Stewardship Code

Stewardship Code Institutional Investors Investment Trusts Pension Funds Corporate Engagement Voting Rights Compliance
A code of best practice for institutional investors, such as pension funds, insurance companies, and investment trusts, which sets guidelines on how these entities should engage with their investee companies, notably in the exercise of voting rights.
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Definition

Stewardship Code refers to a set of guidelines and principles to direct institutional investors on engaging with the companies they invest in, particularly concerning the exercise of voting rights and overall corporate governance. First introduced in the United Kingdom in 2010, the code operates on a “comply or explain” basis, meaning that institutions must either adhere to the guidelines or provide a public explanation for any deviations. This framework aims to promote long-term value for shareholders and enhanced corporate governance.

Examples

  1. Pension Funds: A pension fund may use the Stewardship Code to guide its engagement strategies with portfolio companies, ensuring it uses its influence to promote sustainable and profitable practices.

  2. Insurance Companies: An insurance firm might follow the Stewardship Code to participate actively in shareholder meetings and votes, thereby contributing to ensuring that investee companies adhere to sound corporate governance principles.

  3. Investment Trusts: An investment trust adhering to the Stewardship Code might regularly meet with the boards of companies it invests in to discuss strategy, performance, and governance issues to protect and enhance investor value.

Frequently Asked Questions

Q1: What is the primary objective of the Stewardship Code? A1: The main goal is to ensure institutional investors, like pension funds and insurance companies, actively engage with investee companies to promote long-term value creation and better corporate governance.

Q2: When was the Stewardship Code first introduced? A2: The Stewardship Code was first introduced in 2010 in the United Kingdom.

Q3: What does the “comply or explain” principle mean? A3: It means that institutional investors must either comply with the Stewardship Code’s guidelines or publicly explain their reasons for not complying.

Q4: Who issues the Stewardship Code? A4: In the UK, the Financial Reporting Council (FRC) issues the Stewardship Code.

Q5: How does the Stewardship Code benefit investors? A5: The code promotes active engagement and effective governance, which can lead to improved long-term performance and value creation for investors.

1. Corporate Governance

  • The system by which companies are directed and controlled. It includes practices and processes to ensure accountability, fairness, and transparency in a company’s relationship with its stakeholders.

2. Institutional Investors

  • Organizations that invest large sums of money in financial markets, including pension funds, insurance companies, and investment trusts.

3. Voting Rights

  • The rights of shareholders to vote on matters of corporate policy, including decisions on the makeup of the board of directors, mergers, and other significant actions.

4. Comply or Explain

  • A regulatory approach where firms must comply with specific guidelines or publicly explain why they have not done so.

Online References

Suggested Books for Further Studies

  1. “Corporate Governance and Responsible Investment in Private Equity” by Simon Witney
  2. “Stewardship: Lessons Learned from the Lost Culture of Wall Street” by John G. Taft
  3. “The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors” by Gregory Curtis
  4. “The Shareholder’s Use of the Stewardship Code” by Krista Bondy and Lancaster Stevens

Accounting Basics: “Stewardship Code” Fundamentals Quiz

### What is the primary purpose of the Stewardship Code? - [ ] To regulate the pay of CEOs. - [ ] To increase dividends for shareholders. - [x] To guide institutional investors on engaging with investee companies. - [ ] To manage individual stock investments. > **Explanation:** The primary purpose of the Stewardship Code is to guide institutional investors on engaging with investee companies, particularly concerning the exercise of voting rights, to ensure long-term value creation and better corporate governance. ### When was the Stewardship Code first introduced in the UK? - [ ] 2000 - [ ] 2005 - [ ] 2015 - [x] 2010 > **Explanation:** The Stewardship Code was first introduced in the United Kingdom in 2010 as a initiative to improve corporate governance and long-term value for institutional investors. ### Which entity typically issues the Stewardship Code in the UK? - [ ] The Bank of England - [x] Financial Reporting Council (FRC) - [ ] The London Stock Exchange - [ ] Her Majesty's Treasury > **Explanation:** In the UK, the Financial Reporting Council (FRC) is the entity that issues the Stewardship Code. ### What does the "comply or explain" approach mean? - [ ] Comply with all rules, without exception. - [ ] Ignore the guidelines if not feasible. - [x] Comply with guidelines or explain reasons for non-compliance. - [ ] Seek annual exemptions from regulations. > **Explanation:** The "comply or explain" approach means institutional investors must either follow the guidelines set by the Stewardship Code or publicly explain why they have chosen not to comply. ### Which of the following is NOT an example of an institutional investor? - [ ] Pension Funds - [ ] Insurance Companies - [x] Individual retail investors - [ ] Investment Trusts > **Explanation:** Individual retail investors are not considered institutional investors. Institutional investors include entities like pension funds, insurance companies, and investment trusts that invest large sums of money. ### How does the Stewardship Code benefit institutional investors? - [x] Promotes long-term value creation and better governance - [ ] Guarantees higher short-term returns - [ ] Reduces all operational costs - [ ] Ensures seats on the board of investee companies > **Explanation:** The Stewardship Code benefits institutional investors by promoting long-term value creation and better corporate governance, rather than guaranteeing higher short-term returns or reducing costs. ### Which type of investment is most directly influenced by the Stewardship Code? - [ ] Unregulated mutual funds - [x] Managed funds, like pension funds and insurance portfolios - [ ] Personal savings accounts - [ ] Day trading accounts > **Explanation:** Managed funds, like pension funds and insurance portfolios, are most directly influenced by the Stewardship Code as they are significant institutional investors. ### What key aspect do institutional investors focus on under the Stewardship Code? - [x] Engagement with investee companies - [ ] Trading frequencies - [ ] Short-term profits - [ ] Share buybacks > **Explanation:** Under the Stewardship Code, institutional investors focus primarily on engagement with investee companies to promote long-term value and effective governance. ### Why might an investor choose to explain instead of comply with the Stewardship Code? - [x] Reasons specific to their investment strategy - [ ] To minimize regulatory oversight - [ ] To reduce compliance costs - [ ] To avoid engagement with the companies > **Explanation:** An investor might choose to explain instead of comply with the Stewardship Code due to reasons specific to their investment strategy or context that may warrant deviation from the prescribed guidelines. ### Who benefits from the proper implementation of the Stewardship Code? - [ ] Only the institutional investors - [x] Both institutional investors and their stakeholders - [ ] Only the investee companies - [ ] The government regulators > **Explanation:** Both institutional investors and their stakeholders benefit from the proper implementation of the Stewardship Code as it aims to enhance long-term value and governance, benefiting the overall investment ecosystem.

Thank you for exploring the in-depth analysis and practical quiz on the “Stewardship Code.” Keeping updated with these guidelines ensures sound investment practices and enhanced corporate governance.

Tuesday, August 6, 2024
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