Reviewing the UK Stewardship Code

Published: 27 February 2024

8 minute read

As we begin the review of the UK Stewardship Code Kate O’Neill, Director of Stakeholder Engagement and Corporate Affairs sits down with Richard Moriarty, CEO for the latest FRC In Conversation episode. Kate and Richard discuss the key areas the review will focus on and the importance of working with other regulators throughout the review.

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0:09
Hello there and welcome to another FRC in conversation. My name's Kate O'Neill. I'm the Director of Stakeholder Engagement and Corporate Affairs. And today I'm joined by our Chief Executive Officer, Richard Moriarty. Hello, Richard, your second In Conversation podcast here at the FRC. So delighted to have you on an auspicious day because today we're starting the review of the UK stewardship code. So welcome, Richard. I would probably be great for our listeners if you just reminded them of what we put out

0:40
in November last year, not just the Corporate Governance code, but what we intended to do with the review of the Stewardship Code. Yeah. Hi, Kate. When we published in November our policy statement on the future of the UK Corporate Governance code, it was clear then, that there was an appetite out there for us to conduct a conversation around what good stewardship looks like and the principles of good stewardship as encapsulated by our stewardship code. So we committed at that point that after we'd finished the review of the UK Corporate Governance code, which we did only last month, we would then move our attention to a root and branch review of the Stewardship Code

1:19
in 2024. And Richard, we were going to review it anyway. But I think you have said quite publicly that during the Corporate Governance code consultation, you, like many of us at the FRC, were surprised by how so much of the conversation was dominated and in fact consultation responses were really dominated about stewardship issues in corporate governance ones. Yes, I was quite surprised reading the responses to the governance code and engaging with a wide range of people around it. But there was a real appetite and I detected some angst around the present state of stewardship in the UK. And that really led us to say,

1:59
well, we promised to review our Stewardship Code anyway in 2024 because it was the fourth year of its present iteration. But what I was really keen to do is actually undertake a root and branch review of the Stewardship Code, starting with the principles you know, what do we mean by good quality and effective stewardship? I think we can all agree and unite on the point that, you know, good quality engagement, good quality stewardship supports growth, it supports UK competitiveness and also it supports public trust in corporate Britain. So I'm really keen to understand and distil what are the essential principles that we need in the code?

2:39
Is it doing the right thing? If not, why not? Are there any unintended consequences? And I've been quite struck by a feeling from some people that we've spoken to, that stewardship now in some places has become much more of a reporting task rather than the quality of the engagement between investors and boards. So really I'm keen to take this back to first principles and start the consultation with a listening exercise. I think it's really important that the FRC doesn't presume that it knows the answer. I think the first thing that we've got to do is engage really broadly with a wide range of people

3:19
and ask them, you know, what's their current views, what are the issues in relation to stewardship and how does the code either help or hinder those issues. And I guess in today's statement, we've been very, clearly very different approach for us to start with this listening exercise and not just go straight to consultation. And we're really starting with the four main groups that are most affected by the stewardship code, asset managers, asset owners, issuers. And I guess by that we mean corporate and also service providers who are also part of the stewardship ecosystem. I guess when we do go to consultation will be a wider public interest in this. But it's been four years,

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that's a long time in any ecosystem in these days. So I guess since the original coach, so much has changed globally and in the UK with a lot of, as you were saying, focus on proportionality burdens, how do we support growth and competitiveness, and that's a lot to be talking about but the stewardship code seems to touch such a broad part of the UK's ecosystem, in particular relation to capital markets. So do you think there's been an increased kind of focus in magnification of some of these issues in the recent past? I think that's right. I think there has been an increased focus on these issues. I mean, I'm quite pleased that the code

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is widely supported in principle. We have over 190 asset managers, 70 asset owners and 20 service providers signed up to the voluntary code. And I think in total we're talking about £45 trillion worth of assets under management. So the code has proven very popular, which is a good thing. But I think it is important that we just step back and ask ourselves, is it really supporting good quality stewardship or has it become a reporting burden and is it helping drive growth and competitiveness in the UK? That should be our principal focus as we undertake this review. And I think that's

5:18
a really interesting one, because it's not just the burdens on issuers, corporates for want of a better word, it's the burdens on signatories to the code. We ask signatories to reapply to maintain their status on an annual basis, which some could say perhaps is too often. So I guess we're really looking at it from all angles, but the stewardship principles are supposed to be driving better engagement with corporates and looking at the way that it can support long term-ism. I guess we're hearing a lot of the opposite across corporate Britain at the moment, that reporting burdens feel like they're increasing and that there's too much emphasis on short term-ism. I mean, I'm not sure that the consultation can

