A Stewardship Code for Institutional Investors

TUC response to the Financial Reporting Council consultation

Introduction

The financial crisis has shone a spot light onto the UK's corporate governance system and in particular on the importance of effective engagement between investors and the companies in which they invest. The TUC has long been concerned that the lack of effective shareholder engagement represents a serious weakness in the UK's system of corporate governance. The gravity of the problems this can create has been illustrated all too clearly by the lack of investor oversight at the banks in the run up to the crisis. The TUC welcomes the recognition of the weaknesses in the current system and the need to strengthen shareholder engagement in investee companies in David Walker's Review of corporate governance in UK Banks and other financial entities and in the responses of the Financial Reporting Council (FRC) and the Government to this report. We welcome the opportunity to respond to this consultation on a stewardship code for institutional investors.

Shareholder engagement is ascribed a vital role in the UK's system of corporate governance. A wide range of issues from director's pay through to the election of directors and the performance of the board are left to shareholders, rather than regulators, to monitor and address. Successive corporate governance reviews, from the Cadbury Committee in 1992, through the Greenbury, Hampel, Turnbull reviews in the mid to late 1990s to the Higgs Report in 2002, have all placed considerable emphasis on shareholder monitoring and engagement as a discipline upon companies and as a substitute for regulation.

If this approach is to work, it is clearly essential that shareholders have the ability and the right incentives to act responsibly in relation to the companies whose shares they hold. Given that shareholder oversight has been deemed preferable to regulatory requirements in many key areas of corporate governance, there is a high degree of public interest riding on this. Yet, as already noted, the financial crisis has graphically illustrated the significant problems in terms of both the quality and quantity of shareholder engagement that currently takes place.

The TUC is concerned that some of the problems that prevent effective shareholder engagement will be extremely difficult to address. For the TUC, the proposed stewardship code provides a last chance for a corporate governance system that relies so heavily on shareholder engagement as an essential part of the monitoring system of corporate Britain. If implementation of the stewardship code does not lead investors to show that they are willing and able to play the role in corporate governance that has been ascribed to them, it will be a clear and irrefutable sign that the system itself needs to change.

The TUC represents over six million people in 58 trade unions. Our members and all working people are affected by the quality of investor engagement both as beneficiaries of pension funds and insurance policies and as employees in investee companies. Occupational pension funds remain significant long-term investors in UK (and overseas) companies and the beneficiaries of such schemes are a key group for consideration in determining appropriate policies in relation to investment. The TUC's expertise in the practicalities of engaged investment has been informed by its experience of organising a network of trade union-nominated pension fund trustees for over fifteen years. The network includes over 1,000 trustees, and is the largest network of trustees in the UK. The TUC holds an annual trustee conference as well as ad-hoc seminars and other events for the network, and circulates a quarterly Trustee Newsletter to the network. In addition, since 2003 we have carried out an annual Fund Manager Voting Survey, which is intended to give trustees information on how fund managers exercise voting rights in relation to a range of controversial issues at company AGMs and provide an insight into voting and engagement practices. A copy of the TUC Fund Manager Voting Survey 2009 is appended to this submission. The TUC would be happy to share its experience gained from these initiatives with the FRC as plans for developing and implementing the Stewardship Code are explored.

Responses to consultation questions

Introduction

The FRC would welcome views on the policy objectives against which the FRC should judge its approach to a Stewardship Code.

The TUC agrees with the policy objectives for the Stewardship Code listed in paragraph 1.14, but believes that two further objectives should be added.

Firstly, the code should promote improved communication between institutional investors and their clients on the engagement and voting undertaken on the latter's behalf, and ensure that clients are able to direct how their own shares are voted regardless of the nature of the investment vehicle in which they invest. In addition, institutional investors should seek to build a dialogue with their clients about the development of their policies on corporate governance and responsible investment, to ensure that they are reflecting client views in their work on these areas.

Secondly, and building on the last bullet point in paragraph 1.14, the Code should secure sufficient disclosure to enable the public to judge the extent to which both individual institutional investors and institutional investors as a whole are acting as responsible and engaged investors and fulfilling their responsibilities under the Code.

