Implementing the Stewardship Code

Posted 21.12.2010

Heard of the Stewardship Code?

The prize for the least well sign-posted rule change must surely go to the FSA’s work on the Stewardship Code. Indeed so obscure was the FSA’s publication of the new rule, that the probability must be that only a small minority of the firms affected will have complied by the now-passed deadline of 6th December. Rule changes sneaked out through anonymous consultations and without any policy statement beg many questions, the most interesting of which is why is the FSA indifferent to mass non-compliance with this requirement?

But first the facts. The new rule (COBS 2.2.3R) requires all managers of institutional money to publish a statement setting out how and to what extent they comply with the Financial Reporting Council’s Stewardship Code. As the FSA announced just three weeks ago, this should have been done by 6th December. If you did not know that, join the club.

Not a daunting task… yet a task

The good news – apart from the fact that the FSA obviously does not care – is that stuffing a one pager onto your website is not a labour that would have tested Hercules. The bad news is that this document, even if of no interest to FSA, may well become a hostage to fortune. The theory is that the information will inform the decisions of potential clients over who should manage their money. The reality may well be that these statements are surveyed and scrutinised by investigative journalists, government departments, company management and political agitators. Control of public companies will always be a hot potato and now the rod with which to beat the shareholders and their agents, the investment managers, is being crafted.

The temptation must be simply to construct an innocuous and disdainfully vague statement, adequate for public consumption even if insufficient to guide the potential clients for whom it is primarily intended. As a holding position this may work, but it seems unlikely to survive for long as the scrutineers begin to press for better particulars. Most importantly, though, the policy and the actions have got to be consistent. Anything less will emerge before long and prove indefensible.

Looks reasonable and easy, but…

The essential requirements of the Code look, at first glance, reasonable enough. Having a policy on stewardship is hardly inappropriate. Working with other investors, where permissible, seems eminently sensible if one wishes to magnify the impact of one’s vote. Liaising with company management and knowing how to escalate issues sounds useful. But when it comes to an obligation to tell the world how you have voted shares that belong not to you but to your clients, it is beginning to sound intrusive. And not just intrusive but actually creates a conflict of interest that was not there before. If fund managers go the whole way, they will be breaching client confidentiality and simultaneously opening themselves up to pressures to act in a way that may not be in the best interests of their client.

Public disclosure of voting should not be undertaken lightly. It will not be long before pressure groups use this information to cajole fund managers into casting votes which reflect the views of the pressure group but do not reflect the interests of the fund managers’ clients. With the experience of the tactics used to damage the legitimate business of Huntingdon Life Sciences, it is not difficult to see how publication of voting records could introduce significant conflicts of interest for fund managers. It is to be hoped that firms will make clear that they consider the voting of shares that belong to their clients to be a matter of client confidentiality and therefore interpret the Code, wherein much ambiguity lies, as requiring nothing more than statistical summaries.

With time very pressing, firms will need to draft, adopt and publish quickly. OWL will be happy to advise on process and articulation.

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