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FRC finds support for stewardship code to mirror section 172 duty

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The UK’s accounting and audit regulator has highlighted support for new stewardship requirements for investors similar to those currently imposed on company directors.

Respondents to a recent Financial Reporting Council (FRC) consultation supported modifying the UK stewardship code to include a duty for investors similar to section 172 of the UK Companies Act.

The accounting watchdog is due to present a revised stewardship code for public consultation later this year, but asked for views on some initial questions when it consulted on amendments to the corporate governance code in December.

The FRC floated the idea of a “section 172 for asset managers”. Under this part of the UK’s Companies Act 2006, directors have a duty to promote the success of a company for the benefit of shareholders, but in doing so they must have regard to a number of other factors and stakeholders, including employees.

Reporting on feedback to both consultations yesterday, the FRC said the majority of respondents were in favour of the stewardship code mirroring at least some elements of the code for listed companies.

“Many respondents were in favour of including a similar duty for investors as exists under section 172 of the Companies Act for directors,” the FRC reported.

The revised corporate governance code, which was unveiled yesterday, asks boards to describe how they have considered the interests of stakeholders when performing this duty – or to explain why they haven’t done so.

The FRC said there was support for stewardship code signatories to report on how they had considered a wide range of stakeholders in their own organisations, their investment process, and the companies in which they invest.

There was support for strengthening the definition of the purpose of stewardship and for including issues such as culture and diversity and workforce matters within the code.

However, many respondents were wary about the code including a prescribed list of environmental, social and corporate governance (ESG) issues to be monitored and acted on.

The FRC said: “There was a broad preference for the stewardship code to encourage a focus on material long-term issues, or to require a description of how investments and stewardship approaches align with clients’ long-term interests, as a useful way of encouraging signatories to consider ESG issues, without being too prescriptive.”

Stewardship by bondholders

A majority of respondents also felt it would be helpful to have clearer expectations of the stewardship roles and responsibilities of those “at different points in the investment chain”, the FRC reported.

Many respondents called for specific attention to be paid to the role of proxy advisers.

The current stewardship code, which was last reviewed in 2012, is primarily concerned with the role of investors as shareholders in publicly listed companies. According to the FRC, however, there was broad agreement among respondents that “including an increased range of asset classes… would be helpful, with fixed income assets being the most frequently cited as appropriate for inclusion”.

There were 109 responses to the December 2017 consultation questions on the stewardship code. A breakdown by type of respondent was not provided.

The UK stewardship code is aimed at fund managers, pension fund trustees and other asset owners and can also be used by service providers.

The FRC recently appointed a 17-strong committee of investors to help inform its future work on issues such as corporate governance and stewardship.

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