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Corporate Governance And Investor Stewardship – Are We Losing The Plot?

By Guy Jubb, CA, who is an Honorary Professor at the University of Edinburgh, Vice Chair of the European Corporate Governance Institute, and an Independent Non-Executive of Mazars LLP[1]. He was formerly Global Head of Governance & Stewardship at Standard Life Investments.


Charles Darwin wrote,

the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself”. 

One of the hallmarks of the UK’s principles-based corporate governance has hitherto been its ability to adjust to its changing environment.

But in recent years there has been a tsunami of new regulations and reporting requirements for both companies, and institutional investors and their advisers – and there is no end in sight. Companies, directors, and investors are drowning in the welter of well-meaning initiatives. Annual reports are getting longer and longer and are being used increasingly by stakeholders as well as shareholders.

The importance now attached to environmental, social and governance (ESG) issues is fundamentally welcome but something - or some things – must give.  The much-vaunted concept of responsible capitalism is based on entrepreneurial leadership, and boards and senior executives may be struggling to maintain their entrepreneurial flair in the face of diverse and ever-increasing ESG reporting requirements.

Anecdotally, they are devoting more and more of their time to code compliance and engagement with shareholders and stakeholders, rather than to providing the entrepreneurial leadership and strategic direction which is required from a board to promote the sustainable success of the company for the benefit of shareholders and wider society, as encouraged by the UK Corporate Governance Code[2].

This article explores, from a public interest perspective, some of the challenges and pinch points, and makes some proposals to ease the congestion to help to restore a sustainable risk-appetite by companies, whilst integrating societal values into their culture and purpose. It suggests that the time has come to not only review the 2006 Companies Act but also consider setting up an independent Corporate Governance and Stewardship Commission to help resolve some of the emerging issues and respond to those yet to come in a responsible manner.

DISCLAIMER: The views expressed are personal and are not represented on behalf of the organisations with which Guy Jubb is associated
[2] UK Corporate Governance Code 2018, Principle A, page4

The Changing Landscape

Despite an emerging anti-ESG lobby, especially in the United States, ESG is here to stay – and rightly so. What was once a cottage industry has now become a global movement that no company can or should ignore. However, the ESG marketplace has become very noisy. It has spawned a spectrum of reporting and engagement initiatives which are sometimes weaving a counterproductive tapestry, both in terms of achieving investor impact and enabling companies to pursue attractive market opportunities.

Cgpro Network Corporate Governance And Investor Stewardship 2100X1400

International Sustainability Reporting Standards (ISRS) will be an important ingredient to help restore order to chaos and reduce duplication when reporting on climate and other environmental issues. Its first two standards are due to be published by the end of June 2023.

The International Sustainability Standards Board (ISSB), which is responsible for ISRS, must beware falling into the trap of complexity and slothfulness that ensnared its financial reporting sibling. Importantly, it should prioritise its commitment to build on the project work done by the Sustainability Accounting Standards Board in developing a conceptual framework that sets out the principles, objectives, assumptions, and definitions underpinning ISRS. Such a framework would provide a reference point for the integrity of the standards and help to ensure that the ISSB remains consistent over the long term in its approach to standard setting, for the benefit of investors and other users.

Social activists are often taking an assertive role in leading engagements with companies but there can be inherent challenges in developing a consensus between shareholders, stakeholders and a board. Transparency is increasing from year to year, but the absence of any generally accepted social reporting standards can frustrate good intentions and undermine accountability.

Governance provides the overarching checks and balances to enable directors to fulfil their responsibilities to shareholders and stakeholders, including those relating to environmental and social issues. Governance is slowly and belatedly re-emerging from the shadows, despite the critical role it plays in the ecosystem.

For example, in 2023 we have witnessed in the UK a handful of independent non-executives having the courage to provide, formally or informally, a substantive explanation of their governance concerns when resigning from boards, rather than slipping anchor silently. Irrespective of the merits of their respective cases, it takes courage to dissent publicly, and they deserve commendation. That said, it would be naïve to hope that this voluntarily trickle might become a trend of transparency without legal or regulatory impetus.

Also, there has been a significant shift in the ownership landscape in recent years, with the dominant influence of the so-called Big 3 global investors[3] being critical to both the style and substance of corporate governance at their investee companies.

International ownership has increased from

12% to 56%

BlackRock, Vanguard and State Street

The Art of Engagement

The cacophony of the ESG choir can sometimes send mixed messages to boards. It has never been easy for boards to reconcile the views of different investors and it certainly isn’t getting any easier.

ESG priorities, net zero transitioning timescales, and the role of ESG targets in remuneration are just the tip of the iceberg when it comes to the issues on which investors engage. Their views on specific subjects will almost certainly not be aligned. This is compounded by many front-line investor engagement executives having entered the investment world through non-traditional channels, which can sometimes limit their ability to engage holistically in discussions about sustainable value creation and preservation.

