Tuesday, December 22, 2009

Walker Report Calls for Asset Managers to Adopt Institutional Investors Code of Best Practices

The Walker Report on corporate governance in the United Kingdom has called on fund managers and institutional investors to adopt a code of best practices on a comply or explain basis. The report was the result of an independent review of corporate governance in the UK banking and financial services industries led by Sir David Walker.

The Code was developed by the Institutional Shareholders’ Committee. Fund managers will be asked to confirm their commitment to the Code or, alternatively, to explain their investment approach in clear terms if they are unwilling to assume such a commitment. The Code for Institutional Investors embodies the principle that some form of governance or engagement activity may offer a means of increasing absolute returns by addressing issues in the company in a timely and influential manner and thus improving long-run performance. The report envisions engagement by fund managers as monitoring investee companies, meeting their senior management, and having a policy on voting and voting disclosure

The report recommends that the jurisdiction of the Financial Reporting Council should be expanded to cover the development and encouragement of adherence to best practices by institutional investors and fund managers. The code of best practices for institutional investors should be ratified by the FRC, and be akin to the Combined Code on Corporate Governance. The FRC should regularly review the Code in consultation with fund managers and institutional investors and make proposals for change.

All fund managers that indicate commitment to engagement should participate in a survey to monitor adherence to the Code. Arrangements should be put in place under the guidance of the FRC for the independent oversight of this monitoring process which should publish an engagement survey on an annual basis.

Fund managers and other institutions authorized by the FSA to undertake investment business should signify on their websites whether they commit to the Code. Disclosure of such commitment should be accompanied by an indication whether their mandates from pension fund and other major clients normally include provisions in support of engagement activity and of their engagement policies on discharge of the responsibilities set out in the Code. Where a fund manager or institutional investor is not ready to commit and to report in this sense, it should provide on its website a clear explanation of its alternative business model and the reasons for the position it is taking.

The Walker Report also urges fund managers and institutional shareholders to take collective efforts to influence senior management at the companies they invest in. The possibility of such collective initiative on the part of a group of major shareholders to influence a board has given rise to some concern that it could create a possible concert party situation. Fortunately, the Takeover Panel and the Financial Services Authority have respectively issued a practice statement and a letter that are seen as going substantially in the direction of creating safe harbor protection. The Code requires institutional investors to disclose their policy on collective engagement.

As part of best practices, the report urged fund managers and other institutional investors to disclose their voting record, and their policies in respect of voting should be described in statements on their websites. Disclosure of voting policies and outcomes should be seen as part of good governance, and even fund managers that decline to subscribe to the Code should disclose how they vote.

Finally, those that agree to adhere to the Code should consider obtaining an independent audit opinion on their engagement and voting processes having regard to the standards SAS 70. The existence of such assurance certification should be publicly disclosed.


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