5:58
cure all of those problems, but this early phase will certainly bring up where the consultation will focus. Is that how you're thinking about it? It is, Kate. I'm really keen, as I said, to use the initial phase of the consultation to listen and really try and diagnose what the problem statements are because I'm sceptical that the stewardship code is the source of all problems or can be the answer to all problems. I mean, stewardship, as you know, is a very complex set of issues. But it is important that I think we step back. It is important that we ask ourselves if we are in a place where the code is driving the wrong behaviours, then

6:37
we should have the courage and the self-confidence as the regulator to undertake the review and put it back onto a better track, more in keeping with a principles based approach and with an outcome in mind, which is how do we drive good quality engagement between investors and boards. I should say that it's really important in undertaking this review to work with other regulators because other regulators often pick up the Stewardship Code and put it into their regulatory frameworks as a bit of a benchmark expectation for what they expect of their regulated entities. So for instance, we will be working very closely with the Financial Conduct Authority

7:17
and the Pensions Regulator who have a very important role in the application in practise for regulation of the Stewardship Code. I think that's a really important point to make because it doesn't exist in isolation and even the Department of Work and Pensions is involved because let's face it, so many of the assets invested, our pensions, ISA's, it's all individual savings through different routes. So I think that's an important point as much as we can do our bit, it is dependent on other parts of the regulatory framework to make stewardship work for everybody. It's important we see this as a system and we don't act in isolation. I think it's

7:56
also notable for listeners to remember we're not talking about some magic money tree of investment, it is pensions and savings and that relates to all individuals in the UK and how your savings and pensions are being invested in companies and finding out to what purpose they're being used by the asset managers. So it's very easy to think this is kind of a City of London issue and not actually a whole UK society issue. Kate, I think you've just made a really, really important point which is it's really key that we focus stewardship not just on that relationship between investors and boards and being able to create

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public trust in stewardship in the UK. We know that where stewardship drives value creation, that is a good thing for UK citizens because a lot of us have pension funds and long term savings that are related to wealth creation in the economy. So good stewardship is more than just a commercial or an investment issue. I believe it is a public interest issue. So when we start this review, we'll really be targeted around groups that we're going to engage with and really focus on things like as you've said, what are the potential unintended consequences, how does it affect reporting on both sides of the coin? Is it supporting long term-ism

9:16
driving better prospects and performance for corporates? But then we'll go to consultation most likely over the summer, which we will do after the annual AGM reporting season because we don't want to put burdens on all the parts of the ecosystem affected by the stewardship code. So would you say that it's likely that any new revised code would really be published early 2025, much in the same way as we did with the corporate governance code? That's exactly right. OK, I see a three stage process here. The first stage is the listening exercise where anybody with an interest in the future of stewardship in this country should feel able to engage with us. Let's get those issues

9:55
on the table insofar as they are related to the Stewardship Code, we will look at that. And as a second stage, put some ideas out for consultation later in the year and obviously get feedback to help us fine tune a final consultation, which will set out insofar as we need an update or modification to the way we go about the Stewardship Code probably in calendar Q1 of 2025. And it's important for listeners to note the application process that is underway annually is going to continue through the consultation and it'll become clearer as we come closer to publication, you know, what kind of sequencing,

10:35
and what kind of process will run once any new code is published. So last week, Richard, we updated some of the signatories to the code and it was great to see the keen interest globally in the code. But we don't want to stop the ongoing process while we undertake this important review. That's a really important point, Kate. Until we announce changes, people should carry on business as usual and carry on with the requirements and expectations of the code process. I'm also very mindful and just like I said, that we need to work closely with other regulators in the UK. The Stewardship Code does set a bit of a global benchmark and has been replicated

11:15
in other jurisdictions. So there will be a lot of international interest in this review too. So for all our listeners states important kick off date for an important review. Details of some of the activity plan can be found on the FRC website which we will be updating as we plan more consultation activity, but also as we plan our outreach in this early phase. Thanks Richard for your time this morning. I think as you say, this will not just have intense interest in the UK corporate life, but I think globally given how many large fund managers internationally are very keen signatories to the code. But I guess we'll want to really be part of the process,

11:55
to see if it's working as well as we think and hope and what are some of the consequences of activity. So I think this won't be the last podcast you do on the Stewardship Code , Richard we'll have you back once the process gets underway as we can share with listeners what we hear in this early phase of the review. Kate, many thanks, and just a final message to anyone out there that has an interest in the stewardship code. Please engage with us as part of this process. I'm very keen for your voice to be heard.

12:23
Thanks, Richard.

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