Stewardship Code for Institutional Investors—gazetted last month – is finally here. Although just a few pages, the promulgation of the code is the most detailed attempt to date to give regulatory form to the belief that shareholders are part of the solution. In its current form, the code requires institutional investors to commit to seven principles which include public disclosure of voting records, crafting a stewardship policy and incorporation of environmental, social and governance (ESG) factors in their investment process.
Despite borrowing heavily from the UK Stewardship Code, the idea is a significant step in the right direction.
At this point, it must be said that the code was long overdue. The sheer scale of the institutional investor community necessitated a standard code. Data from the latest Capital Markets Authority (CMA) quarterly bulletin shows that unit schemes (there are 18 licensed investment schemes) controlled about Sh57 billion by the close of December 2016.
In addition, CMA List of 2017 fund management licensees’ shows the number has crept up to 26.
Now, one important feature stands out for me; the code is to be implemented on an “Apply or Explain” basis – a concept which does not constitute obligation, in which case, the institutional investors should explain why their business model precludes adherence to the code.
This is important considering that sometimes what constitutes “best practice” is relative. As a result, while not as impactful as regulation, this “flexibility” increases the chances for the code to gain wider support. Though potentially controversial, this approach is vital especially in these early days of the codes implementation.
Another feature that stands out is the principle six; Focus on sustainability issues, Including ESG factors. In a nutshell, institutional investors will be required to actively promote responsible investments. If this catches on, ESG will no longer be a mere buzzword or a fad. It’ll be interesting to see how investors help catalyse this revolution.
That notwithstanding, there are, of course, numerous questions surrounding the Stewardship Code. For example: How will institutional investor engagement incorporate the interests of minority investors?
In the event that an issuer is closely linked to an institutional investor—(CIC Insurance/CIC Unit scheme, Britam Asset managers/Britam Group, ICEA Lion/NIC Bank, Equity Group/Equity Fund)—is just declaring the conflict of interest enough?
With a few large institutions engaging with companies — the top five unit schemes control about three-quarters of the assets under management (or an equivalent of about Sh42 billion) — how will the regulator ensure success of the code should these institutions choose a rather “passive” approach or worse, not sign up?
Questions notwithstanding, this initiative is a significant forward step. The institutional investor is now right at the centre of the corporate governance reforms.
In the long run, their increased engagement is expected to not only hold boards of directors and company management accountable, but to also serve as an important component in boosting investor returns.