FRC Annual Report on Developments in Corporate Governance and Stewardship 2015

In the Introduction and Overall Assessment to its Annual Report ‘Developments in Corporate Governance and Stewardship 2015’ (, the UK’s Financial Reporting Council (FRC) highlighted that 2015 was a year of consolidation for the UK Corporate Governance Code (the Code) which had some significant changes made in 2014. Companies’ explanations improved in quality and there was a high level of compliance with the Code ‘with 90 per cent of FTSE 350 companies reporting compliance with all, or all but one or two, of its provisions’. The FRC’s ongoing strategy for 2016/19 is to give time for recent changes to embed and not to consider further changes – other than those arising from the implementation of the EU Audit Regulation and Directive – to the Code until 2019.

The importance of culture is recognised as the Code makes it clear that there is a role for the board in ‘establishing the culture, values and ethics of the company’ and in setting ‘the tone from the top’. The FRC plans to publish findings of a study looking at the role of boards in shaping and embedding a desired culture in the summer of 2016.

In relation to the Stewardship Code, the FRC intends to make a public assessment of the reporting of signatories – again in the summer of 2016 – as it is of the view that ‘the reporting of too many signatories does not demonstrate that they are following through on their commitment [to the Stewardship Code]’.

The next section of the Annual Report on the Governance of Listed Companies details how the UK Corporate Governance Code has been implemented during 2015 and provides an assessment of the quality of reporting on corporate governance. There is an interesting summary of the top 10 areas of non-compliance and ‘Code provision B.1.2, which states that at least half the board (excluding the chairman) should be independent, remains the lowest rated in terms of compliance among FTSE 350 companies’. In 2015, 42 FTSE 350 companies did not comply with this provision although the FRC note that ‘as with last year just under half had returned to having more than 50 per cent of the board as independent non-executive directors at the time their annual report and accounts was published. On the whole non-compliance was usually as a result of retirements rather than a specific wish not to comply.’ As well as overall compliance rates, this section of the Annual Report covers the quality of explanations for non-compliance; Code changes in 2012 including audit tendering, audit committee reporting, boardroom diversity, the ‘fair, balanced and understandable’ aspects of the company’s annual report and accounts; and Code changes in 2014 relating to risk management and internal control, remuneration, and shareholder engagement.

The following section of the Annual Report covers Stewardship and Engagement. The FRC points out that the quality of signatory statements varies considerably and that they would like to see improved reporting by all signatories across the seven principles of the Stewardship Code. The FRC will be contacting signatories individually to outline where their statements need to improve and will tier signatories publicly: ‘Tier 1 signatories will be those that meet our reporting expectations and provide evidence of the implementation of their approach to stewardship. We will pay particular attention to information on conflicts of interest disclosures, evidence of engagement and the approach to resourcing and integration of stewardship. Tier 2 signatories will be those where improvements are needed.’ As mentioned earlier, they will announce the outcome in the summer of 2016. This section of the Annual Report also covers engagement in the 2015 AGM season; company and investor expectations and reporting; collective engagement; proxy advisors; and voting and ownership.

The penultimate section of the Annual Report covers Other Corporate Governance and Stewardship Developments including Audit Regulation and Directive; Lord Davies Report on diversity (highlighting that FTSE 100 companies now have over 26% of the directorships held by women, and that whilst in 2011 there were 152 all male boards in the FTSE 350, now there are only 15 companies left with all male boards, all within the FTSE 250); the European Commission’s recommendation on the quality of corporate governance reporting (the ‘comply or explain principle’); the review of the OECD’s Principles of Corporate Governance; the European Commission’s Shareholder Rights Directive; the European Securities and Markets Authority (ESMA) Call for Evidence; fiduciary duties; the ICGN Global Stewardship Code consultation; other Stewardship initiatives; and the Capital Markets Union.

The final section of the Annual Report summarises the Corporate Governance and Stewardship Work for 2016/17. As well as mentioning the main activities, the FRC points out that its work in the ‘areas of governance and stewardship overlaps with that of many others, and we continue to work closely with market participants, representative organisations, service providers, regulators and Government departments.’

The Annual Report therefore provides both an interesting position paper in terms of where we are now in UK corporate governance and also highlights areas which the FRC will be focussing on for improvement.

