The Stewardship Code is a framework of best practices for institutional investors, such as pension funds, insurance companies, and investment trusts. First introduced in 2010, it provides guidelines on how these entities should engage with their investee companies, particularly in the exercise of voting rights. The Code operates on a ‘comply or explain’ basis, similar to the UK Corporate Governance Code.
Historical Context
The concept of stewardship in investment emerged prominently after the 2008 financial crisis. The need for a structured framework that ensures responsible and sustainable investment practices became apparent. The first Stewardship Code was published by the Financial Reporting Council (FRC) in the UK in 2010.
Key Principles
The Stewardship Code outlines several key principles that institutional investors are encouraged to follow:
- Publicly Disclose Stewardship Approach: Investors should explain their approach to stewardship and governance.
- Conflict Management: Clear guidelines for managing conflicts of interest.
- Monitoring Investee Companies: Regular monitoring of investee companies’ performance and governance.
- Engage in Dialogue: Proactive engagement with investee companies.
- Exercise Voting Rights: Policies on how voting rights are exercised.
- Collective Action: Collaboration with other investors where appropriate.
- Reporting on Stewardship Activities: Transparency in disclosing stewardship activities and outcomes.
Applicability and Importance
The Code is primarily aimed at institutional investors, including:
- Pension funds
- Insurance companies
- Investment trusts
- Asset managers
Importance
- Encourages Accountability: Ensures that institutional investors act in the best interests of their clients and beneficiaries.
- Promotes Transparency: Fosters greater transparency in investment practices and decisions.
- Enhances Corporate Governance: Leads to improved corporate governance practices among investee companies.
- Facilitates Sustainable Investment: Encourages long-term, sustainable investment strategies.
Examples
- Pension Fund A publicly discloses its stewardship activities and policies, explaining how it integrates environmental, social, and governance (ESG) factors into its investment decisions.
- Investment Trust B actively engages with its investee companies, voting against executive compensation plans that do not align with shareholder interests.
Related Terms
- Corporate Governance: The system of rules, practices, and processes by which a company is directed and controlled.
- ESG Investing: Investment strategies that consider environmental, social, and governance factors.
- Proxy Voting: The process by which a shareholder delegates their voting power to a representative.
- Fiduciary Duty: The legal obligation to act in the best interest of another party, such as the beneficiaries of a pension fund.
Comparisons
- UK Corporate Governance Code vs. Stewardship Code: While both codes aim to enhance corporate accountability, the former focuses on the responsibilities of corporate boards, whereas the latter addresses the responsibilities of institutional investors.
FAQs
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What is the ‘comply or explain’ principle?
- It means that institutional investors should either comply with the Stewardship Code or explain why they have not done so.
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Why is the Stewardship Code important?
- It promotes responsible investment practices and ensures that institutional investors act in the best interests of their beneficiaries.
Inspirational Stories
Famous Quote: “Effective stewardship can bring long-term value not only to investors but also to society as a whole.” — Mary Schapiro, Former Chair of the U.S. Securities and Exchange Commission.
References
- UK Stewardship Code 2012
- Financial Reporting Council. “The UK Stewardship Code.” FRC.
Summary
The Stewardship Code plays a pivotal role in guiding institutional investors towards responsible and sustainable investment practices. By adhering to its principles, investors can enhance corporate governance, ensure transparency, and contribute to long-term value creation for their beneficiaries and society at large.
