by Michael Connor

Institutional investors and pension fund managers in the United Kingdom should do more to monitor and engage with the companies in which they invest – or else explain why they have not done so, according to provisions of a new voluntary code issued by the U.K.’s Financial Reporting Council (FRC).

Board Room The U.K. Stewardship Code “aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities,” the FRC said. “Engagement includes pursuing purposeful dialogue on strategy, performance and the management of risk, as well as on issues that are the immediate subject of votes at general meetings.”

The stewardship code is designed to be complementary to a revised U.K. Corporate Governance Code issued by the FRC in June 2010.

Both the stewardship code and the revised governance code are voluntary and subject to the U.K.’s “comply or explain approach” to compliance.

The FRC said it recognizes “that not all parts of the (stewardship) Code will be relevant to all institutional investors, while smaller institutions may judge that some of its principles and guidance are disproportionate in their case. In these circumstances, they should take advantage of the ‘comply or explain’ approach and set out why this is the case.”

The UK Stewardship Code says institutional investors should:

  • publicly disclose their policy on how they will discharge their stewardship responsibilities;
  • have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed;
  • monitor their investee companies;
  • establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value;
  • be willing to act collectively with other investors where appropriate;
  • have a clear policy on voting and disclosure of voting activity; and
  • report periodically on their stewardship and voting activities.