In addition, the last bullet point in paragraph 1.14 should be amended to read 'secure sufficient public disclosure to enable institutional shareholders' prospective clients to assess how those managers are acting in relation to the Code...' (italics denotes added wording).

The FRC is seeking views on whether it should accept oversight of the Code in its current form, or whether amendments should be made before the FRC does so.

The TUC believes that the existing ISC Code is too weak, and should be substantially amended before being adopted by the FRC as the new Stewardship Code. It is of critical importance that the new Code should be 'owned' by the FRC rather than the ISC. The ISC is a trade body for some, but not all, institutional investor organisations. Its membership does not include representatives of the end-beneficiaries of investments; nor does it include representatives of pension funds, other than through the NAPF, which represents the employer-sponsors of pension funds, not the pension funds themselves. Nor does the ISC operate in a transparent or open manner. The TUC, despite our long record of policy work on pensions, our long-standing trustee network and annual Fund Manager Voting Survey, and the fact that we represent a significant proportion of pension fund beneficiaries, has never been consulted by the ISC on any of its publications, including the ISC Code discussed here.

We believe that all references to the ISC should be removed from the Code, and that the ISC should have no further involvement with the Code, other than to be consulted along with other interested parties and the wider public on future proposals.

Views are also sought on which institutional investors and agents should be encouraged to apply the code on a 'comply or explain' basis, what they should be asked to disclose and to whom, and the monitoring arrangements that should be put in place.

A major flaw with the existing ISC Code is the lack of effective monitoring and enforcement. The TUC believes that it is essential that this is addressed in the Stewardship Code so that it is clear to both investment beneficiaries and the public the extent to which institutional investors are adhering to the Code. The TUC believes that all investors who invest on behalf of others should be required to adhere to the Code, or explain publicly why it is not in their clients' interests for them to do so. If they choose not to comply with the Code, for example because their investment strategies are based on share trading rather than long-term shareholding, the TUC believes that they should forego their governance rights such as voting rights in relation to their shares. Given the importance of investor stewardship in the UK's corporate governance system as set out above, it is essential that investors should take their responsibilities in this area seriously; UK corporate governance standards should not be subject to a pick and choose approach from investors.

In addition, the TUC believes that organisations that offer engagement or governance services to investors should be required to comply with the Code.

The Coverage of the Code

The FRC would encourage all UK institutional investors to apply and report on the Code regardless of whether or not they are subject to mandatory requirements, and would welcome views on whether there are any barriers or other reasons that would prevent or discourage them from doing so.

The TUC does not see that there are any barriers that should prevent all UK institutional investors from applying and reporting on the Code. Some institutional investors, though by no means all, already report on existing standards such as the UNPRI without difficulty.

Views are invited on whether agents such as voting services agencies and investment consultants should be encouraged to commit to the spirit of the Code, and if so how this could be done.

As argued above, the TUC believes that voting service agencies and investment consultants should comply with the Code and report against it. We see this as an essential element of allowing potential clients and the public to judge different organisations' approach to responsible investment and engagement issues. Disclosure of the approach and activities of all participants is necessary to facilitate debate about the different strategies employed in this area.

The Content of the Code

Introductory comments on the ISC Code

The TUC believes that the ISC Code as currently drafted is inadequate, and must be substantially redrafted in order to become the Stewardship Code.

An immediate problem with the ISC Code is that it is apparently aimed at both pension funds and fund managers, as well as other collective investment vehicles. While the largest pension funds may operate on a level reasonably similarly to fund managers in relation to engagement, this is not the case for the vast majority of pension funds, which are small, and will therefore of necessity deal with the issues of engagement with investee companies in a different way. The TUC believes that it is essential that the ISC Code is redrafted and the responsibilities of the different organisations involved in the investment chain separated out clearly.

