Stephanie Baxter looks at why schemes should challenge asset managers on whether they truly comply with the Stewardship Code
Financial Reporting Council (FRC) chairman Sir Winston Bischoff raised concern last week that some asset managers that sign up to the UK Stewardship Code are not meeting all of its principles.
It is disappointing at a time when pension schemes are increasingly encouraged to be responsible owners. Many rely on their asset managers to comply with the code as most schemes do not have the resources.
Bischoff is concerned that asset owners are not holding their managers to account and he urges schemes to challenge them on this issue.
The National Association of Pension Funds (NAPF) also believes this is a problem. Stewardship and corporate governance lead Will Pomfroy says: "It doesn't take a great deal of digging to see that some managers are more committed to the code than others. This makes it very difficult for a scheme to try to compare and contrast different approaches to award mandates to those doing well."
The concern is that some managers sign up to the code to get on investors' shortlists but do not fully comply with all of the principles. This is difficult to ascertain but one clue is that some signatories have failed regularly to update their statements, says Bischoff.
The Investment Management Association's (IMA) annual voluntary survey on how signatories comply with the code is a useful tool but its response rate has decreased since inception in 2010 when 67% of signatories responded. This compares to 42% in last year's survey.
However the number of respondents has risen over the years from 50 in 2010 to 114 in 2013 due to the increasing number of signatories to the code, which now stands at over 300. IMA director of corporate governance and reporting Liz Morrell believes the 2013 rate indicates some stability.
Bischoff reveals that some managers treat the code as a tick box process. Morrell says this is "not entirely correct" as there are a "core of people that are very committed and deliver", however.
Some firms that decide not to participate in the questionnaire choose to delist. "That's good because it keeps it alive," she adds. The problem tends to be with small managers that may struggle to meet all of the principles.
While pension schemes expect asset managers to meet the code's principles, they could and should hold them to account as with other outsourced activities. Large schemes are better able to do this than their smaller counterparts.
"Small and medium schemes can give a sign to the market by signing up to the code," says Pomfroy.
Asset owners make up just one third of the total signatories to the code. Hermes EOS director and senior engager Jennifer Walmsley agrees this would be a positive move but acknowledges the scale of the code may deter schemes.
She says: "It's a question of resources, particularly for smaller schemes. They may be concerned about how to meet all of the code's requirements which are quite stretching and not easy to comply with."
One option could be to require all asset managers to comply with the code, but Morrell believes it is important to have choice.
"It is very important for asset owners to question their asset managers and ensure they are adopting the approach they want - but they may not want them to take a stewardship approach," she says. "Everyone thinks stewardship is only a good thing but it only is if it's done properly. The market needs to provide a choice and the ‘comply or explain' element allows that."
Yet it creates a problem where schemes take for granted that all managers signed up to the code actually implement all of its principles. There needs to be a better way for schemes to differentiate between managers.
One option is to delist managers that fail to update their statement annually, although Bischoff has no intention of doing this yet. It may come to that but until then schemes can act now to hold their managers to account.
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