Asset managers face corporate governance crackdown

 14 November 2016

 Investment groups are facing a corporate governance crackdown as pressure mounts on the way asset managers vote on pay and monitor issues such as board independence and company strategy.

Regulators will remove asset managers and pension funds from the UK stewardship code, launched in 2010 to improve corporate oversight, if they fail to meet certain standards on the reporting of a wide range of governance issues.

Groups such as Franklin Templeton Investments, Toscafund Asset Management, Neuberger Berman Europe and UK wealth manager Brewin Dolphin face being axed as signatories of the code if they fail to improve reporting standards.

The UK has led the world on governance and stewardship, with many countries around the globe following Britain's example in creating a code, which has a range of principles on issues such as engagement, voting and conflicts of interest.

"This is a significant move in an effort to encourage asset managers and owners to raise standards and report in a better way," said David Styles, director of corporate governance at the Financial Reporting Council.

"It will give clients a better idea of what asset management groups and owners are doing on stewardship, how they are disclosing the way they vote, whether they use proxy advisers and how they are dealing with any potential conflicts of interest."

Paul Lee, head of corporate governance at Aberdeen Asset Management, added: "The UK was the first country to establish a stewardship code. Clients will now be better able to choose fund managers on the basis of stewardship as well as performance, with a code that has teeth."

The FRC has created three tiers for its nearly 300 signatories to the code, which includes asset managers, pension funds and consulting groups. This is based on the quality of reporting on the seven principles of the code.

Groups that have not achieved at least Tier 2 status after six months will be removed from the list of signatories. Those in Tier 3 include Franklin, Toscafund, Neuberger and Brewin.

There are 120 groups in Tier 1, which include the likes of Aberdeen Asset Management, Aviva Investors, Axa Investment Managers, BlackRock, Columbia Threadneedle, Hermes Fund Managers, Henderson Global Investors, Investec Asset Management, Jupiter, Legal & General Investment Management, M&G Investment Management, Old Mutual Global Investors, Schroders and Standard Life Investments.

But some big institutions such as Pimco Europe, Ashmore Investment Management, Baillie Gifford and T Rowe Price were placed on Tier 2.

In particular, asset management groups have come under growing pressure to prevent excessive pay in the boardroom after prime minister Theresa May promised corporate governance reforms.

Groups such as Aberdeen, Hermes, Legal & General and Standard Life Investments (SLI) have been particularly vocal in trying to curb boardroom excesses on remuneration.

In submissions to a parliamentary inquiry into corporate governance, Guy Jubb, formerly of SLI, told the Business, Energy and Industrial Strategy Committee that "the law has given a legal licence to implementing excessive boardroom pay practices that fail to take account of the public interest".

In comments to the same committee, Aberdeen proposed that companies that lose pay votes should face a steeper hurdle when it comes to getting revised plans approved. The fund manager said that the threshold for revised plans should rise to 75 per cent.

Franklin, Toscafund, Neuberger and Brewin had not responded to requests for comment by time of publication.

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