As the AGM season is upon us, it will be interesting to see how companies deal with corporate governance hot topics such as the perennial executive remuneration issues – now very much in the headlines at BP and WPP – and how investors respond in terms of their stewardship role.

Chris Mallin, April 2016

Move Away from Short-Termism?

There has been a long-standing debate about short-termism versus the longer-term, with companies often appearing to focus on short-term earnings to the detriment of the longer-term sustainable value of the firm. Seminal works such as Paul Marsh’s ‘Short-Termism on Trial’, published by the Institutional Fund Managers’ Association in 1990, pointed out that directors might focus on the short-term, believing, perhaps erroneously, that this is the focus that shareholders wish them to take.

Over two decades later, the ‘Kay Review of UK Equity Markets and Long-Term Decision Making Final Report (July 2012)’ published by the Department for Business, Innovation and Skills stated “Overall we conclude that short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain.”… “We must create cultures in which business and finance can work together to create high performing companies and earn returns for savers on a sustainable basis.”

Subsequently, David Oakley highlights how the UK’s National Grid had ceased to provide quarterly reporting of results in his article ‘John Kay’s battle against short-termism reaps rewards’ (February 1st 2015, Financial Times). Reporting on quarterly results could increase any focus on the short-term by shareholders.

Roger L. Martin writes an interesting article with a US perspective, ‘Yes, Short-termism Really Is a Problem’, (9th October 2015, Harvard Business Review), and states that “The executives I work with speak openly about the market pressures for short-term performance. Though my perspective might be colored [by] my empathy toward them, I would say that to a person, they want to ensure that their companies do as well as possible in the long run. But they believe the capital markets place unrealistic and unproductive constraints on them.”

Two recent articles, one in The New York Times and another in the Financial Times, mention the recent activities of Larry Fink, co-founder and chief executive of BlackRock. The New York Times (1st February 2016) article ‘Some Heresy on Wall Street: Look Past the Quarter’ by Andrew Ross Sorkin, details how Larry Fink wrote to 500 chief executives asking them to stop providing quarterly earnings estimates, stating that “Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need”. However, Mr Fink believes that companies should still report quarterly results which provide transparency (but not be so focussed on earnings per share). Moreover, he is asking CEOs and corporate boards to provide “a strategic framework for long-term value creation”. He is also asking companies to consider environmental, social, and governance (ESG) issues as core to their business rather than as an afterthought.

Brooke Masters in her article ‘Governance Rules Need to be Set by Objective Parties’ (6th/7th February 2016, Financial Times), highlights the involvement of Larry Fink in a meeting of large asset managers brought together by James Dimon, JPMorgan Chase’s Chief Executive, with the aim of producing “governance principles for public companies to encourage long-term thinking and reduce friction with shareholders”. However Brooke Masters points out that some of the asset managers in the meeting (BlackRock aside) were amongst the least likely to vote against management on contentious issues. She concludes that any governance principles produced should not weaken the power of activist investors and “more shareholder pressure rather than less would seem to be the solution”.

It remains to be seen whether CEOs and corporate boards are able to move away successfully from the short-term emphasis to one of longer-term sustainable value. However, a more long-term focus by investors is key to this, and directors embracing ESG as core to the business is another necessary step in this direction.

Chris Mallin, February 2016

Tax avoidance

Recent developments in corporate governance policies and practices

Since the third edition of Tricker – Corporate Governance: Principles, Policies, and Practices published in February 2015, the subject has continued to evolve in regulation, policy, and practice. Some of the more significant developments include:

Tax avoidance

The notion of aggressive tax avoidance, in which corporate groups generating profits around the world transfer profits made in high tax regimes to low-tax havens, was addressed in case 15.2 (3E, p404). This topic has continued to excite interest.

In the UK, Facebook was criticised for paying less than £5,000 in tax, despite having UK sales of more than £100 million. Facebook (UK) channels profits to its international headquarters in Ireland, which then moves them to the Cayman Islands, avoiding corporation tax. Google, Apple, and other multinational groups were also criticised for using tax avoidance devices, such as charging intellectual property and brand image rights to their subsidiaries in high tax countries, transferring the proceeds to regimes with low or no corporate taxes.

