What is stewardship? The FRC wants to know

The UK watchdog for accounting and corporate governance plans to take a fresh look at how shareholders related to the companies whose shares they own, and it would like your views. Just two years after the launch of its Stewardship Code, the Financial Reporting Council thinks it's time to "to build on a promising start by reinforcing it where necessary, but not fundamentally changing it". It notes that a similar view was expressed in the interim report of the Kay Review, published in February. "For that reason the FRC does not propose to change or add to the Code's seven principles," the FRC said, but neither that nor the prospect that John Kay's final review, due in July, might rethink the nature of stewardship gives the FRC reason to pause in its revision. Its draft revised Code "does look rather different" from the one launched in 2010, when these themes were removed from the old Combined Code so they could achieve greater attention. The reasons for the proposed new introductory sections include:

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• Definition: The FRC said: "it has become clear that there is no common understanding of what is meant by the term 'stewardship', or of the respective roles and responsibilities of asset owners and managers". It attempts to provide greater clarity.
• Lending: The first iteration of the Stewardship Code deliberately left out consideration of the practice of stock lending, wanting its other provisions to become bedded into practice first. It's time now to take a look at whether investors who have lent shares – often to support short-sellers – should be allowed to recall them for voting purposes.
• Bug fixes: The FRC also wants to take into account various lessons learned in implementation of the code, including those highlighted in its "Developments in Corporate Governance" report, published in December.

Among its specific measures, the FRC wants to encourage the practice of companies discussing major strategic moves with their key investors before those plans are fully developed. It follows a case where a planned merger involving one of the UK's largest 100 companies faltered, owing to investor displeasure over the terms. It suggests investors provide named individuals who would become "off market", that is, would not trade shares for a time, who could then become insiders in advance of deals being disclosed.

The new draft also seeks to incorporate a change in the discourse, one viewed skeptically in parts of the investment landscape but promoted by the powerful lobbying force of insurers and pension funds: the concept of "asset owner" as a way of focusing attention on the beneficial owner often lost in the investment supply chain. The consultation paper puts it this way: "Where a statement in the Code refers only to one type of firm the words 'institutional investor' have been replaced with either 'asset manager' or 'asset owner'. Where a statement refers to both managers and owners, the term 'institutional investor' is used. Lastly, the word 'shareholder' has been replaced with 'investor', to avoid debate and confusion over whether the asset manager or owner is considered the shareholder."

It also wants views about the use of proxy voting agencies, another hotly contested theme that the first version of the Stewardship Code set aside for attention later.

Source document: The consultation paper is a 13-page pdf file.