ANALYSIS

Calls for global governance code go unheard

The global application of a code of best practice for institutional investors, developed by the UK Financial Reporting Council, was debated at the International Corporate Governance Network’s annual conference in Toronto. Amanda White reports.


anne_sheehan_nlThe International Corporate Governance Network (ICGN) has been looking at a code of best practice for institutional investors for years. Now a collaboration of four associations in the UK have collectively written a governance code for local constituents.

Peter Montagnon, senior investment adviser at the Financial Reporting Council, which is the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance, says a final version of the code will be released at the end of this month.

While it has been difficult to get consensus, the associations, including the Association of British Insurers, NAPF and the Investment Management Association, have finally agreed on seven principles that will underpin the new Stewardship Code. The next, and perhaps more critical stage, is the must-have buy-in from investors.

One of the motivations for the code is to improve the quality and effectiveness of the dialogue between shareholders and the companies they invest in.

“We want to improve the quality of communication, not just at annual meetings,” Montagnon says.

One of the delicate balances is the relationship between the regulators and shareholders, and Montagnon says shareholders need to be aware of the differences in their motivations.

“The balance between regulators and shareholder enthusiasm is a challenge,” he says. “Shareholders want to increase value, and regulators want to minimise risk and want shareholders to help monitor that. Shareholders have to push back on that.”

The code also aims to set out the chain of participants and ask funds managers to report whether they apply the code.

“If they don’t that’s fine, but if they do we want them to see how they do.”

Montagnon believes the process of engagement needs to be more international and wants to persuade international institutions which hold UK securities to follow the code.

“This needs to be internationalised so it’s not too onerous,” he says.

But Anne Sheehan, director of corporate governance at CalSTRS believes the idea of a code in the US is a “big leap”.

“We are trying to get our colleagues in the US to make sure they recognise we need to be good stewards, but we are behind the game. I can’t imagine the regulators devising and enforcing it,” she says.

While Sheehan believes a regulatory approach is not the solution in the US, she does believe there is room for larger funds to lead by example.

“CalSTRS started in 1913 and from the beginning we had a culture of looking out for interests of teachers [the fund’s member base]. But were we always good, diligent stewards? Leading up to the crisis, maybe not. We were riding the wave up but not thinking enough about the risks of the way down. We were part of the problem,” she says. “Our board is asking what more could we do to take leadership role, to lead by example.”

Sheehan recommends more transparency as a first step for her US counterparts.

“We are being transparent about our actions, for example we pre-announce our votes. More needs to be done. We want to lead by example with other larger funds and say what we expect from fellow funds. Because we are global investors need to know what’s happening in other parts of the world, but we’re just beginning to walk.”

CalSTRS is going through the process of getting funds managers to integrate sustainability into their investment processes.