Companies resident in the USA are taxed on their global profits at relatively high rates. Some US-based companies, generating taxable profits around the world, have sought opportunities, often through M&A activity, to shift their headquarters and their tax domicile to other countries which have less demanding tax rules. Known as ‘tax inversion,’ international groups re-organize to reduce their exposure to tax. Though strictly legal, such manoeuvres are, predictably, frowned upon in the US.

Tax avoidance that exploits loop holes in the international tax system are typically compliant with local tax law, but considered by many to raise ethical questions. However, for anti-tax avoidance measures to work, nations need to cooperate. In October 2015, the G20 and the OECD, institutions representing developed nations, published a set of new measures in an attempt to stop companies exploiting tax avoidance opportunities. The OECD’s ‘base-erosion and profit-shifting project’ tries to bind multi-nationals with a set of global tax rules. Sceptics, though, wonder whether nations will be prepared to harmonize their tax laws. For example, the UK introduced a scheme in 2013, which taxed the transfer of intellectual property rights, such as patents, at a substantially lower rate. Ireland and the Netherlands have similar, but different schemes. See

The European Union has also produced a blacklist of tax haven countries, but the rather arbitrary grounds on which countries have been included has been challenged.

Bob Tricker, January 2016

G20-OECD Principles of Corporate Governance

Recent developments in corporate governance policies and practices

Since the third edition of Tricker – Corporate Governance: Principles, Policies, and Practices published in February 2015, the subject has continued to evolve in regulation, policy, and practice. Some of the more significant developments include:

G20-OECD Principles of Corporate Governance

On 5 September 2015, the G20 Finance Ministers endorsed a new set of corporate governance principles developed by the OECD. The aims of these principles are to reinforce business integrity, improve trust in capital markets, unlock investment, and boost long-term economic growth. The intention is to provide governments and those who publish codes of corporate governance throughout the G20 nations and beyond with recommendations on shareholder rights, financial disclosure, executive remuneration, and the activities of institutional investors and stock markets.

The first OECD corporate governance principles were published in 1999 and updated in 2004 (3E, p129). Following the global financial crisis, which began in 2007, the OECD standards have been recognized as key to sound financial systems. The study leading to the 2015 revision began in 2013 and involved major international institutions including the Basel Committee on Banking Supervision, the Financial Stability Board (FSB), and the World Bank.

Details of the revised principles can be accessed at G20/OECD Principles of Corporate Governance. In launching the new principles, the authorities emphasized that ‘good corporate governance is not an end in itself, but a means to support economic efficiency, sustainable growth, and financial stability. It facilitates companies’ access to capital for long-term investment and helps ensure that shareholders and other stakeholders who contribute to the success of the corporation are treated fairly.’

Bob Tricker, January 2016

Corporate governance by principle or rule

Recent developments in corporate governance policies and practices

Since the third edition of Tricker – Corporate Governance: Principles, Policies, and Practices published in February 2015, the subject has continued to evolve in regulation, policy, and practice. Some of the more significant developments include:

Corporate governance by principle or rule

In its drive to create a single capital market, the European Commission (EU) has continued its quest to harmonize corporate governance rules across member states. Inevitably, it has had to face the dilemma (3E, p477) of whether corporate governance practices should be based on principles, as in the UK’s ‘comply or explain’ approach, or determined by rules backed by law, as in Germany and many other EU states.

This is not a new problem: in 1972, the draft 5th directive, from what was then the European Economic Community would have required major companies in all member states to adopt the German two-tier board system of corporate governance, with employee directors on the supervisory board. It failed, not least because of British commitment to their unitary board system. The EU is now working on a shareholder rights directive that would apply across all member states. If enacted, it would have to be enshrined in the laws of each member state.

Around the world, if any trends can be seen, they are towards corporate governance by rules backed by legislation; for example in the Sarbanes-Oxley and the Dodds-Frank Acts in the United States. Nevertheless, the UK remains strongly committed to the principles not rules approach. In other words, companies should comply with the corporate governance code or explain why they have not done so. Britain is trying to extend this approach to the rest of Europe.

