U.K STEWARDSHIP CODE

UK Stewardship Code

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U.K Stewardship Code

The Financial Reporting Council (FRC) has introduced the UK Stewardship Code in lieu of the UK Corporate Governance Code in July 2010. The principle objective of the Code is to enhance the engagement quality between the companies and the institutional investors, so as to improve the long term returns for the shareholders and increase the efficiency of the corporate governance and responsibilities implemented by companies and businesses. Before the Stewardship Code it was the responsibility of the Corporate Governance Code to create an environment where the dialogues between institutional investors and companies could become efficient and constructive based on mutual understanding. Now, it is the sole responsibility of the Stewardship Code to make an environment where constructive dialogues are created with the help of mutual understanding between the institutional investors and companies. It was initially suggested by Sir David Walker who reviewed the UK Corporate Governance Code in UK banks and was then later consulted by the FRC (Sutherland, 2009).

Although, such codes and acts are not new for the investor's relationship with companies in hopes for providing security to the institutional investors that invest large chunks of their capital in companies. There are many other international and oversees codes and acts that are based on the same sentiments. However, the Stewardship Code puts corporate governance for the companies in UK on the principle of 'comply or explain'. The nature and extent of corporate governance implied on UK companies is based on their size and nature of business. Recognizing that the corporate governance rules could not fit all organizations and companies, that is why every listed company in the UK is either required to comply with the corporate governance code implemented at that time or justify to the authorities about how they deviate from the code. Hence, it is upon the views of the shareholders as to whether they see their investee companies to be using the appropriate corporate governance. This can be practiced by the shareholder since they have voting rights which they can exercise in order to make the company change its corporate governance policies if they believe that the company is engaging in risky investments activities (Skypala, 2010). Nonetheless, the issue here is that companies and shareholders are slow in engaging with each other on the issue of corporate governance, and if there were any discussion or engagement between the companies and their respective shareholders they seemed to be reactive rather than considered normal. But, the companies perceived that if a shareholder considers their corporate governance policies to be risky than he should just sell the shares of their company and invest in some other company, rather than discussing it with the company's management. Since, these discussions are thought as symptomatic of the problem already being in place (Hutchings & Foster, 2009).

However, it is considered that stewardship is not appropriate for all shareholders since it discourages shareholders' engagement in the company's decision making process. Since, the corporate governance ...