developed.
5:18
Just to jump in there, that's such an important point because it's easy for people to become fixated on just active fund management.
5:25
But the rise of the passives, as you said, has really opened up a whole different dynamic, Absolutely.
5:31
And it's an important part of our capital ecosystem and it opens up markets to others that perhaps wouldn't see a place in the market without them.
5:40
I also think what it does do though, is bring to the fore a conversation about the importance and the place within the system of proxy advisors.
5:50
The main proxy advisors are signatories to the code, but I think there's a question for us, which is, given the importance they have in the ecosystem, what is the right and most proportionate set of expectations to have upon them?
6:02
And then the final two issues, Kate, for me that have come through the conversations which I think need to shape the agenda.
6:09
One is around the positioning with other regulators.
6:11
I think it's really important that the FRC and the Stewardship Code recognises that it sits within a broader system of regulation.
6:19
So making sure that we are fully joined up with our friends at the Financial Conduct Authority and the Pensions Regulator is really important.
6:27
Our stakeholders will really expect that the regulatory system works in unison.
6:32
And I guess because it's important for people to realise we're not the only regulator in this space for different reasons and different remits.
6:38
It's absolutely right.
6:40
And I'm pleased to say that we have excellent relationships with the other regulators.
6:45
But clearly in making changes ultimately to the Stewardship Code, we will want to make sure that that has the full confidence and support of the broader regulatory system.
6:56
And then the final point I would point out, which is in need of us looking at in more detail, is the whole process that goes behind developing, reporting and submitting a response to the stewardship code to the FRC.
7:12
I've been quite struck by the length and the sheer weight of the reports that we receive every year.
7:19
And the challenge that we've laid down is whether there is a way of maintaining the value that is extracted through reporting whilst minimising some of the reporting burden.
7:32
And that is why one of the parts of the announcements today was to significantly reduce the reporting burden on those that need to develop those reports for the FRC.
7:43
We think we've struck the right balance.
7:45
A lot of what we've done and announced in that streamlining of the reporting process, those ideas have been given to us by the conversations that we've had over the past few months.
7:56
So we are pretty satisfied that we will still gain the value of reporting, albeit the cost and the overhead involved in the production of those reports will be significantly less with the announcements that we've made today.
8:09
And I would be keen to continue this conversation with our stakeholders as to whether there's any other further improvements that we can make.
8:18
So just in summary, Kate, I think there are five key issues to shape the agenda for the conversations that we need to have.
8:25
Those five key issues of the purpose of the code, the principles of the code, the particularly the principles that relate to passive investors and and proxy advisers, how we work with our other regulators to ensure regulatory alignment and finally the process of reporting against the code.
8:44
And I would be really keen to hear from the broadest range of interested parties on those five issues before we publish a formal consultation document later this year.
8:56
So Richard, I guess also people will welcome the clarity around some of these changes to the process, not just because of any perceived burdens, but there will be those signatories either reapplying or new signatories applying in our window that is usually held in October.
9:13
So they will be getting some really good forward advance warning of the changes and what they no longer perhaps have to put in their applications.
9:22
All right, Kate, and it's an important .1 of the reasons why we were keen to announce these changes today is so those looking to develop their reports for the October submission can factor them in and hopefully save some of the previous effort involved in compiling those, you know, quite lengthy and voluminous reports.
9:41
As I said, all of the ideas that we've put forward to streamline that report in have been given to us by market participants and we are satisfied that we will still get the value of the stewardship reports and hopefully reduce the costs involved in their production.
9:59
And I guess it really points to the dangers of overthinking any codes.
10:03
Effectiveness is defined by reporting or activity rather than assessing what the real impact of good stewardship is on both relationships with corporates, between fund managers and corporates, but also what value they deliver for their underlying clients and beneficiaries.
10:20
Absolutely right.
10:22
And in an ideal world, we would encourage a really collaborative relationship between boards of companies and their investors.
10:32
And it's a win win to create that value for the beneficiaries of investors and the long term success of that company.
10:39
And actually that is an outcome that is often measured over quite a period of time rather than a specific event that you can report on.
10:49
So it is important that people see stewardship in terms of outcomes, engagement and a process rather than a series of performative interventions.
10:59
So what's next?
11:00
We've done this extensive outreach.
11:02
We've come up with the five PS, as I will call them today, which will be where we will focus all of our next stage of activity around.
11:10
So what kind of activity is that going to be?
11:12
Is it round tables?
11:13
Is it going to be very targeted?
11:15
How's the FRC going to approach this?
11:17
I'm keen to use the next few months to take this agenda to market participants and all those with an interest in our work to start to hone in on what the proposals might be.
11:30
I think we've got a sense of feedback from people that these are the right questions to be asking.
11:36
We now need to develop proposals for the answers.
11:39
And one thing I am keen to do is to have conversations with market participants and those that are interested in our work before we come up for air later this year and put pen to paper in a formal consultation document that will set out the details of the proposals.
11:54
And we've received quite a lot of support for this approach because we haven't gone into a lengthy or detailed consultation with PRE considered ideas of what the outcomes should be.
12:06
Do you think that's because this is such a wide ecosystem, it's such a slightly complicated part of the capital market structure?
12:14
There's definitely that.
12:15
OK, I would agree with that.
12:16
I think there's another factor and I don't want to be overly controversial here, but when regulators write consultation documents, they become like quick drying cement.
12:25
It's really important I think for regulators like the FRC that have a broad stakeholder universe engage upstream before they put pen to paper.
12:36
So actually the ideas that we come up with, albeit we have exercised our independent mind.
12:42
So it's really important that we will ultimately have the final say and we will exercise that in an independent way.
12:48
But it is more likely to have legitimacy, is more likely to work in practise if we have understood the lived experience of those that have to implement it and the realities of that implementation on all parties affected by it.
13:02
Like so.
13:03
Well, Richard, I guess we'll be asking our listeners and our stakeholders to watch out for invitations to various roundtables and also always grateful to those stakeholders who hold platforms on our behalf to discuss this in more detail.
13:18
And there is a stewardship webinar planned over the next week where people can come along with some fairly detailed questions about the announcement today and the what's next for them.
13:28
So thank you very much, Richard.
13:30
It's a bit of a milestone in what's such an important process.
13:34
And thanks for sharing your views from a strategic perspective on why the Stewardship code review is so important and why it's so important in our capital markets ecosystem.
13:44
Many thanks, Kate.