In the UK, most institutional shareholders have traditionally refrained from exercising active control over the corporate activities of their companies. As a result, they are said to take a rather passive approach to corporate governance. The "UK Stewardship Code" (“the Code”), published in July 2010 and revised in September 2012, implements changes to the traditional approach. The Code has, for the first time, adopted the idea that institutional shareholders can play a significant role in today’s corporate governance.
The Financial Reporting Council (“FRC”) published the Code with the major aim of trying “to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities by setting out good practice on engagement with investee companies to which the FRC believes institutional investors should aspire”.
Stewards Of Financial Assets
The concept of stewardship arises from the fact that institutional shareholders own shares on behalf of beneficiaries. As a result they are stewards of financial assets for these beneficiaries, and have a responsibility to manage these assets and protect them in the best way possible.
The Code outlines seven guiding principles for institutional shareholders, representing current best practice on how they should perform their stewardship duties. The institutional shareholders have a duty to supervise corporate activities and to challenge the board when appropriate. The Code is about holding management accountable for their performance and actions.
The Code brings about some important initiatives with regard to existing practices. One such initiative is the encouragement of collaboration between institutional shareholders. This aims to reduce the ability of companies to “divide and rule” when confronted by shareholders pressing for management changes.
Annual General Meetings - An Arena For Interaction
A visible example of shareholder collaboration is the use of Annual General Meetings. This can be seen as an arena for interaction between institutional shareholders and management and can be effective, predominantly in cases of high ownership concentration.
Institutional shareholders should be prepared to be active in the protection of shares held by beneficiaries. The concept of active share ownership is said to be “central to the regulatory framework for the governance of listed companies in the UK”. The Code emphasises that shareholders have not just a right, but a duty, to engage with the companies in which they invest.
Having the opportunity to voice their opinion can help ensure satisfied shareholders, who are beneficial to the long-term success of the company. Dissatisfied shareholders may ‘exit’, or sell their stock. This has an adverse effect on share prices. This in turn affects the company’s manager’s income. The Code emphasises voice over exit.
Addressing The Problem Of Ownerless Corporation
Institutional shareholders have the power and right to ensure the board take notice of their concerns and suggestions. Shareholders need to use those powers to affect real change when appropriate. By and large, the Code intends to advance shareholder surveillance of companies, addressing the problem of ‘ownerless corporation’. Institutional shareholders can no longer allow directors to do as they please without questioning or challenging their actions.