Stewardship Code is 'last chance' says TUC
UK - The Trade Union Congress (TUC) has warned the proposed Stewardship Code for institutional investors "provides a last chance" to develop a corporate governance system that relies less on regulation to discipline companies and more on shareholder engagement and monitoring.
In its submission to the Financial Reporting Council's (FRC) consultation on the proposed Code, which closed in April, the TUC said it "has long been concerned that the lack of effective shareholder engagement represents a serious weakness in the UK's system of corporate governance". (See earlier IPE article: FRC seeks overseas feedback on Stewardship Code)
It cited successive corporate governance reviews - including the Cadbury Committee in 1992, the Greenbury, Hampel and Turnbull reviews in the 1990s and the Higgs Report in 2002 - as having all "placed considerable emphasis on shareholder monitoring and engagement as a discipline upon companies and as a substitute for regulation".
But the trade union warned that if this approach was too work, shareholders must have the ability and incentives to act responsibly in relation to the companies they invest in, and suggested that "some of the problems that prevent effective shareholder engagement will be extremely difficult to address".
The TUC added that the proposed stewardship code provided a last chance to change the existing system of monitoring corporate Britain. "If implementation of the stewardship code does not lead investors to show that they are willing and able to play the role in corporate governance that has been ascribed to them, it will be a clear and irrefutable sign that the system itself needs to change".
In its consultation response, the TUC put forward improvements to the proposed code - based on the code developed by the Institutional Shareholders Committee in November 2009 - such as improved communication and greater disclosure by institutional investors.
It also argued that the existing ISC code is "too weak, and should be substantially amended before being adopted by the FRC as the new Stewardship Code". It claimed a major flaw is the lack of effective monitoring and enforcement of the code, and suggested that investors that choose not to comply with the code "should forego their governance rights such as voting rights".
Meanwhile, the Chartered Institute of Public Finance and Accountancy (CIPFA) highlighted concerns relating to how the stewardship code would work alongside existing principles and codes of practice, such as the Myners Principles and UN Principles for Responsible Investment (UN PRI).
The point was made particularly in mind of the cost of extra resources needed to comply with the code, especially in public sector pension schemes "where costs are under intense scrutiny and levels of compliance with existing guidelines are already very high".
CIPFA argued that "the necessary policy formulation, monitoring, engagement activity and reporting" were resource-intensive from a pension fund perspective, "whether they are undertaken in-house by pension funds or outsourced to advisors".
The organisation also highlighted a potential danger that certain groups such as asset managers or custodians could pass on the cost of compliance to their clients, resulting in further costs for pension funds.
The organisation said: "Consequently funds may find these costs prohibitive and be dissuaded from engaging with the code. In a public sector context these costs would ultimately fall upon the public sector employers partaking in schemes, such as the LGPS, at a time when public sector budgets are already under pressure."
The latest comments on the proposed approach to corporate governance follows concerns raised earlier in the year by the National Association of Pension Funds (NAPF) that the code should not result in a 'box-ticking exercise'. (See earlier IPE articles: NAPF says new Stewardship Code should avoid 'tick-box' exercise; Stewardship Code continues to receive mixed views on governance and Stewardship Code could trigger EU guidelines, claims ICGN)