The ISC Code is too equivocal in relation to whether or not institutional investors should engage with investee companies. As noted in the introduction to this submission, engagement by investors with companies is ascribed a vital role in the UK's corporate governance system. The fact that in practice such engagement is often patchy and superficial represents a very significant weakness in the practice of corporate governance in the UK, as evidenced by the recent financial crisis. Given this, it is simply not appropriate for the Code to be so equivocal on the crucial issue of whether or not institutional investors should engage with investee companies, and the Code should be much more explicit about the responsibilities of investors towards the companies they invest in, including the need for informed engagement. The ISC Code could almost serve to deter investors from engagement; there is nothing about the benefits of engagement or the responsibilities of shareholders to the companies in which they invest. This is entirely unsatisfactory, and requires a fundamental rewriting of the ISC Code.

The ISC Code states explicitly that the duty of institutional investors is to their beneficiaries and not to the wider public. However, as argued above, important corporate governance functions are ascribed to shareholders, and there is therefore a public interest in ensuring that shareholders act responsibly in relation to their responsibilities. Investors enjoy the benefit of unlimited liability, enjoyed by no other company stakeholder, and when companies fail there is a cost to the tax payer as well as major costs to employees and creditors. It is therefore inappropriate for investors to be advised that they can 'take it or leave it' in terms of their governance responsibilities in the companies in which they invest.

At the heart of the 2006 Companies Act is the concept of 'enlightened shareholder value'. This is based on the assumption that, in the long-term, there is a convergence of interests between company shareholders and other company stakeholders such as employees, creditors and customers. After considerable debate, directors' duties were codified in the 2006 Companies Act to make clear that in serving shareholder interests, directors should have regard to the interests of employees, supplier and customer relationships, community and environmental impacts and the need to maintain a good reputation and take account of the long-term impact of decisions (section 172). The convergence of interests envisaged in this approach only works in practice when shareholders take a long-term approach to their investments, and the TUC believes that the Stewardship Code should include a definition of 'stewardship' that seeks to mirror section 172 of directors' duties in the Companies Act with equivalent responsibilities for investors. This should include something along the lines of: 'long-term investment beneficiaries have an interest in the long-term success of the companies in which they invest. This includes ensuring that boards are having regard to the interests of employees, supplier and customer relationships, community and environmental impacts and the need to maintain a good reputation.'

What are the responsibilities for engagement of institutional investors to the beneficial owners whose interests they represent? Does the ISC Code cover all the relevant responsibilities?

`There are a number of important responsibilities to beneficiaries that are not covered by the ISC Code.

The ISC Code stipulates that 'Institutional shareholders' mandates given to fund managers or agents should specify the policy on stewardship, if any, that is to be followed.'

However, the majority of fund managers serve large numbers of different clients. The Code is silent on how fund managers should act to balance different priorities if they are given conflicting policy mandates by different clients. Yet, if the share ownership chain were working effectively on this issue, this is exactly the position that all fund managers would face, because it would be inevitable that different clients would wish their fund managers to take differing stances on issues. |t is hard to see how this difficulty can be overcome effectively in terms of engagement, as it is by definition difficult for a fund manager to represent different policy positions in its engagement with companies.

When it comes to voting, however, it should be possible for clients to stipulate how they want their shares voted. Given the recognition of the need for pension funds and others to give stronger mandates to fund managers in terms of corporate engagement, being able to determine the voting policy for their pension fund is clearly an essential element of such an approach.

However, at present pension funds investing in pooled funds are frequently told that they cannot determine their own voting policy in relation to their shares. This issue has been raised by members of the TUC's trustee network on a number of occasions, and can be a source of immense frustration to the trustees and beneficiaries concerned.

It is clear that there are no insurmountable practical barriers to enabling clients to determine the voting policy for their shares in pooled funds, because some fund managers already allow it. The TUC's 2009 Fund Manager Voting Survey asked a question on the subject. Of the 16 fund managers responding, six stated that clients cannot override the voting policy in pooled funds; four stated that they had allowed clients to issue their own instructions; one said that the situation had never arisen, but that if it did clients' wishes would be accommodated; and five said that the situation had not arisen without indicating how they would respond if it did.

