Proposed changes to the UK Stewardship Code
The Financial Reporting Council (FRC) is planning to introduce a revised UK Stewardship Code (the Code) to take effect from 16 July 2019.
What is happening?
The Code is aimed at institutional investors, and sets out principles of good practice for engaging with the companies in which they invest. The intention is that, by setting out effective standards of stewardship across the investor community, the Code will ultimately help to deliver sustainable value for investors, the economy and society as a whole.
Why does it matter?
In a retail context, the Code is of direct relevance to publicly-listed retailers in connection with their ongoing engagement with investors. The Code aims to encourage active investor engagement in listed companies by requiring institutional investors to hold boards of directors to account and engage on matters such as strategy, performance, risk and corporate governance. The Code is designed to be a voluntary supplement to the “regulatory baseline” for stewardship implemented by the Shareholder Rights Directive II (which is discussed on page 6) and is intended to drive standards beyond that baseline.
The existing version of the Code had been heavily criticised for simply driving “boilerplate reporting”. This led to the FRC publishing a consultation paper and a revised Code in January 2019 in which it proposed various structural and substantive changes. The change that is likely to have the most significance for retailers is the requirement that institutional investors take into account environmental, social and governance issues when fulfilling their stewardship responsibilities (indeed, stewardship itself is defined in the Code as the creation of “sustainable value”). This requirement is further strengthened by more stringent reporting requirements for institutional investors, including an obligation on investors to produce an annual activities and outcomes report, detailing the extent of their compliance with the Code.
Some respondents to the FRC’s consultation paper (including Blackrock) have warned that implementing more onerous reporting obligations for investors could actively deter companies from listing in London on the grounds that it could potentially lead to sensitive discussions between investors and companies being disclosed publicly.
What action should you take?
- Prepare for institutional investors to increase engagement on environmental, social and governance issues after 16 July 2019, which may include sustainability, diversity, human rights, animal welfare issues, employee relations, remuneration and climate change (which is the only environmental issue specifically referred to in the revised Code).
- In light of more stringent reporting obligations on institutional investors, approach sensitive matters with particular care until it becomes apparent how investors will comply with their obligations.