UK - The final report of the Walker Review into corporate governance has recommended institutional investors should abide by a new Stewardship Code, developed from the principles set out by the Institutional Shareholders Committee (ISC).

Sir David Walker, a senior adviser to Morgan Stanley, noted in his latest report that while recommendations relating to engagement by institutional investors and fund managers was prepared "with particular regard to shareholdings in banks and other financial institutions (BOFIs)", they also have wider relevance for holdings in other UK companies.

The "review of corporate governance in UK banks and other financial industry entities" proposed the new Stewardship Code - which addresses arrangements for monitoring investee companies, intervention strategies and voting policies - will be ratified and overseen by the Financial Reporting Council (FRC) and should sit alongside the existing Combined Code on Corporate Governance that is also currently under review.

In addition, the Financial Services Authority (FSA) said it intends to consult on a "requirement for relevant authorised firms who manage assets on behalf of others to disclose on a 'comply or explain' basis the nature of their commitment to this Stewardship Code".

The review noted a common problem for long-only shareholders and the boards of their investee companies is that historically "close engagement has often begun only in event-driven problem situations where specific differences of view may be pronounced and which have tended to focus in particular on remuneration rather than wider strategic issues".

Walker added: "Institutional investors should be less passive and prepared to engage earlier if they suspect weaknesses in governance. They enjoy the privilege of limited liability whereas taxpayers have ended up assuming unlimited liability in respect of the big banks. Early preventive medicine through shareholder engagement can save everyone substantial time and money later on."

The report admitted the recommendations are "UK-centric" in the sense that they relate to the FRC, the FSA and UK-domiciled fund management entities authorised by the FSA. However, it noted because there is substantial investment in BOFIs from sovereign wealth funds, non-UK pension and endowment funds and non-UK fund managers, these investors should be encouraged to participate in the code voluntarily. He argued "this is likely to be in their own interest and in that of their clients as ultimate beneficiaries".

The report stated: "Interest in promoting greater fund manager and investor attentiveness to longer-time scales in portfolio management decisions is most unlikely to be confined to the UK and, hopefully, the enhanced arrangements put in place in this country will come to be seen to have wider relevance internationally, particularly given the continued cross-border diversification of the portfolios of major investors."

Lindsay Tomlinson, chairman of the National Association of Pension Funds (NAPF) told the BBC earlier today that Walker had produced a "pretty fair" and balanced report. In response to questioning about the role of institutional investors in the crisis, he added: "The important point is that there were many, many contributors to the credit crisis, for example supervisory failure. I think we would acknowledge as investors that we could have done more, but our role in this is relatively minor."

Daniel Summerfield, Co-Head of Responsible Investment at the Universities Superannuation Scheme (USS), also said of today's report: "USS is broadly supportive of the recommendations being put forward today by Sir David Walker. We believe that they strike a delicate balance, between being overly prescriptive and allowing for appropriate flexibility, which should encourage best practice and avoid box-ticking conformity."

He continued: "USS has long advocated the need for the fund management industry to ‘up its game' in the area of shareholder engagement and is therefore supportive of the recommendation for the principles of stewardship to be turned into a code, with an appropriate monitoring mechanism. It is now up to boards and shareholders to respond positively and constructively to Sir David Walker's recommendations if we want to avoid further regulatory interference in this area."
 
The full report - including The Code on the Responsibilities of Institutional Investors in Appendix 8 - can be found on the HM Treasury website.

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