Stewardship Code — is the Code review likely to improve shareholder oversight?

By David Hackett, Technical Policy Manager, Association of International Certified Professional Accountants

With the continuing uncertainty around the global economy — and the UK economy in particular — it’s heartening to see that the UK corporate governance agenda continues to evolve with a view to maintain the country’s position as a global leader and a place to do business. The latest focus is on stewardship, a catch-all term which seeks to capture the responsibilities that asset owners and managers have over their investments in our leading companies. One of the public criticisms frequently made against global capitalism is that it allows a few privileged executives to behave beyond scrutiny and without accountability. However, many of the largest companies in the UK, such as Unilever, Tesco or BP, are owned by the general public through their savings and investment in equities and are able to have oversight over them. Therefore, it feels right that they should have a say on how the money is invested with a few to ensuring long term and sustainable benefits for the wider society.

The UK Stewardship Code

To help facilitate this cause, large investors came together and developed the UK Stewardship Code. The original aim was to facilitate engagement between investors and companies. However, in light of recent corporate failings such as BHS and Patisserie Valerie, it’s increasingly being seen as a mechanism to promote more public accountability into business decisions and behaviour. It’s potentially one of the levers that the shareholder has over the corporate.

The Financial Reporting Council (FRC) released the Code in 2010 and has remained largely unchanged in nearly a decade. However, it now is the right time to redefine stewardship away from just a written document to a way of doing business. Increasingly, investors are using primary research and coupling this with environmental, social and governance analysis and financial information to take an informed position on growth prospects and the risks involved in this growth. Additionally, the non-financial data being provided by companies continues to get broader. New metrics are being developed including areas such as health and safety data, employee satisfaction data, board skills and composition, environmental management and ethical concerns. It’s therefore great to see the FRC’s consultation bring these developments into the Code and their inclusion should lead to further developments in this type of reporting and hence better oversight.

Greater rigour

The new Code, due to come into force in July 2019, marks an overall positive step towards more accountability and transparency in the modern business world. However, to build on this and truly deliver value for the wider society (and not just by paying lip service to goals but by actively promoting different decisions and hence outcomes) we need to be bolder. 

What can be achieved is highlighted by the decision of Carillion’s investors to pull out in 2015. More specifically, when Standard Life actively pursued a strategy of divestment on the basis of concerns over corporate governance. This decision may have been attributable to the Code. Examples like this show what effective stewardship is, and the Code should promote similar investment action. Ideally, these actions should also be captured and attributed to the Code to broaden its evidence base.

Tied in with investment action one would also argue that investors should be putting pressure on entities to demonstrate in their reporting the broader value drivers of their business as expressed through their business model. Corporate failings are most likely when an executive has reconfigured or changed outright a business model but failed to explain this change more widely and seek buy-in from broader stakeholders. The bankruptcy of Northern Rock was an example of this, and the Code should promote more accountability and transparency on these issues.

Finally, the Stewardship Code like many components of corporate governance, is developing a more comprehensive set of considerations, and this can be unsettling. But by keeping information material, the Code needn’t lead to extra layers of reporting. This is where management accountants can play a key role in helping investors. Superfluous or decision irrelevant information should be stripped out and reported information should be given for informed decision making. So, while the Code on its own may not improve oversight, I think that in the right hands and coupled with the above improvements, it will facilitate dialogue and result in better outcomes for all stakeholders.

Read also: The “Is the Stewardship Code fit for purpose?” research study seeking to understand the nature of engagement and stewardship as practiced in major UK-based asset management firms with long-term shareholdings.