There is clearly an inconsistency of approach between fund managers and even sometimes within the same fund manager organisation. Discussions at TUC trustee network events have revealed that in some instances the same fund manager organisation has allowed one pension fund to issue their own voting policy for their shares in pooled funds while refusing another, perhaps based on the differing approaches of individual managers within the fund or perhaps on the relative sizes of the pension fund in question.

It is essential that the Stewardship Code should make it absolutely clear that fund managers' clients should be able to determine the voting policies for all of their shares, including those held in pooled funds.

Another point that has come to the attention of the TUC in discussion with trustees and others is the fact that there is often no follow up in terms of the actual voting of shares. The technical procedures for voting shares are at times quite complicated, and the TUC recommends that a review of the mechanics of voting, including issuing instructions and recording votes, is commissioned by the FRC to see whether improvements to simplify the process or make it more watertight can be devised. Despite the fact that there are frequent stories of votes not being cast as intended or not being cast at all, fund managers do not always check whether votes have been cast as instructed, and do not report back to beneficiaries in cases where there have been problems with votes cast. The Stewardship Code should require fund managers to follow up whether their voting instructions have been carried out, and to report back to beneficiaries in instances where they have not.

Finally, while not all fund managers' clients may wish to issue their own voting policies, they should be entitled at least to inform those of their fund manager, and fund managers should seek to engage with their clients on the development of their voting and engagement policies.

A very important issue not covered in the ISC Code at all is the relationship between fund managers and individual retail investors investing in retail products. For the most part, retail investors have no input whatsoever into how their assets are used in terms of voting and engagement. This does not encourage greater understanding of the responsibilities of share ownership on the part of end beneficiaries. While it is clearly not practical to allow each individual retail investor to determine his or her own voting and engagement policy, fund managers should offer retail investors a choice of policies for voting and engagement for their particular investments. These choices could be based on those of existing market participants to minimise costs and duplication. As the TUC's Fund Manager Voting Survey shows, there are wide variations between fund managers and proxy voting advisors in terms of their voting policies, and it is appropriate that retail investors should be able to choose that their assets are voted along policy lines that most closely mirror their own preferences. This measure would make a significant contribution towards boosting the concepts of engagement and responsible investment more broadly. There is currently a glaring gap in the ability of retail investors and also members of defined contribution pension schemes to participate in engaged investment strategies in relation to their investments; given the move towards private pension provision and defined contribution pension schemes, it is essential that this is addressed as a matter of urgency.

What are the responsibilities for engagement of institutional shareholders to the UK listed companies in which they invest? Does the ISC Code cover all the relevant responsibilities?

As argued above, the ISC Code is too weak on the responsibility of institutional investors to engage with the companies whose shares they hold. It should be strengthened to make it clear that institutional investors are expected to engage with their investee companies through monitoring, direct communication with company directors and voting all their shares at company AGMs.

As set out above, the Code should provide some guidance on what considerations should inform institutional investors' approach to the companies in which they invest. Company law requires directors to serve shareholder interests, taking into account the impact of decisions in the long-term, employee interests, customer and supplier relationships, environmental and community impacts and the need to maintain a good reputation. Behind this configuration of directors' fiduciary duties is an assumption that the long-term success of the company is in the interests of both shareholders and other stakeholders. However, for this element of company law to work as intended, it is essential that investors take a long-term approach to their investments and seek investor returns through the long-term success of the companies in which they invest. The Stewardship Code should encourage investors to use their share ownership rights to promote long-term and sustainable company success.

The TUC has been carrying out an annual Fund Manager Voting Survey since 2003. Reviewing the successive surveys shows how rarely fund managers vote against management. Too frequently fund managers argue that while they have serious concerns about a particular issue, they do not wish to indicate concern publicly by voting against the company. The Code should discourage this approach, and encourage institutional investors to see casting a 'no' vote as a legitimate way of expressing concern which goes hand in hand with ongoing, constructive engagement.

Are the respective responsibilities of the different parts of the investment chain sufficiently clear and appropriate?

