UK Code Sparks Overhaul of Stewardship Governance

Governance upgrade includes focus on internal conflict management to resolve differences between investment and stewardship teams.

The introduction of a toughened code has led to improved governance and resourcing of stewardship by UK-based asset managers and owners, but investment in the area faces ongoing challenges, including tensions with other staff.   

Independent research commissioned by the Financial Reporting Council (FRC), which updated the UK Stewardship Code in 2020, found it has had a “very positive” overall impact on the quality of oversight over assets, despite teething problems.   

The report said that the introduction of the code, which requires organisations to explain how their governance, resources and incentives structures support stewardship, had led to sweeping changes.   

All surveyed asset managers and owners said they had made changes to their governance of stewardship, which included actions such as establishing oversight committees, improving reporting and transparency, and appointing a head of sustainable or responsible investment.   

Some also said they had given greater attention to internal conflict management, reflecting challenges arising from the evolution of governance practice, notably “changing boundaries and relationships” between investment and stewardship teams.

The report noted the development of dedicated stewardship teams, most commonly in larger asset management firms, which were having greater influence in investment meetings. It recorded “diverse” approaches to the formalisation of stewardship governance as well as integration into core investment processes, with some interviewees noting that “close proximity” made it easier to resolve conflicts between investment, ESG and stewardship teams.   

According to survey interviewees, “differences in views typically arise in relation to the design and implementation of stewardship policies by the dedicated stewardship team which clashed with the investment manager or analyst teams”.   

Differences could arise relating to exclusions, voting, engagement or escalation, the report found, with sources saying they were most likely to emerge where there was a “lack of consistent or clear dialogue”.  

Both asset managers and owners told researchers they were experiencing regular disagreements between stewardship and portfolio management teams. These were typically being handled via dedicated conflict resolution mechanisms, involving “open and ongoing dialogue” between the teams.   

Some asset owners said unresolved disagreements could be escalated to the CIO, while others also noted that the greater focus on stewardship had led to an increased number of investment and oversight committees, which could hamper decision-making and policy approval processes.   

The report, which was based on a survey of more than 50 asset managers, plus 40 interviews with asset managers and owners, was conducted by researchers from Minerva Analytics, the Durham University Business School and the Dickson Poon School of Law, King’s College London.   

The FRC replaced its 2012 Stewardship Code with a new version with the intention of increasing and clarifying regulatory expectations. The new code provided a wider definition of stewardship, to a range of asset classes, encouraging a greater focus on activities and outcomes, rather than policies. 

Bolstering stewardship resources  

The revised code has prompted increased investment in stewardship, the report said, reflected to date in larger stewardship teams, more structured career paths, greater use of external resources and a broader range of stewardship and engagement related activities.   

According to the report’s survey, 96% of asset managers said they had increased staff resourcing on stewardship with 43% of the sample saying they had increased headcount “significantly”. The stewardship recruitment drive is expected to continue with 92% of survey respondents saying they will increase staffing levels in the next one to two years; 29% said they would grow their teams “significantly”.   

The survey found that asset manager respondents with more than £250 billion in assets have larger stewardship teams, typically averaging 22 individuals dedicating over 50% of their time to stewardship-related activities, while medium-sized firms had slightly smaller teams of 20 on average. Asset managers with less than £50 billion in AUM have generally embedded stewardship directly into their core investment and research processes, hiring four dedicated stewardship staff on average.  

Research budgets for stewardship have already increased widely, with spending expected to accelerate. More than three-quarters of surveyed asset managers expected their research budgets would increase in the next one to two years. A quarter said they would rise “significantly”.   

Use of external resources to support stewardship activities is also widespread among asset managers with 47% outsourcing proxy vote management, 43% using ESG ratings services and around a quarter using proxy governance (27%) or ESG research (24%).   

Both asset owners and managers reported using their increased resources to enhance the quality and range of their stewardship and engagement activities. Whereas stewardship is traditionally focused on interactions with directors of listed corporates, the study found that investors were exercising stewardship across a fuller range of asset classes.  

It also said asset owners and managers were increasing their volume and range of stewardship and engagement-related activities and broadening out the spectrum of interlocutors. Almost all survey participants said they were now regularly involved in collaborative stewardship initiatives with peers, while many also highlighted and increased focus on policy advocacy. The survey highlighted use of a wide range of escalation techniques, and a high level of willingness to vote against management recommendations and director re-elections.   

Despite increased resourcing and activity by asset owners and managers, the research highlighted concerns among interviewees that they still did not have the capabilities required to meet all their stewardship goals.  

“When discussing their stewardship practices, both asset manager and asset owner interviewees frequently used phrases such as ‘due to the lack of resources’ or ‘due to resourcing constraints’, to comment on certain elements of their daily activities,” the report said.   

Citing also under-investment in systems and poor data quality, the report said “mismatched expectations” around resourcing warranted deeper analysis, given evolving regulations and expectations.  

Last month, the UK’s Department for Work and Pensions published new guidance to improve pension trustees’ reporting on ESG-related stewardship priorities, which included requirements for trustees to take more ownership of their external managers’ voting priorities and to publicly disclose detailed stewardship priorities and how these are being utilised. 

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