The UK Stewardship Code 2010-2020 from Saving the Company to Saving the Planet?

Abstract

The United Kingdom introduced a Stewardship Code in 2010, followed by a slightly revised iteration in 2012 (the “first version” of the SC). It was premised upon the corporate governance advantages of engagement between institutional investors and corporate boards and was designed to redress what were perceived to be the weaknesses in the model of the monitoring board as revealed during the financial crisis. In short, the institutions were to monitor the monitor. The first version was officially branded as ineffective in a government appointed reviews at the end of 2018. It was recommended that the first version should either be abandoned or revised so as to focus more on the results of engagement. Surprisingly, the Financial Reporting Council chose not only to revise the SC in the hope of making it effective within the engagement framework, but also to expand the Code’s concept of stewardship so as to embrace environmental, social and governance matters (including climate change). This “second version” came into effect at the beginning of 2020. The purpose of this paper is to assess the chances of the second version being more successful than the first. It begins by examining the most plausible reasons for the failure of the first version, by reference to the capacity and the incentives of institutional investors to discharge the engagement function which the first version cast upon them. It concludes that the incentives and capacities were weak. Turning to predictions for the second version, it concludes that, in relation to engagement as envisaged in the first version, the second version has not effectively addressed the causes of the weakness of the first version. However, in relation to ESG factors, especially climate change, there are reasons to expect a more positive impact from the second version, mainly because governmental policy has increased the reputational incentives for institutions to exercise stewardship in this area. These reputational incentives may also be supported by changes in investors’ preferences. Overall, the second version may turn out to operate along the same lines as other changes in society rather than as an isolated reform, as with the first version. However, this optimistic prediction is conditional upon the continuance of the governmental policy and social changes which support the second version of the SC.