Institutional investors' "stewardship" of large companies to be enforced by FRC

The FRC, which oversees changes to and compliance with the UK Corporate Governance and Stewardship Codes, intends to particularly focus on the implementation of the latter during 2015, according to its annual report (28-page / 478KB PDF); following concerns that some of its 300 signatories were not "following through on their responsibilities". However, the report found some signs of improvement, as well as evidence that compliance by larger companies with the Corporate Governance Code was improving.

In its report, the FRC said that there was "the potential for a critical mass of oversight and engagement" with proper implementation of the Stewardship Code.

"There are signs … that following the UK Stewardship Code has become best practice, with mandates increasingly referring to stewardship and reports of better proactive engagement by companies and investors over the 2014 AGM season," it said in its report.

"However, despite these improvements, too many signatories fail to follow-through on their commitment to the Code. Asset managers should not sign-up just to tick a box, but to commit to adopting and reporting against the principles of the UK Stewardship Code with appropriate explanations where needed," it said.

The first Stewardship Code was published in July 2010 and was intended to enhance the ability of institutional investors to hold the companies that they invest in to account, for the long-term benefit of shareholders. Almost 300 organisations are publicly registered as signatories to the code, most of which are asset managers. Since December 2010, the Financial Conduct Authority (FCA) has required all UK-authorised asset managers to produce a statement of commitment to the Code, or to explain why it is not appropriate to their business model.

In its report, the FRC said there were signs that the Code was beginning to meet its objectives including increasing the quality and quantity of engagement and increasing accountability further down the investment chain, to clients and beneficiaries. The differences were particularly noticeable when looking at engagement between large companies and their major shareholders, it said. However, this was not the case across all signatories or all listed companies, and most signatories would benefit from improved reporting, it said.

Given the new binding shareholder vote on directors' remuneration, it was unsurprising that this had been the biggest topic of engagement in 2014, the FRC said. However, it said that both companies and investors should be careful that the focus on remuneration did not "crowd out" other issues. The FRC quoted recent research by the Investment Management Association (IMA) which found that strategy and objectives; board leadership; and board and committee composition and succession were more important issues for shareholders than remuneration.

The FRC said that it would spend the first half of 2015 looking at how best it could promote a culture of stewardship and its benefits, and how best to increase its scrutiny of adherence to the Code. On corporate governance more generally, it intends to focus on the effectiveness of company boards at setting firm-wide culture and leading on good corporate behaviour.

"The governance of individual companies depends crucially on the culture that is in place," said Sir Win Bischoff, chair of the FRC. "Unfortunately we still see examples of governance failings in this area."

"Boards have responsibility for shaping the culture, both within the boardroom and across the organisation as a whole. This requires constant vigilance. Changing culture is not an easy task. Our recent guidance on risk management highlighted the need for boards to think hard about how they can better assess whether the culture practised within the company is the same as that which they espouse, particularly under pressure," he said.

According to the report, 61.2% of the UK's 350 largest listed companies now fully comply with the UK Corporate Governance Code, while 93.5% comply with all but one or two provisions. There had also been considerable improvements in reports by audit committees, as well as companies' reporting of their diversity policies, in 2014, it said.