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FRC urges deeper engagement with stewardship code

THE FRC has called for greater commitment to its stewardship code, compelling asset managers not to simply ‘sign-up to tick a box’.

The accounting and audit watchdog’s plea was made as it published its annual review of developments in corporate governance and stewardship for 2014.

It expressed disappointment that despite some improvements, “too many signatories fail to follow-through on their commitment to the code” and that asset managers should “commit to adopting and reporting against the principle”s of the  tewardship code with “appropriate explanations where needed”.

Despite ‘encouraging news’ from larger companies and major investors that deeper engagement on a wider range of issues was happening, the FRC raised concerns that it had failed to take place “with sufficient quality”. The FRC was did acknowledge that developing a culture of stewardship “may take time” and praised the efforts of the Investor Forum in helping to create an effective model for collective engagement with UK companies.

Nevertheless, it remained concerned that too many signatories were simply not following through on their commitment to the Code.

Jennifer Walmsley, director at advisor Hermes EOS, said: “Asset owners and asset managers need to walk the walk, not just talk the talk, but there are a number of different ways in which they can do this.

“We support the FRC’s desire to a review of signatories but would not support outright banning. We would like to see them held to account with a view to a change of their behaviour.”

To that end the FRC stressed that its main focus for 2015 and 2016 is to improve the implementation of the code. Specific areas of attention will include “developing the evidence base for the benefits of stewardship; generating demand from asset owners for stewardship work by fund managers; and undertaking greater scrutiny of adherence to the code”.

The stewardship code now had just under 300 signatories, “with mandates increasingly referring to stewardship and reports of better proactive engagement by companies and investors over the 2014 AGM season”.

On a more upbeat note, the FRC reported increased levels of compliance with the UK corporate governance code with reporting more transparent and informative. It singled out audit committee reports and diversity reporting, as demonstrating particular improvement.

FRC chairman Sir Win Bischoff, said: “The governance of individual companies depends crucially on the culture that is in place. The UK’s strong governance culture encourages companies to list in London and provides assurance to investors. Unfortunately we still see examples of governance failings in this area. Boards have responsibility for shaping the culture, both within the boardroom and across the organisation as a whole. This requires constant vigilance.”

Despite stewardship issues, overall compliance levels with the corporate governance code continued to improve with full compliance by the FTSE 350 reaching 61.2% and 93.5% complying with all but a few provisions.

Audit committee reports also saw improvements, with “good examples of greater transparency and informative reporting”. The Financial Reporting Lab ‘Reporting of Audit Committees’ had been helpful to companies in this matter.

It added that the UK was now on course to hit Lord Davies target of 25% of FTSE 100 female directors in 2015, with 22.8% of directorships now held by women.

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