City Watchdog Takes Axe to UK Stewardship Code

The Financial Reporting Council (FRC) is set to make significant changes to the UK Stewardship Code, a framework designed to guide how shareholders hold companies to account. Created in the aftermath of the 2008 banking crisis, the code has served as a voluntary tool for fund managers, proxy agencies, and institutional investors to demonstrate their engagement with companies on key issues. However, the FRC now aims to streamline the code, reducing reporting demands by up to 30 per cent in an effort to align with the government’s growth agenda.

Richard Moriarty, chief executive of the FRC, has indicated that a more concise version of the UK Stewardship Code will be released this week. The updated framework will remove the specific reference to environmental, social, and governance (ESG) issues, which were introduced in 2020. Instead, it will focus on fostering long-term sustainable value for clients and beneficiaries. Moriarty stated that the changes are intended to make the code less burdensome while ensuring it remains effective in its aims.

One of the most notable updates includes a new focus on proxy voting agencies, marking the first time that such entities have been explicitly referenced in the code. These agencies, which advise institutional investors on voting decisions at corporate annual meetings, have faced criticism for their lack of transparency. Concerns have been raised, particularly by the London Stock Exchange, over discrepancies in their recommendations, such as why higher executive pay deals receive approval in the US compared to the UK. The updated code will now call on proxy agencies to publish their methodologies and clarify their approach to corporate engagement.

The proposed revisions reflect an effort to address complaints from industry stakeholders. FTSE 100 fund manager Schroders, for example, recently highlighted that its stewardship code report spanned a lengthy 122 pages and, according to the firm, was seldom reviewed by website visitors. These changes aim to reduce such inefficiencies and ensure the code serves as a practical tool for all its users.

As part of the revisions, the FRC’s updated framework seeks to strike a balance between reducing regulatory burdens and maintaining shareholder accountability. This aligns with the broader government initiative to incentivise economic growth by simplifying regulatory processes across the financial sector. By addressing long-standing concerns within the investment community, the revamped code is expected to encourage more active and productive participation from key stakeholders.

Proxy voting agencies, a critical yet controversial part of the corporate governance ecosystem, have drawn sharp criticism in recent years. JPMorgan chief executive Jamie Dimon recently described them as a “cancer” on the system, bringing their alleged influence into the spotlight. The FRC’s decision to incorporate these entities more formally into the code could help build trust and accountability within the investment landscape by making their processes more transparent and standardised.

These changes to the UK Stewardship Code highlight a step forward in modernising the framework while balancing simplicity with effectiveness. The FRC appears committed to ensuring that the code remains relevant and practical, fostering a healthier environment of corporate governance and shareholder responsibility in the UK.