The engagement landscape will become more confused as moves to give voting empowerment to retail investors in collective investment and similar vehicles gathers momentum. It is an irreversible trend, especially as self-acclaimed voting technology experts, such as Tumelo, roll out innovative products and platforms that give power to the people.

Leading investment managers and their advisors are signing up and showing serious interest. That said, it remains to be seen how many retail investors will take up their voting rights and thereby dilute the voice of institutional investors. It is still early days, but the legal, regulatory, and voting implications are significant for all involved in the stewardship chain.

Diversity and inclusion policies, which are a justifiable priority for many investors, are an important example of how a board can meet investor governance criteria and look great on paper but may fail badly in falling short in appointing the best people to fill the skills requirements.

Chairs are pushing back and becoming more vocal themselves about the challenges they face. In Tulchan’s insightful State of Stewardship Report, published in November 2022, chairs warned that relations with their institutional investors have deteriorated markedly, with “box-ticking” exercises over stewardship now risking company growth. Their concerns should not be brushed under the carpet. Otherwise, they will fester and, with justification, be increasingly cited as a major contributory factor to the decline in the number of UK listed companies.

These concerns were alluded to by the Investor Forum in its 2022 Annual Review. Andy Griffiths, the Forum’s Executive Director, reminded readers that

shareholders and companies can create a powerful reinforcing virtuous circle when they work in tandem to generate outcomes that benefits all stakeholders’.

From his unique vantage point, he goes on to state that We have seen an increase in the volume of activity, notably in the type of activity that can most easily be measured, but not in the quality of stewardship’.

Perhaps this is not surprising. As of February 2023, there were 254 signatories to the 2020 UK Stewardship Code, which is an increase of 102% over the 125 initial signatories to the Code in September 2021. And individual fund managers are increasing the number of their engagements – for example, in 2022 AXA IM increased its number of global engagements by 111% to 596. With engagement lying at the heart of the UK Stewardship Code’s principles it is small wonder that company chairs are frustrated.

As of February 2023, there were

254 signatories

to the 2020 UK Stewardship Code

In May 2022, the UK Government, in its paper ‘Restoring trust in audit and corporate governance’ confirmed that the FRC, working with the FCA and others, ‘will carry out a review of the regulatory framework for effective stewardship including the operation of the [UK Stewardship] Code’. It was its expectation that this review would be undertaken in 2023. Such a review cannot come soon enough, and it is vital that the quality of investor stewardship - not its quantum - and the effectiveness of stewardship engagement is prioritised within its scope.

Solutions are needed and it behoves the FRC or an organisation of similar standing to convene business and investment leaders to develop authoritative ESG engagement guidelines to help address the current shortcomings and frustrations on both sides. It should be a win-win result, enabling not only more effective, impactful, and constructive engagement but also improved engagement productivity for investors, which may marginally help alleviate the cost pressures many of them are facing.

In any event, engagement is an art not a science, and creative solutions are required to restore and maintain a responsible equilibrium. The status quo is neither sustainable nor desirable.


Are AGMs Fit for Purpose?

AGMs lie at the heart of corporate accountability. They provide a forum for shareholder voting and engagement but little of substance has changed for decades. That said, institutional investors, spurred on by stewardship codes, have steadily raised their game, and most are now voting by proxy at AGMs and other shareholder meetings on a more regular and consistent basis than previously.

However, it remains the case – and always will be – that, voting against the board is a blunt instrument unless it is accompanied by robust and effective engagement, which preferably focuses on solutions to the perceived problems rather than just rendering a binary judgement on the resolution.

Therefore, it is both surprising and concerning how infrequently institutional shareholders find the time and courage to turn up in person to AGMs. They miss out on the opportunity to explain directly to the whole board the reasons for their voting decisions and thereby to not only hold the directors to account but also be seen to be good stewards.

In 2021 ShareAction published a thought leadership paper about AGMs. It set out a bold new vision for the purpose of the AGM of the future. I co-chaired the working group whose deliberations informed the report. The paper highlighted that the AGM has failed to adapt to the changing face of capitalism and shifts in societal values.

ShareAction pinpointed that the AGM of today has lost its sense of purpose. Its proposed new purpose of the AGM of the future is to provide a forum for stakeholders, companies and shareholders to engage in transparent, accountable communication, which crystallises how a company’s board is fulfilling its organisational purpose and its directors in meeting their section 172 responsibilities. After all, that is what they are paid to do, albeit that enforceability of their responsibilities, especially in egregious cases, remains elusive.

