Baroness Hogg on the need for portfolio managers to engage with companies in generating sustainable value
The Chairman of the Financial Reporting Council reviewed the progress of the FRC’s Stewardship Code in a speech to the ICGN conference this week. Her principal argument was that although the Stewardship Code has made a good start:
“We now have over 250 adherents; there is a growing international interest in the concept of stewardship; and there are some signs of a change in behaviour by shareholders and investors. For example, there is more communication between them, which is a good thing, and companies tell us that there are signs – albeit by no means across the board – that shareholders are starting to discuss a broader range of issues in a more informed way. Strategy and risk are on the agenda, not just small print details of the financials and the box-ticking aspects of governance.”
There is more to do to “embed the concept of stewardship”, and if the current voluntary approach strongly promoted by the FRC is seen to work, then:
“The authorities in Europe would then fail to be convinced that stewardship can work and would then revert to the view that investors are part of the problem, not part of the solution. That would in turn lead to a further erosion of the rights of shareholders and providers of capital. There are signs of that already with the regulator-dominated approach to governance in banks set out in CRD4 and the requirements on audit committees set out in the Commission’s proposals on audit.”
Importance of portfolio managers in the stewardship process – “more than just forecasters who take a view of the share price against expected earnings”
Baroness Hogg discussed how corporate governance is dealt with in investment managers - “the traditional approach among asset managers has been to leave engagement on governance to a separate unit responsible for voting” – and why that approach is not ideal:
“Ever since we established the Code we have been concerned to break down the silos that still all too often exist in investment houses between the investment and the governance function. Unless you have really good governance specialists, it may be better for the responsibility to be set firmly on the shoulders of the Portfolio Managers who take investment decisions. These people should be more than just forecasters who take a view of the share price against expected earnings. They should have a rounded view of the companies in which they invest, its business model, risk management and the strengths and weaknesses of its board and management…In some of my meetings with portfolio managers I have been surprised to see how little interest they have shown in vital issues like strategy and risk management.”
Unless attitudes to stewardship to change, the danger is the European Commission will go for a legislative, regulatory approach, rather than a voluntary one:
“…we need to show…that investment firms are taking a more joined up view and that this is showing through in a more insightful dialogue with companies. If we cannot show this we will look very weak vis-à-vis Brussels just when the Commission will be putting together its definitive package on governance and shareholder rights. If the Commission concludes that stewardship has failed, that will push us inexorably down the road to more regulation and the further loss of rights which we – and you – rightly prize so highly.”
Threat posed by the Market Abuse Directive revisions
“…we are aware, as you will be too, that the present discussions in Brussels on revision to the Market Abuse Directive pose a potential threat to the exercise of stewardship because of the limits they might place on the ability of investors to trade shares after even quite routine contact with companies. We have raised the issue with the Commission and members of the European Parliament and are fully supportive of the efforts by our own Treasury to address the issue in the European council.”
Listed companies get all the attention on the corporate governance front
The FRC Chairman also remarked on how the very transparency of the listed company market makes it a focus for the:
“attention of policy makers worried about issues such as diversity on boards, executive remuneration, corporate social responsibility etc. All of these issues are important and it is right that policy makers are concerned with them, but it would be wrong for them to focus their attention entirely and solely on the behaviour of companies and executives in listed markets just because more information is available about what they are doing.”
Review of the Stewardship Code
Finally, Baroness Hogg confirmed that the FRC will consult in April 2012 on changes to the Stewardship Code:
“…we are rewriting the introduction to provide a clearer articulation of the stewardship. That is the requirement of accountability all along the investment chain. We will also try to differentiate more clearly the roles played by asset owners and asset managers. We will also propose to strengthen the language in a number of areas: around conflicts of interest, acting together and the use of proxy voting agencies. We will also propose new wording encouraging investors to state their policy on recalling lent stock when they want to vote.”
See also: New “Stewardship Working Party” launched
European Commission green paper on the EU corporate governance framework
A new European Regulation and Directive on market abuse and insider dealing
Kay Review of UK Equity Markets and Long-Term Decision Making: Interim report published
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