Sir Winfried Bischoff, chairman of the UK’s Financial Reporting Council (FRC), wrote (September 2015): ‘The UK Corporate Governance code recognizes the collective role of the board and makes specific mention of board members and their responsibilities – chief executives, chairmen, and non-executive and executive directors. This is the UK approach and one that Europe is now coming round to. In the last 20 years corporate governance codes have emerged across Europe as public perceptions of boardroom behaviour has widened and come under increasing scrutiny. These codes set out best practice principles for boards and generally operate on a ‘comply or explain’ basis, on the assumption that good corporate behaviour can be accomplished through transparency rather than through hard rules and unnecessary (bureaucratic) burdens.’

The FRC wrote formally to the EU on 26 June 2015 explaining that the FRC sets the framework in the UK of codes and standards for corporate reporting, accounting, auditing, and actuarial and investor communities, including the corporate governance and stewardship codes. It explained how the stock exchange listing rules for major listed companies required them to follow the codes, under the supervision of the Financial Conduct Authority. Details of the work of the FRC and their latest report is available at

Bob Tricker, January 2016

UK reporting on ‘going concern’ taking risk into account

Recent developments in corporate governance policies and practices

Since the third edition of Tricker – Corporate Governance: Principles, Policies, and Practices published in February 2015, the subject has continued to evolve in regulation, policy, and practice. Some of the more significant developments include:

UK reporting on ‘going concern’ taking risk into account
Following the global financial crisis, the UK’s Sharman Report called for companies to give greater clarity to assurances that their company was a ‘going concern’, by identifying liquidity and solvency issues existing in potential long-term risks. In September 2014, the FRC updated the UK corporate governance code to take account of these recommendations, and issued guidance information. See and

The code now calls for companies to monitor risk management and internal controls and, at least annually, to carry out a review of their effectiveness, and further to report on that review in the annual report. Since boards are unlikely to want to report on their exposure to risk, it is likely that external auditors will include such reviews in their audit programmes.

However, these changes applied only to companies coved by the code. In October 2015, the FRC issued a further consultation paper for all companies, including those not covered by the corporate governance code, on the assessment and reporting of the ‘going concern’ basis of accounting, taking solvency and liquidity risks into account (3E, p194 onwards).

Bob Tricker, January 2016

Corporate governance in China

Recent developments in corporate governance policies and practices

Since the third edition of Tricker – Corporate Governance: Principles, Policies, and Practices published in February 2015, the subject has continued to evolve in regulation, policy, and practice. Some of the more significant developments include:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   Corporate governance in China

I lived in Hong Kong (now a special administrative region of China) for 14 years and have been visiting regularly since 1982. Over that time, China has changed from an essentially agrarian economy, through massive labour-intensive, low-tech manufacturing, to become the world’s second largest economy, second only to the United States. A substantial car and property owning middle class are now moving the economy from an industrial towards a consumer and service orientated society. Nevertheless, China remains a key manufacturer, increasingly in high-tech fields, backed by R&D. The double-digit economic growth seen in recent years was clearly not sustainable indefinitely, but the economic slow-down has produced some interesting corporate governance issues.

The two Chinese stock markets, in Shenzen (just across the border from Hong Kong) and Shanghai, are predominantly retail markets – institutional investors such as pension funds are relatively new. The markets are also relatively small compared with stock markets in Europe and North America. Seeing dramatic increases in share values and believing government assurances, many individuals borrowed to fund their investments. When the market began to fall, reflecting a slowing economy, and crashed in July 2015 with many shares suspended, the government panicked. In fact, the market had only fallen back to the levels of a year earlier. Yet the government tried to slow the fall by ill-judged interference – prohibiting initial public offerings and providing funds to buy-back shares in an attempt to prop up the market. An unanticipated devaluation of the currency by 2% compounded the problem by triggering panic selling of the yuan around the world.

State-owned enterprises (SOEs) still play a fundamental role in China, even though some of them are partially privatised and quoted on the stock market (3E, p297). The government maintains a tight control over industries which it feels are strategically important, such as oil, steel, and communications. Control is exercised through enmeshed relationships between government and party officials at every level: from the approval of strategic developments, the appointment and remuneration of senior executives, and the oversight of finances at the state or province level, down to Communist party cells in each plant at the employee level.   Bureaucracy can hinder corporate development.