Although most boards preach the virtues and benefits of inclusivity and diversity, it is deeply disappointing that very few go out of their way to formally embrace their stakeholders into their AGM processes. Done properly, this would enable shareholders to make much better-informed voting decisions. Also, it would give non-executive directors the opportunity to hear at first hand the views of the company’s stakeholders, whose interests they have a legal obligation to have regard for, rather than just through the rose-tinted prism of the CEO.

ShareAction’s other recommendations included:

a series of meetings with stakeholders throughout the year, an online Q&A provided in advance of the AGM to address clarificatory questions and equip participants for a nuanced discussion at the AGM event itself and, critically, that the annual shareholder vote be separated from the AGM itself and take place only after the minutes of the stakeholder meetings are published;

institutional investors having robust and transparent AGM attendance policies to govern their attendance at and participation in the AGMs of their investee companies. To provide transparency and accountability they would publish the names of the companies whose AGMs they attended, and provide an account of their participation; and

giving all shareholders the opportunity to assess company performance in advance of voting by providing that voting on resolutions happens after the AGM, rather than taking place in the run up to the AGM and on the day. This would give shareholders an improved opportunity to gauge stakeholder views, as well as board responses to them.

Taking Control of the Change Agenda

A lot has changed in the last 20 years, but the 2006 Companies Act has not. It is undoubtedly one of the most critical components of the governance and stewardship ecosystem and a review, which would take several years to complete, is overdue.

Such a review would have the potential to deliver a solid legal foundation which embeds contemporary views of society and harnesses technological developments in a way that ARGA, the UK’s long-promised new audit, reporting and governance regulator, which by then will hopefully be up and running, can promote good practices without having to be constrained by outmoded corporate law.

Accordingly, it is to be hoped that the UK’s major political parties, as they start to look around the corner to the 2024 UK General Election, pledge to review the Companies Act and draw on ShareAction’s AGM recommendations for their business manifestos. This would have the potential to strengthen the UK’s legal framework in a way that makes the UK an attractive jurisdiction in which to invest and do business.  It would reinforce that the UK is a force for good when it comes to responsible capitalism.

ARGA will be a powerful governance and stewardship regulator but, although it would have its own board, there is a real risk that it could become a political pawn, especially mindful that ESG itself has become a potent political football. Witness the opening salvoes in the US 2024 presidential nominations campaigns.

Companies and institutional investors thrive on certainty and continuity - it enables them to plan and invest for the long-term. Good governance and stewardship frameworks and policies are an integral part of the certainty and continuity agenda. They should be developed and implemented in a way that enables businesses and their owners to rise above political whims, behave responsibly and be responsive to societal views.

To achieve this, perhaps the time has come to establish by statute an independent UK Corporate Governance and Stewardship Commission, constitutionally akin to the Bank of England. This could provide public interest continuity, consistent with principles of responsible capitalism, through joined-up oversight of corporate governance and investor stewardship and those responsible for its regulation. This Commission could independently address issues such as climate change governance, audit market competitiveness and the problems arising from the increased concentration of AGMs in ‘the busy season’.


The UK continues to be seen as a global leader in corporate governance, but it cannot rest on its laurels. It must adapt to the changing environment in respect of both responsible capitalism and the need for capital markets to be attractive and competitive for both companies and investors. As well as being important to enabling economic growth and the sustainability of London as a major global financial centre, the relative decline in the rankings of the UK capital markets, and in the significance of UK equities, which are arguably no longer an asset class of their own, means that UK corporate governance and stewardship codes are becoming proportionally less relevant for global investors.

In this regard, the codes and the diverse range of ESG initiatives, especially relating to corporate reporting, are a heavy burden to many boards, which is compounded by a shareholder and stakeholder engagement environment that can sometimes be fractious and fickle. An enlightened approach by regulators and leading investors which champions the flexible application of code principles rather than compliance with code provisions would be an important step in the right direction. Bringing sustainable value creation and preservation explicitly into the purpose of such an approach would help to unlock long-term principles-based prosperity.

If and when the procrastination is over, ARGA will be a powerful and potent regulator. The FRC is doing a good job in preparing the way but the inherent uncertainties about how ARGA will operate and what powers it will have is not conducive to attracting and retaining issuers to the London market.

The UK Companies Act needs to be refreshed, not least to embed the changes in social attitudes and the benefits of technological changes over the last twenty years. This will take time and careful consideration by all concerned but this is no excuse. Establishing an independent Corporate Governance and Stewardship Commission deserves consideration to help solve problems without interference from politicians or other interested parties.

If the UK fails to adapt its corporate governance and investor stewardship regimes in a way that enables them to be responsive to the constantly changing ESG and capital market environments, then it risks undermining the spirit of entrepreneurship and losing its corporate governance crown. The public interest and the pursuit of responsible capitalism require the nettle to be grasped with a sense of purposeful urgency.

Please do look out for our next updates. In the meantime, and should you like to speak to us about how EQ could support you, please contact us.

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