As indicated above, the TUC does not believe that the responsibilities of the different parts of the investment chain are sufficiently clear and appropriate. Indeed, the ISC Code barely acknowledges that there is an investment chain, and simply lumps together all collective investment schemes, despite the very different ways in which these operate, including on the issue of company engagement. The distinct roles of the different elements of the investment chain are not acknowledged, and this weakens the ability of the ISC Code to give practical guidance on the issues it seeks to cover.

The Code should be rewritten to examine the different and shared responsibilities of the different parts of the investment chain in relation to engagement and stewardship. The ability of each part of the investment chain to exert influence up the investment chain and the responsibility to report back down the investment chain should be covered by the Code.

Does the Code strike the right balance between the need to avoid overspecification that might discourage the application of the Code and the need for it to be effective with an appropriate degree of transparency?

The TUC does not believe that the ISC code has sufficient clarity or detail. If the Stewardship Code is to raise standards of investor engagement it needs to be much clearer about what is expected of the different types of organisation to whom it is addressed. Lack of clarity is not a way of encouraging take-up; it simply gives insufficient guidance to those organisations that are seeking to raise standards in this area and allows others to get away with doing the minimum while saying that they comply with the Code.

Are there any parts of the ISC Code where further guidance is needed, or where the existing guidance should be amended?

Our response to this question is mainly covered by our answers to earlier questions, which would significantly amend the ISC Code and add further guidance. The following comments supplement those already made.

In the guidance under Principle 3, the Code should clarify that investors should keep records of letters and phone calls as well as meetings with company management. Letters and phone calls are an essential part of the process of engagement, and it is important that investors should be able to account for their engagement process in full.

In the early years of the TUC's Fund Manager Voting Survey, fund managers were asked only about their voting records, and this led some fund managers to comment that voting should be seen in the context of a wider process of engagement with a company, rather than in isolation. In response, the TUC survey now includes questions on the engagement that has taken place around each of the issues on which the survey seeks voting records, as well as some general questions on voting and engagement which may require qualitative rather than quantitative responses. However, very few fund managers fill in the questions on the engagement that has complimented their voting position, and on questioning about this lack of response, some have said that the information is not recorded, while others do not have it in a form that makes it easy to extract to fill in the survey. Given the point made by fund managers themselves that voting is part of a wider engagement process, it is not acceptable that across the fund management industry records on the engagement process should be patchy and inaccessible even to those within the organisations. Fund managers need to be able to account for their engagement actions to their clients as well as publicly, and at present some fund managers' record keeping processes clearly do not allow this.

In the guidance section on Principle 4, the ISC Code stipulates that discussions should be held initially on a confidential basis. While we would agree that this will be appropriate in the majority of circumstances, we do not believe that it is necessary for the Code to make a pronouncement on this issue.

We believe the guidance under Principle 5 should be expanded substantially. One of the reasons given for lack of engagement by fund managers is a lack of resources. Given that most fund managers hold shares in literally hundreds of companies, it would be impossible for each fund manager to engage to a high standard with every company in which it holds an investment, unless the resources devoted to engagement are increased very significantly indeed. While the TUC does believe that investors' resources devoted to engagement will need to increase, collaboration between investors on engagement with companies would provide efficiencies to fund managers in terms of their ability to engage across a range of companies, and also potentially increase the effectiveness of engagement by facilitating a more focussed distillation of views to company directors. However, collaboration between investors is currently rare, as noted by the Walker Review. Given this, it would be useful if the Stewardship Code were to set out some non-prescriptive guidance on collaboration to give investors greater confidence in becoming involved in collaborative engagements.

The TUC also believes that the sections on voting and disclosure of voting - Principles 6 and 7 - should be amended, but this will be covered in responses to the questions on reporting and monitoring below.

Views are invited on whether the ISC Code adequately covers the content of Section E of the Combined Code.

The TUC considers that in terms of contents, Section E of the Combined Code is broadly covered by the ISC Code. In some areas the tone of Section E sends a clearer message about what is expected of investors that the ISC Code: for example, we consider that 'Institutional shareholders have a responsibility to make considered use of their votes' sends a clearer message than 'Institutional investors should have a clear policy on voting and disclosure of voting policy'.