Private companies play an increasingly important role in China; for example, the e-business firm Alibaba, the vast conglomerate Dalian Holdings, and computer company Lenovo, (although Lenovo is a subsidiary of Legend Holdings, a conglomerate with SOE characteristics). In such firms, the founding entrepreneurs and top executives, working with shareholders, play the dominant role in setting strategic direction, the appointment of top management, and financial oversight. Private firms have more freedom than SOEs to innovate, respond to market opportunities, and stimulate change. Nevertheless, relationships with the state and party (the often mentioned guanxi) remain essential if a private firm is to prosper.

A recent IMF report in August 2015 calls for a transition in China from slower to better growth. It notes growth slowing as vulnerabilities, particularly credit growth, are reined in, and calls for policies calibrated to ensure orderly slowdown, and structural reforms to create new sources of growth (

Bob Tricker, January 2016


How the phrase ‘corporate governance’ arose

My experiences during a decade as Director of the Oxford Management Centre in the 1970s made me realize that there was an underlying contradiction in the way that the Centre was run. Oxford colleges are run by their Fellows and the Head of the House (by whatever name the Head is known – Master, Warden, Principal) reflecting the governance of the monastic institutions from which the colleges derived.

The Management Centre, on the other hand, was run like a company, which it was. But the academic standards set for the Fellows were those of an Oxford college, as Sir Norman Chester, Warden of Nuffield College and Chairman of the Management Centre’s board of directors (its Council), was frequently at pains to point out. Power over the Centre’s strategy lay with the Chairman and that Council, not with the Centre’s Director or the Fellows. The Chairman and his Council wielded power over the finances, and the hiring and firing of academic staff.

The Council was made up of senior Oxford academics and influential businessmen, and had more members than the teaching staff. The problem was that the Chairman and the other board members, both the businessmen and the Oxford academics alike, had no experience of management education. They did not know the subject, they were unaware of the market, and ignorant of the competition: whereas the Director and Fellows, who did know, were subject to the whims of that governing body. Moreover, I came to realize that members of the Council often acted personally and politically in Council meetings, sometimes with prejudice and personal passion. This was not the analytical and rational management decision making we were teaching at the Management Centre.

Eventually, Chester was replaced as Chairman by a businessman, who had also been the benefactor of the Centre. He did not agree with my strategy of focusing the Centre’s work on top management and fired me. ‘Every man has his price,’ he said. Mine was a five year research fellowship at Nuffield College to research whatever I wanted, with a tiny teaching commitment and no administration – an opportunity seldom available at the professorial level.

Governance is not management – the Corporate Policy Group

It occurred to me that the experience of board level activities at the Management Centre was probably the case at the top in many organizations. What went on in boardrooms was not management. It involved the exercise of power. It was a personal and political process. This activity, which could be called governance, was different from management. Governance involved formulating strategy, setting policy, supervising management, and being accountable overall. Management runs the enterprise, but the governing body ensures that it is being run well and in the right direction. This awareness was reinforced by a study[1] on audit committees for British boards that I had already done for accountancy firm Deloitte, Haskins and Sells.

My Research Fellowship provided the perfect opportunity to explore board level processes in depth. I formed a trust, called the Corporate Policy Group, as a focus for the project. In retrospect, I should have called it the Corporate Governance Group, but the phrase ‘corporate governance’ was not then in use and the concept was not understood. When I contributed the management topics to Alan Bullock’s Dictionary of Modern Thought in 1977, there was an entry for ‘corporate strategy’ but not for ‘corporate governance.’ It would be different today.

The Corporate Policy Group was based at Nuffield College and ran for the five years of my Research Fellowship from 1979 to 1983. In the explanatory literature of the Corporate Policy Group I suggested that ‘Many ideas are currently being discussed around the world – improving strategic decision-making, alternative board structures and committees, new roles for outside non-executive directors, audit committees, supervisory boards, regulation, accountability, industrial democracy, wider disclosure, accounting standards, and so on. Yet we know remarkably little about the reality of board level behaviour. There is no generally agreed frame of reference, little except anecdotal evidence, a paucity of serious analysis and thought, inadequate development and training for board membership; concern but few answers on improving board level performance. Companies today can be complex, concentrated, and large, their operations multi-product and international. Inevitably they are enmeshed with governments. They exist in a world of changed expectations – of managers, employees and their unions, consumers and throughout society. Yet we continue with essentially nineteenth century assumptions, based on entrepreneurial capitalism and the (supposed) power of shareholders in annual meeting. There is a variety of ideas but a paucity of thought. There is discussion without data, decisions without grasping the totality of matters involved. The Corporate Policy Group has been created to provide rigorous analysis, careful discussion, thoughtful review, and dissemination of the results.’

