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New rules aim to make investors vote and take responsibility

Fri, 2010-07-02

Citywire

The Financial Reporting Council (FRC) has unveiled the globe’s first set of guidelines covering corporate governance in institutional investing.

The move follows a period where institutional investors were heavily criticised by politicians and regulators for not being sufficiently engaged in the banking sector in the period leading up to the credit crunch.

The UK Stewardship Code sets out principles for monitoring investee companies, the protection of shareholder value, voting policy and management of conflicts of interest.

The seven-point rule set also covers collective engagement, public reporting and reporting to clients.

It aims to improve the quality of corporate governance by promoting a better dialogue between shareholders and company boards, and encourages greater transparency in the way investors oversee the companies they own.

Shareholder bodies and the Department for Business, Innovation and Skills (BIS) have welcomed the guidelines set out and FRC chair Baroness Hogg expressed hopes it would act as a catalyst for the forging of stronger links between stakeholders and companies.

‘Disclosures made by institutions under the code should assist companies to understand the approach and expectations of their major shareholders,’ Baroness Hogg said. ‘They should also assist those issuing mandates to fund managers.

'Pension funds and other owners may not wish to become directly involved in engagement but they can make a significant contribution by, for example, mandating their fund managers to do so on their behalf.’

It is also hoped the code will help rebuild public trust in the corporate sector following the worldwide financial crisis. BIS said the UK code earmarked Britain as a leader in this field.

‘The code shows the UK is leading the way in this area. It is the first of its kind in the world and a major step forward, business minister Edward Davey said. ‘I want to see fund mangers and shareholders of UK companies adhere to its best practice principles.’

PIRC, the largest independent European provider of corporate governance and proxy voting advisory services also welcomed the unveiling of the code's principles, hailing them a significant step forward in matters linked to improving corporate governance and forecast that other countries would follow suit.

PIRC’s managing director Alan MacDougall said he agreed with the FRC that all institutional investors should adhere with the guidelines as without widespread uptake, fund managers would send out a weak signal regarding the need to take ownership responsibilities seriously.