While we understand the point made by investors of the difficulty in attending the AGMs of all the companies in which they hold shares, we nonetheless believe that AGMs are an important opportunity for engagement between companies and shareholders. Greater collaboration between institutional investors on engagement should make it easier for a wider range of AGMs to be attended by institutional investors.

There is, however, a significant difference between the Combined Code and the ISC Code in terms of status. Compliance with the Combined Code is not perfect, but there is widespread agreement that the Combined Code represents standards to which companies should adhere, unless they have an overriding reason for not doing so. This is not the case with the ISC Code. The ISC Code has also never until now been subject to public consultation. In its present incarnation, the ISC Code lacks the legitimacy and buy-in of the Combined Code. The Combined Code is also backed up by a listing rules requirement, which applies to institutional investors that are also listed companies. It is essential that the Stewardship Code is able to assume sufficient buy-in and legitimacy to secure its effectiveness. In addition, the listing requirement of the Combined Code should also apply to the Stewardship Code where appropriate.

Section 5: Reporting, Monitoring and Review

The FRC would welcome views on the specific information that should be disclosed by institutional shareholders and their agents, and at what level of detail the 'comply or explain' principle should apply.

The TUC believes that institutional investors should be required to comply or explain in relation to the Stewardship Code in full as it relates to them (reflecting the need to address different parts of the Code to different institutional investors); a 'pick and choose' approach should not be permissible.

Views are invited on whether public disclosure of the information summarised is appropriate and useful, and whether other information might also usefully be disclosed.

The TUC believes that the Code must be strengthened in relation to public disclosure of voting and engagement.

The Code should clearly state that institutional investors should disclose publicly their full voting record. If the distinction between principles and guidance remains, this should be a principle of the Stewardship Code.

The TUC has been campaigning for public disclosure of voting records for many years. Votes are an important asset of a fund, and there is a public interest in investors using their votes responsibly. It is important that both prospective clients and the wider public are able to assess the voting records of individual institutional investors and make comparisons across the sector.

In order to compile the TUC Fund Manager Voting Survey each year, the TUC has to write individually to fund managers and ask them to fill in a questionnaire regarding their voting records. In theory, if all fund managers publicly disclosed their voting records, it should be possible to compile the survey from publicly available information. In practice, this is impossible to do because:

• some funds still do not publicly disclose their voting records at all;
• others do disclose but the information is very difficult to find on their sites, or disclosed in poorly designed formats that are hard to understand;
• others disclose just headline statistics on voting with no detail on votes at individual companies; and
• others disclose only part of their voting record, generally just 'oppose' or 'abstain' votes. This means that unless the reader also has watertight knowledge of the fund manager's share holding on the day of the vote, it is impossible to know whether the fact that a vote is not listed means that the fund manager voted in favour or did not hold shares at the relevant time. This makes it impossible to compile a full voting record for these funds.
• There are also wide variations in terms of how frequently disclosure information is updated.

Public disclosure of voting records has increased in recent years, mainly in response to the reserve power taken in the Companies Act 2006 to enable the Government to require mandatory public disclosure of voting records. However, the increase in public disclosure that this encouraged seems now to have tailed off, and some significant fund managers still do not disclose their voting records. In addition, as already noted, the quality of the reporting that does take place is extremely variable.

One of the main advantages of public disclosure of voting records is that it allows comparison between the approaches of different investors. For this to be possible, it is essential that investors disclose according to the same criteria and ideally in the same format. Disclosure should include:

• all votes cast;
• information on past as well as current votes so that a comparison across time is possible;
• ideally, the information should be searchable by company, date or by issue/type of vote;
• the TUC would recommend that information is updated on at least a quarterly basis.

The Stewardship Code should state that institutional investors should disclose their full voting record and should do so using a standard format to enable comparison with others, which should be included as an annex to the Code. The format to be used should be designed on the basis of full consultation, including with users of such information like the TUC.

The TUC believes that the FRC should either host a website on which all institutional investors' voting records can be accessed, or commission another organisation to establish such a website.

