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Raising The Bar On 'Stewardship' By Spelling It Out

Posted on February 5, 2014 at 12:45 PM

From all corners of the UK corporate governance landscape, there is a steady creep in the effort to raise the bar from compliance to excellence. Involvement and engagement appears to be moving forward in leaps and bounds - an excellent trend.

A report lands today with practical recommendations designed "to build momentum for effective investor stewardship." Issued by Standard Life Investments, (SLI) the global investment manager managing around £179 bn on behalf of clients worldwide and Tomorrow's Company, the London-based think-tank, it identifies barriers throughout the chain that holds the responsibility for stewardship and offers specific remedies.

'Stewardship' itself is a peculiarly British word in the context of governance. It was defined by Tomorrow's Company in 2011 as "the active and responsible management of entrusted resources now and in the longer term, so as to hand them on in better condition." That's quite a mouthful of reponsibility. While it is now three years since the first publication of the UK Stewardship Code, there is a sense that  momentum has stalled.

"Stewardship is no longer an optional extra and has to be taken seriously. Despite being part of daily parlance, Stewardship still struggles to secure its place at the heart of the relationships between those involved in the stewardship chain. We firmly believe that this has to change and that every player in the stewardship chain - asset owners, investment advisors and investment managers - should play their part to promote the success of companies and deliver long-term prosperity" says Guy Jubb, global head of governance and stewardship at SLI. 

From a lack of understanding of what stewardship is to weaknesses in the way in which investment performance is defined and an over reliance on external experts and advisors, this report identifies six obstacles, and makes recommendations for change.

They include the strengthening and broadening of the existing UK Stewardship Code "so that investors engage with companies on strategy not just corporate governance." (my emphasis)

(I am of the view that corporate governance is really about strategic thinking and has nothing to do with anoraks so that was a pleasing shift in emphasis). 

It also makes this important point: "Institutional investors who own less than 1% of a company do not have sufficient incentive to become good stewards: the answer to this is to get them to work together so that their combined stakes in a company make their engagement imperative."

The report calls for "a simplification and strengthening" of the criteria for assessing investor stewardship, including the development of an approach to 'stewardship accrediation' to create an incentive to excel and to inform savers. It also suggests a review by the investing consulting industry into its own contribution to the advancement of stewardship.

Recommended reading: it is both clear and concise.  It does not leave out the importance of the shift from defined benefit (DB) to defined contribution (DC) schemes - which has meant that individuals are now responsible for decisions instead of a collective. It comes as an important reminder of the interconnected nature of the chain of investment value.

"The recommendations in the report are designed to ensure that all those involved in the stewardship chain focus on the creation of value by companies which will in turn help enhance portfolio returns and deliver value to the ultimate clients and beneficiaries" says Mr Jubb.

Similar language is used by those interested in looking at the possibility of creating a new corporate governance 'index' of some sort, which would help identify what 'good' looks like. Tthe movement behind 'integrated reporting' also seeks to redefine the thinking around all the variables that contribute to business performance. A common theme here is re-establishing the connection between business and society, and re-thinking the purpose of the former for the latter. 

It is not a coincidence, perhaps that the thinking is beginning to come together five years after a financial crisis that still leaves us gasping.

The findings in the report were developed independently over dialogues held in March and May 2013 with representatives of 'every link in the stewardship chain.' It is now 18 months since the publication of the Kay Report on Long Term Decision-Making in UK Equity Markets and there is a real sense that it is time to get down to the nitty gritty. 

The Financial Reporting Council (FRC), the UK's independent regulator on corporate governance, is due to review the UK Stewardship Code.  The UK's commitment to 'comply or explain' is yet again being asked for a bit more backbone.

Asked about the timing of today's report, Mr Jubb says: "It is an important coincidence."

Building The Momentum For Effective Investor Stewardship:


Categories: Behaviour, Accountability, Transparency