Auditors could play a starring role in the enforcement of a new stewardship
code, which would compel investors to take a greater interest in the management
of their investments.
The profession may end up providing independent assurance on whether
companies are adhering to parts of a future stewardship code, under plans being
considered by the ICAEW.
Within the ICAEW, a working party is debating how to integrate elements of
the stewardship code into existing assurance standards.
A stewardship code was first suggested in hearings by the Treasury select
committee. The committee heard investors had become disengaged from their
investments, giving rise to “ownerless” corporations.
It was thought a stewardship code would address this. The idea was adopted by
the Financial Reporting Council (FRC) which has been seeking feedback since
January. It’s proposed code, drawn largely from the current Institutional
Shareholders’ Committee’s own investor code, aims to set best practice on how
institutional investors engage with the companies they invest in.
The ICAEW is exploring whether existing assurance standards could be used as
a vehicle to promote adherence.
Assurance standards have proved a successful and popular means to encourage
fund managers to use best practice risk management procedures. Fund managers use
them to demonstrate that a client’s money is being handled responsibly and risk
controls are in place.
The ICAEW wants to take the idea a step further. It is exploring whether
parts of the stewardship code can be absorbed into the assurance standards.
But debate remains on what measures can be objectively verified and included.
“Auditors are very keen to verify things that can only be truly verified,”
said working party member Marc Jobling, who is also assistant director with the
Association of British Insurers.
Investors also question whether any objectively verified measure, included in
the assurance standards, would encourage the spirit of good engagement
envisioned by the FRC. “The assurance standards can be used to measure objective
criteria, but so much of good engagement is subjective and there are questions
as to how valuable this approach would be,” said Liz Murrall, director corporate
governance and reporting at the Investment Management Association, who also sits
on the working party.
Fund managers are also concerned about the cost of the code at a time when
they are attempting to build up their finances and promote shareholder value.
Martyn Jones, the working group’s chairman, said adoption would be voluntary,
an approach which has proven successful in custodianship, investment management,
hedge funds and private equity. “The intention is to build upon the success of
the existing [standards] in providing useful assurance to investors as to the
quality of process that are operating on their behalf,” he said.
“We need to make a clear identification of what is objectively verifiable as
distinct as what is too subjective a measure.”
There’s speculation the Financial Services Authority will seek to publish
which investors adhere to the code and which do not, in a bid to encourage
Investors say that, if they are not satisfied with how their funds are being
managed, they can simply pull out their money, with or without a stewardship
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