The TUC also believes that institutional investors should report on their engagement activity. There are a small minority of fund managers that do report publicly on at least their most significant corporate engagement activities, but many do not report at all, citing the need for confidentiality as a reason. The fact that some fund managers do report on their engagement belies the argument that to do so creates a problem in terms of confidentiality. Disclosure to clients and beneficiaries is not sufficient; as noted above, investors enjoy very significant benefits of limited liability in relation to their investments in a company, and there is a public interest benefit in them playing an effective role in corporate governance that merits public disclosure of engagement activity.

It is important that disclosure covers the whole Code, including Principles 3 and 4, which, as the consultation notes, in the ISC Code have no disclosure requirements attached to them.

Views are invited on the structure of the ISC Code and on the best way to encourage reporting against it on a 'comply or explain' basis.

As argued above, the TUC believes that a 'pick and choose' response in relation to the Stewardship Code should not be permissible, and we therefore recommend that the majority of institutional investors should be required to state whether they have complied with all the relevant Principles and guidance of the Code or provide an explanation where they have not. To the extent that the Code applies to investors such as small pension funds (as implied in the ISC Code's definition of an institutional investor), a different level of disclosure may be appropriate. Where investors are managing investments on behalf of others, it is essential that any explanation of non-compliance includes an explanation of why non-compliance is in their clients' best interests.

The TUC believes that the best way of encouraging reporting against the Code is to ensure that an effective monitoring process is established. We believe that this should be carried out by the FRC.

Views are invited on the proposals in the ISC Code for reporting to clients and the merits of independent opinions from auditors or other professional accountants.

The TUC believes that Principle 7 on reporting to clients should be strengthened. We believe that reporting on engagement and voting activity should be done on the same basis as reporting on the fund's financial performance, which is generally done on a quarterly basis.

The TUC believes that there could be merit in investors obtaining assurance reports from auditors or others on their voting and engagement practices, so long as there are sufficient practitioners able to offer an effective service on this area at a cost that is not prohibitive. However, we are not convinced that this should be included at the Stewardship Code's inception. It might be more effective to allow the Code to bed down, both from the perspective of investors and auditors, and allow best practice to develop more fully in relation to the new Code before introducing assurance reports. In addition, it may be appropriate for smaller institutional investors to be exempted from formal auditing, depending on the costs involved.

Views are invited on the merits of the current IMA survey and other possible approaches to monitoring the overall application of the Code.

The TUC believes that it is essential that compliance with and disclosure against the Code is monitored effectively, and would suggest that this role would fall most appropriately to the FRC. We would recommend that the FRC produces an annual report on compliance with the Stewardship Code. This will be a useful resource to draw on in terms of reviewing the content of the Code.

The TUC does not believe that the IMA Survey is a suitable source of information on which to base monitoring of the Stewardship Code. The IMA is not independent in relation to its subject matter as it is reviewing its own membership, and its lack of independence is apparent in its public presentation of the results from its survey. In addition, the method for determining the issues covered in the survey is unscientific; the survey does not have a regular time frame; and it does not cover all institutional investors.

The TUC's Fund Manager Voting Survey predates that of the IMA. We would be happy to discuss our experience of producing the survey with the FRC in more detail.

We believe it is vitally important that a credible, independent process is established, or not only the monitoring process but the Stewardship Code itself will lack credibility. If the FRC is not able to carry out effective monitoring of compliance against the Code itself, it should commission an independent organisation to carry out monitoring on its behalf.

Views are invited on the proposed approach to reviewing the Code.

The TUC agrees with the proposal to review the Code on the same basis as the Combined Code. While clearly the review will not focus on individual investors' application of the Code, the issue of how investors have applied the Code will be highly relevant to assessing the Code's effectiveness. It is very important that the consultation is fully accessible to the public, and that views are sought from a wide range of organisations, not just those applying the Code.

It is essential that whatever part of the FRC is tasked with responsibility for the Stewardship Code includes representatives of the whole of the investment chain, including beneficiaries and pension funds (and not just their employer sponsors).