 High-flying aims, but remember it was written in 1979.

The Group had no researchers, other than me, but quickly became a network of scholars, company chairmen, CEOs and directors, auditors, lawyers, and others interested in the field. The main focus of our interest was on board structures and processes, the roles of executive and non-executive directors, the reality of strategy formulation, as well as corporate regulation and accountability. Such matters are commonplace today, but then corporate governance codes, compliance reports, and the other paraphernalia of modern corporate governance did not exist.

The initial approach I adopted involved the exploration of the frontiers of knowledge on the topics, discussions with board chairmen and other directors, round-table discussions with directors from different companies, and seminars and conferences. We invited Harold Williams, the Chairman of the Securities and Exchange Commission from Washington, who gave an American perspective on corporate regulation. Another conference, run with the Anglo-German Foundation, looked at the control of the corporation from the perspective of various stakeholders, outlining the German experience of supervisory boards and worker directors.

As the project progressed, I developed two research exercises about the structure and style of boards, and about management and governance relationships between subsidiary and holding companies, which provided the basis for a book – Corporate Governance – the first to use that title. The main findings were, firstly, that there were many opportunities to improve performance and effectiveness. Secondly, the way many business entities operate in society no longer reflected the underlying nineteenth-century legal model of the corporation, and consequently there was a need to rethink the underlying conceptual framework.

The Trustees of the Corporate Policy Group suggested that the findings published in Corporate Governance should be developed into another book of practical insights for directors. Unfortunately, one of my findings had been that practicing directors had little time for reading books, so the material formed the basis of short courses for the Institute of Directors in London and other programmes I ran in Australia, Singapore, and Malaysia.

On the phrase ‘corporate governance’

One evening at dinner at Nuffield high table, a guest sitting opposite asked what I did. I said I had just written a book. Silly really, because so had everyone else at that table.

‘Really, what is it about?’ he asked politely.

‘Corporate governance,’ I said.

‘You mean corporate government?’

‘No, I checked the meaning – it’s about corporate governance.’

‘Good Lord,’ he responded, ‘that word hasn’t been used since the time of Chaucer.’

Turned out he was a visiting Professor of English. Although he was not entirely correct: Harold Wilson, British Prime Minister (1916–1995) had written a book in 1977 with the title ‘The Governance of Britain’ [2]. But that was about the governance of a country, not a company: corporate governance was new. The visiting professor was right about Chaucer, however. Turns out Chaucer did coin the word governance, although he couldn’t quite decide how to spell it (gouernance, or governaunce).


This note has been adapted from the recently published book Oxford Circus – the story of Oxford University and Management Education, Bob Tricker (2015) available from Amazon or through


[1] Tricker, R. I (1978), The Independent Director, London: Tolley

[2] Wilson, Harold (1977), The Governance of Britain, New York: Harper Collins


Bob Tricker, December 2015

The UK’s Financial Reporting Council (FRC) review of 2014

The UK’s Financial Reporting Council (FRC) review of 2014

  • on compliance with the UK Corporate Governance Code
  • a call for better commitment to the Stewardship Code
  • and focusing on corporate culture and board level behaviour

On 15th January 2015, in its annual review of developments in corporate governance and stewardship for 2014, the FRC reported that levels of compliance with the UK Corporate Governance Code had continued to increase. Reporting had become more transparent and informative, with audit committee reports much improved. Overall, levels of compliance with the UK Corporate Governance Code continued to improve, with full compliance by the FTSE 350 now at 61.2%, whilst 93.5% complied with all but 1 or 2 provisions. Reporting on board-diversity had also made good progress with a clear policy on diversity reported by 85% of FTSE 100 companies; although FTSE 250 companies have more to do, showing an improvement from only 20% to just 56%. The UK is on course, the FRC believes, to reach the Davies Report target of 25% female directors in FTSE 100 companies in 2015, with 22.8% of such directorships now held by women.

