In the past two years, high-profile cases of corporate failure and scandals such as BHS and Patisserie Valerie, and their disastrous consequences, made the headlines in the UK. There is no doubt that such examples of poor corporate conduct continue to negatively affect business trust and credibility, making strong corporate governance and effective stewardship a central concern for financial professionals and the organisations they work for.
For many years, the investment community has been accused of being too focused on maximising short-term business growth and performance over sustainable and inclusive corporate success to benefit all stakeholders. And the 2008/09 financial crisis proved to be a rude awakening, highlighting the importance of having an effective business culture, strong governance and leadership – observations that are still highly pertinent today.
In 2010, the Financial Reporting Council (FRC) in collaboration with leading UK companies developed and published the Stewardship Code to help address these challenges and enhance the quality of engagement between institutional investors and companies. In turn, this aimed to foster best investment practices and the efficient exercise of governance responsibilities, ultimately creating a stronger link between governance and the investment decision-making process.
This was a pioneering step in shaping the future of the UK’s overall corporate governance framework, and led to the creation of similar sets of principles in as many as 20 countries. The positive impact of the Code to date should not be dismissed.
While profitability is still fundamental to any long-term business strategy, we need to challenge the ever prevailing premise that a company’s best interest primarily lies with profit maximisation. We have to find a more sustainable way to do business, focus on creating long-term value and strengthen accountability to benefit investors, society and help boost sustainable economic growth. In short, it is essential that we rethink how we define and approach organisational purpose.
To help achieve this, we agree with the FRC that it is now time to review, refresh and refocus our stewardship expectations and practices. This is why the revised UK Stewardship Code, due to come into force in July 2019, is more important than ever. With this new Code, the FRC aims to set new and substantially higher expectations for investor stewardship policy and practice. It also intends to put an increased focus on how active stewardship can deliver sustainable value for beneficiaries, the economy and society.
With a greater emphasis on organisational purpose, values and culture and the inclusion of material environmental, social and governance (ESG) requirements, the new Code marks an overall positive step towards bringing more accountability and transparency to the modern business world.
The proposed changes, which also include a revised definition of investment, the introduction of more rigorous public reporting with a focus on outcomes and effectiveness as well as a clearer split of responsibilities between asset owners and asset managers, are key to driving a culture of responsible business and help restore trust.
However, we should not have excessive expectations and believe that the application of stewardship principles throughout the capital structure and the inclusion of non-financial factors will necessarily lead to immediate behaviour improvements, especially given the voluntary nature of the Code.
In fact, further developments on the integration of the Stewardship Code provisions with investment decisions and accompanying reporting requirements are required, particularly as these decisions directly impact long-term corporate performance. We should also put a stronger emphasis on the necessary links between the Code and business investment decision-making processes.
At a time where public trust in business remains low, we need to reassess how companies do business, move away from focusing on short-term business performance and reassess their role in society. Active corporate stewardship can play an essential role in delivering long-term value for beneficiaries, the economy and society – and should be fully embedded in the corporate reporting system.
So what does this mean in practice for investment companies? Firstly, they will need to ensure that they fully sign up to the new Code and also understand its implications for their investment strategy. Secondly, they will need to make sure that their investment strategy complies with the new ESG provisions. And finally, moving forward investment companies will also need to consider the Code in its entirety when making investment decisions. The revised Stewardship Code represents is an opportunity for institutional investors to consider the sustainability and long-term value of their holdings and potentially revaluate the risks they are taking.
For other companies, the new Code is an opportunity to consider how strong reporting standards and practices may appeal to new investors. For example, can the company clearly articulate its long-term sustainable business model? Does it take into account the latest trends in technology and the marketplace? Good reporting, including taking in account non-financial factors, has the potential to attract investors by highlighting how a company drives long-term growth and adds value to society.
The UK’s corporate stewardship framework has been widely recognised as a trailblazer in corporate governance. But as the world is changing and new challenges are arising, it is more important than ever that government, business and society work together to set out a shared vision for delivering long-term value for shareholders, customers, employees and wider society alike. People expect more from businesses than they ever did before.
The Association of International Certified Professional Accountants (the Association), the unified voice of the Chartered Institute of Management Accountants (CIMA) and the American Institute of CPAs (AICPA) responded to the FRC Stewardship Code consultation due on 29 March. The Association is also actively participating in the independent review of the FRC through interviews, round tables, letters and comments.