On the 30th January, the Financial Conduct Authority published two papers as part of a process to propose new measures on encouraging effective corporate stewardship for investors. As an investor myself, I was pleased to read that the FCA is trying to encourage asset managers to more closely monitor the companies they invest in and actively engage with them to hold them accountable for their actions and performance.
Corporate failures such as Carillion and Patisserie Valerie have pushed up public expectations stewardship. At its most basic level, corporate stewardship is the responsibility of asset managers who deploy active oversight of assets in which they invest. These activities are crucial for supporting the smooth functioning of the UK’s financial markets and economy and I would argue that they’re absolutely essential for both long-term value creation and the wider benefit of society.
Effectively stewardship requires active monitoring off investee firms and regular, constructive dialogue with key players. It requires effective remuneration to encourage good performance, and penalties for transgressions. It should be transparent and easy to understand. Frankly, right now, there aren’t many asset managers I can list that really live up to those expectations.
Apparently, the FCA agrees with me – as they’re recommending a number of proposals for discussion including;
- Requiring asset managers to publish ‘engagement policies’ that provide details of how they monitor the strategy, financial performance, risk management, capital structure, social and environmental impact and corporate governance of investee companies.
- Requiring asset managers to engage in dialogue with companies they invest in.
- Exercising voting rights.
- Managing actual and potential conflicts of interest from its engagement.
If asset managers are unwilling or unable to comply with the above proposals, they would be required to publish a clear and reasoned explanation.
In addition to this, asset managers would also have to publicly disclose how they implement any engagement policy, including an overview of how they engage with shareholder votes and use proxy advisors. All this information must be made freely available on their website.
How does this compare to current policy?
Currently, the FCA only requires that firms that manage investments for professional clients disclose the nature of their commitment to the FRC’s Stewardship Code but not in as much detail as is being proposed and not necessarily publicly available. Improving the quality and level of disclosure here is clearly a good thing. Despite this, I’m not thrilled about the option for firms to ‘justify’ their non-compliance. As a shareholder, I’m extremely concerned about the poor quality of audits being undertaken at many companies but recognise that I have little to no ability to impact this issue alone. Asset Managers, who represent a much larger shareholding, also carry much greater sway in this arena.
Holding companies to account for their performance is a crucial part of being a shareholder – I’m not simply expecting capital growth and income – I want to know that the companies I invest in are behaving as ethical, responsible corporate citizens. As far as I’m concerned, that behaviour shouldn’t be optional based on whether a company can be bothered.
Hopefully, these proposals, once through the discussion and review phase, will be enacted and will lead to stronger governance, stewardship and investor confidence in UK business. Although I’m not enthralled with the ability to opt out, greater transparency, communication and accountability can only be a good thing.