However, although the signatories to the UK Stewardship Code had increased to almost 300, with investment managers more engaged with large companies, the FRC felt that more needed to be done to ensure that action was taken on their commitment to the principles of the Code. Increasing levels of concern had also been expressed by companies and investors about the role of proxy advisors. In some cases a box-ticking approach seemed to be adopted by them and some investors, with a perceived lack of actual engagement with companies.

The report also highlighted the importance of appreciating the significance of culture and risk management in organisations, as the third edition of Corporate Governance – principles, policies and practices also emphasizes. The recent FRC guidance on risk management highlighted the need for boards to think hard about whether the culture practised within the company is the same as that which they espouse, particularly under pressure.

Commenting on board culture, FRC Chairman Sir Win Bischoff said:

‘The governance of individual companies depends crucially on the culture that is in place. The UK’s strong governance culture encourages companies to list in London and provides assurance to investors. Unfortunately, we still see examples of governance failings in this area. Boards have responsibility for shaping the culture, both within the boardroom and across the organisation as a whole.’

During 2015, the FRC plan to assess how effective boards are at establishing company culture and practices and embedding good corporate behaviour, and will consider whether there is a need for promoting best practice. The FRC will also be focusing on the application of the Stewardship Code and the role of proxy advisors.

Bob Tricker

20 January 2015

Share Ownership in the UK

Increasing ownership by ‘rest of the world’

At the end of 2012, the UK stock market was valued at £1,756.3 billion. The ownership of UK shares has changed dramatically over a 40 year period. The Office of National Statistics (ONS) surveys indicate that the ownership of UK shares by individuals has fallen from 54% in 1963 to under 11% in 2012. On the other hand, the ‘rest of the world’, which held just 7% of UK shares in 1963, now own over 53% of UK quoted shares. This decrease in individual share ownership and increase in the ‘rest of the world’ ownership is perhaps the most notable change in the overall share ownership figures reported by the ONS in its publication ‘Ownership of UK Quoted Shares, 2012’ which is available at:—share-register-survey-report/2012/stb-share-ownership-2012.html

The ONS analysis of the ‘rest of the world’ shareholding of 53% of UK quoted shares finds that some 48% of this is owned by investors in North America, just under 26% by European investors and around 10% by investors in Asia. The balance is made up of investors from various regions including Africa and the Middle East.

Corporate governance activism

One of the possible implications of the increase in ‘rest of the world’ ownership, and particularly ownership by investors in North America, is in relation to corporate governance activism. Such investors may tend to be more pro-active than many UK institutional investors have traditionally been and may engage more in their investee companies especially where these are underperforming or where there are corporate governance issues. The California Public Employees’ Retirement System (CalPERS) is a well-known example of a US pension fund which actively engages with underperforming companies and/or with those where there are corporate governance issues. In years gone by its strategy was to ‘name and shame’ with its focus lists but these days it concentrates more on a particular issue, for example, executive remuneration, and engages privately with the company to try to bring about improvements before then progressing to any more public approach.

Improved Investor Engagement

Nonetheless the UK’s ‘vanguard’ institutional investors including Hermes, Aviva, and Standard Life all have a high corporate governance profile and actively engage with their investee companies. Moreover the Investment Management Association (IMA) reported increased levels of monitoring and engagement in June 2013 in their survey of ‘Adherence to the FRC’s Stewardship Code, At 30 September 2012’, available at:

The report indicated that more institutional investors monitor all their investee companies; that more resources are being put into the stewardship role and that there is ongoing integration of stewardship into the wider investment process. Investors are also prioritising engagement on key issues. Furthermore there has been an increase in voting level with the decision of how to vote the shares being made independently of proxy agencies.

Concluding comments

The UK’s Stewardship Code set the standard in terms of providing a framework for institutional shareholders to monitor, and engage with, their investee companies. There have been a number of encouraging signs that shareholder engagement is on the increase in a number of countries. In her article, ‘Shareholder campaigns more than double in three years’ (FT, Page 20, 11th November 2013), Sam Jones points out that ‘the past 12 months have seen more than 415 instances of corporate activism across the world, up from 172 in 2010’. This trend is expected to continue as institutional investors, with sensitivities highlighted in the aftermath of the financial crisis, increasingly seek to ensure that their investee companies both have appropriate standards of corporate governance and sustainable returns.

Chris Mallin 5th December 2013


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