The UK’s Financial Reporting Council (FRC) has set out an initial line of inquiry about the future of the country’s Stewardship Code, including a focus on the roles of different organisations in the investment chain.  

Comments and questions relating to responsible investment, long-term investment, sustainability, and environmental, social and governance (ESG) factors pervaded the stewardship section of the watchdog’s consultation document regarding the UK Corporate Governance Code.

Within the consultation, the FRC asked respondents whether the Stewardship Code should set out expectations for asset managers to consider a wider group of stakeholders as part of their engagement.

This would reflect the aim of section 172 of the Companies Act, according to which a director of a company is required to act in the way s/he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to a range of matters.

In its suggested revised form, the corporate governance code would acknowledge the importance of boards considering the way their companies interact with the workforce, customers, suppliers and wider stakeholders. 

Should the Stewardship Code more explicitly refer to ESG factors and broader social impact? If so, how should these be integrated and are there any specific areas of focus that should be addressed? 

The FRC noted there had been more focus on section 172 duties as part of recent corporate governance reform discussions. The accounting watchdog said it had been suggested that, if boards were to be required to report on the way in which they have carried out these duties, investors should also be encouraged to monitor and engage on these issues.

City of London

The FRC does not have a mandate to impose duties on asset managers – this falls under the remit of the Financial Conduct Authority – but said it believed “a greater focus on how investors assist companies to build long-term success would be helpful”.

It was therefore seeking views about how this could be better reflected in the Stewardship Code, “including through the use of a ‘section 172’ for asset managers”.

The FRC asked:

  • How could an investor’s role in building a company’s long-term success be further encouraged through the Stewardship Code?
  • Would it be appropriate to incorporate ‘wider stakeholders’ into the areas of suggested focus for monitoring and engagement by investors? Should the Stewardship Code more explicitly refer to ESG factors and broader social impact? If so, how should these be integrated and are there any specific areas of focus that should be addressed? 

The watchdog’s view was that the Stewardship Code should not only be relevant for ESG decision-making, but it said it was interested in views about how it could be amended to refer more effectively to ESG factors and integration.

It has also asked whether the stewardship code should be amended to ask investors to consider company performance and reporting on adapting to climate change – a suggestion made by the UK Committee on Climate Change in June – and whether board and executive pipeline diversity should be included as an explicit expectation of investor engagement.

The FRC also called for views on whether the code should support disclosure of a manager’s approach to directed voting in pooled funds, given that some asset owners have questioned their ability to do so.

As signatories to the current Stewardship Code, asset managers, asset owners and service providers are expected to provide a public statement about their approach to stewardship, using the code as a framework. The FRC is considering revising the code to provide more specific expectations about best practice more in line with the ‘comply or explain’ format of the corporate governance code.

It also asked for views on the idea of separate codes for different signatory categories, either by type of organisation or according to whether they invest directly or indirectly.

The FRC also noted that some signatories “consider themselves responsible investors, as opposed to responsible shareholders” and that it was therefore interested in how it could addressed the fact that investors view their responsibilities in different ways.

A detailed consultation on specific changes to the stewardship code is slated for late 2018.

Trimmed corp gov code ’about purpose’ 

The watchdog today also launched a formal consultation on changes to the UK’s Corporate Governance Code.

The FRC said changes would make the code “shorter and sharper” – down from around 11,000 words to under 5,000, the Pensions and Lifetime Savings Association noted.

The accounting body said the revised code would focus “on the importance of long-term success and sustainability”, while addressing “issues of public trust in business” and ensuring the attractiveness of the UK post-Brexit.

The corporate governance consultation closes on 28 February 2018.

Industry reactions

The Pensions and Lifetime Savings Association

Luke Hildyard, PLSA

Luke Hildyard, PLSA

Luke Hildyard, policy lead for stewardship and corporate governance at the pension fund trade body, said: “Despite the reduced length, the proposed [Corporate Governance Code] contains many positive new measures, particularly the recognition of the importance of corporate culture and employee voice. However, monitoring and enforcement of these provisions will be critical. PLSA research found that most companies already pay lip service to these issues in annual reports, but provide little concrete data demonstrating the strength of their relations with the workforce. 

“The proposals to require long-term incentive plans to be at least five years in length is welcome and will accelerate existing progress in this direction. However, the changes are unlikely to reduce levels of executive pay or address societal concern about gaps between executives and the wider workforce.” 

The Investment Association

Andrew Ninian, director of corporate governance at the asset management industry body, said: “The launch of the revised UK Corporate Governance Code is a welcome step in the evolution of our corporate governance system. The government’s Green Paper [released in November 2016] set out important challenges to the UK corporate governance system, particularly on stakeholder voice and executive pay. It is important that the governance code responds to these challenges so that the UK remains globally competitive and that investor stewardship continues as a key tenet.”


Bethan Livesey, head of policy at the responsible investment campaign organisation, said: “The FRC shows that it is willing to amend the Corporate Governance and Stewardship Codes to ensure that both can help engender trust and long-termism in business. The onus is now on the corporate and investment sectors to press the FRC to be ambitious in taking this agenda forward to build a sustainable UK economy.”