One of the most influential groups in the City has called for the UK’s Stewardship Code to be shifted from an “apply and explain” model to a less onerous “comply or explain” application.

CMIT (the Capital Markets Industry Taskforce), led by London Stock Exchange chief executive Julia Hoggett, has also called for the number of principles in the code to be more than halved: from 12 to five.

The calls come in an open letter written to watchdogs at the Financial Reporting Council and published on CMIT’s website, as regulators begin the next round of consulting on a new code.

The FRC launched a review of the code in February this year, following criticism that it had become a “reporting burden”. The code was last updated in 2019, when it shifted to guide fund managers to focus on the “outcomes” of their engagement with companies they invest in.

CMIT says in its letter that any new code should support engagement, do away with demands for “demonstrations of systemic stewardship”, and reduce reporting.

The letter argues the review should avoid assuming all investors are the same and have the same opinions and resource.

“Recognising and understanding this is critical,” the letter insists, “there is no one-size-fits-all approach to stewardship. Reflecting this reality, the Code should move away from the ‘apply and explain’ to a genuinely ‘comply or explain’ approach to its principles.”

It adds that the code should work to change the perception that not voting at an AGM is a sign of poor stewardship.

“There will be circumstances where investors may not have strong opinions on a particular matter or the necessary resource to consider it properly.

“As such, not voting should not be seen as an indication of poor stewardship, nor should voting in line with the recommendation of the board of the issuer.

“Similarly, as is often now the case, simply voting against resolutions should not be seen, as a default, as effective stewardship.”

Though a review of the stewardship code is yet to conclude, officials at the FRC decided to make “interim” changes in August which reduce disclosures for asset owners and managers, except where there are material issues to report.

Measuring performance

News has also emerged that the FRC has abandoned efforts to develop a KPI for stewardship effectiveness.

The FRC also added some explanation of what it is expected of reporting outcomes following engagement.

Conversations are expected to continue throughout the autumn, before the watchdog produces a draft code for consultation.

There has been a broad welcome for streamlining the stewardship code, although some institutions harbour concerns about whether it remains true to its original purpose.
LGPS Central, one of the largest members of the £200bn Local Government Pension Scheme, says:

“Can these changes go far enough to alleviate the reporting pressures without diluting the code’s effectiveness?

“Investors are cautiously optimistic, but the true impact of these updates will only become clear when the next version of the UK Stewardship Code is published.”

‘Collaborative engagement’

Elsewhere, there are worries that the FRC’s “interim changes” included phrasing that “collaborative engagement” should be “undertaken where necessary”.

Collaborative engagement involves fund managers using groups such as Climate Action 100+ to engage on key topics.

The IIGCC (the Institutional Investors Group on Climate Change) says the “where necessary” formulation could lead to collaboration being cleared only as a tool of “last resort”.

Laith Cahill, a stewardship specialist with IIGCC, writes in a blog: “Many investors engage in collaborative initiatives or use escalation techniques as part of the day-to-day work of stewardship. From our perspective, collaboration is invaluable in its ability to facilitate transparency between investor and company.”

The stewardship code has a long way to go before a new version is released for use. CMIT’s open letter will be one of many efforts attempting to influence the outcome.