The Stewardship Code and Shareholder Engagement: The End of the Road

Shareholders in Britain’s publicly traded companies have traditionally taken a ‘hands off’ approach to corporate governance. A persistent theme in governance circles has been that it would be salutary for the prevailing approach to change. In the UK the most tangible by-product of such reasoning has been the Stewardship Code. Previous versions of the Code have fallen short with respect to fostering investor involvement in the companies in which they own shares. Will the Stewardship Code 2026 reverse the trend? In our recent working paper, we draw upon the history of the Stewardship Code to argue the answer is no, and suggest this may in fact be the end of the road with respect to shareholder engagement and the Stewardship Code.       

In 2010 the Financial Reporting Council (FRC) promulgated the inaugural Stewardship Code, which, according to the Code’s preface, aimed ‘to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders.’ The focal point of the 2010 Code was seven engagement-related principles, each one sentence in length. In 2012 the FRC issued a revised version of the Stewardship Code that differed little from its predecessor. 

The 2020 Stewardship Code was a much lengthier document than its predecessors. One reason was that a dozen principles, a majority of which did not focus on shareholder engagement, replaced the seven principles for institutional investors that were at the heart of the 2010 and 2012 Stewardship Codes. Disclosure obligations also were fortified. With the 2010 and 2012 Codes institutional investors aspiring to be Code signatories were only expected to describe the extent to which their stewardship policies aligned with Code guidance. The 2020 Code, by virtue of supporting commentary with the Code’s dozen principles focusing on institutional investors, required as well that outcomes be divulged in substantial detail. 

The 2026 Stewardship Code is different yet again. Consistent with media reports that the FRC was planning to take a proverbial axe to the Code, the number of Code principles applicable to asset owners and asset managers has been halved from twelve to six. Of these six, only two relate directly to shareholder activism. Moreover, disclosure of outcomes has been substantially downgraded.

Why the change in approach? One factor was doubts about the extent to which the Stewardship Code was bolstering shareholder engagement, which in turn fostered concerns that for institutional investors Code bureaucracy had become unjustifiably burdensome. With the 2010 and 2012 versions of Stewardship Code, the general consensus was that neither delivered with respect to shareholder engagement. A damning 2018 review of the FRC Sir John Kingman carried out on the UK government’s behalf argued the Stewardship Code was ineffective in practice and should be abolished unless there was a fundamental shift in approach. The FRC’s response was the lengthier, outcome-focused 2020 Stewardship Code. 

Evidence on the 2020 Stewardship Code’s impact on shareholder engagement is fragmentary but it appears there was a lack of meaningful improvement. The 2020 Code, in addition to failing to elicit a transformation on the shareholder activism front, fostered complaints that obtaining signatory status under the Code had become an intensely bureaucratic exercise. The scene thus had been set for the considerably truncated treatment of shareholder engagement in the 2026 Stewardship Code as compared with the 2020 Code. 

Regulatory trends affecting British business was a second factor that shaped Stewardship Code reform.  When, with the 2020 Stewardship Code, the FRC created more substantial reporting expectations by increasing the number of principles and by emphasising disclosure of outcomes, it was running with the regulatory grain. Conservative Theresa May, who became Prime Minister in 2016, made various governance-related reform proposals intended to prompt the business community to be fully responsive to its wider responsibilities to society. The FRC became a focal point for delivering on this agenda when the Conservatives lost scope to legislate after failing to obtain a majority of seats in the 2017 general election. The FRC itself ended up on the regulatory agenda because the Kingman review recommended replacing the FRC with a body with clear statutory powers and objectives the FRC lacked. The FRC’s substantial expansion of the Stewardship Code with the 2020 version thus occurred when bolstering regulation was the accepted pattern. 

The regulatory direction of travel would soon change. In 2021, the Financial Conduct Authority (FCA) relaxed aspects of the listing rules governing companies listed on the London Stock Exchange following on from a government-commissioned review prompted by concerns that overly burdensome regulation was discouraging companies from listing. The FCA followed up in 2024 by carrying out the most substantial overhaul of the UK Listing Rules in over three decades and hailed the resulting simplification as a platform for bolstering Britain’s equity markets.     

By the time the FCA carried out its 2024 listing rule reforms, momentum in favour of reducing burdens business faced had developed more generally. The Conservative government of the time was pushing regulators to promote growth to bolster a lacklustre economy, and, as part of this process, updated the FRC’s remit in 2023 to make explicit the FRC’s role in promoting economic growth and competitiveness. The FRC’s chief executive indicated in response that with its anticipated review of the Stewardship Code the FRC would foster ‘stewardship outcomes in a proportionate way.’ Given this context, and given evidence that the Stewardship Code 2020 had not markedly bolstered shareholder engagement, the FRC’s pruning with respect to shareholder engagement in the 2026 version is entirely explicable.   

While it is possible to explain why there was a Stewardship Code shareholder engagement U-turn involving the 2026 shift back toward the approach used in the 2010 and 2012 Codes, the implications are worth underscoring. Each of us has independently argued that previous versions of the Stewardship Code were unlikely to foster shareholder involvement in the affairs of publicly traded company companies, citing the nature of share ownership and the incentives mainstream institutional shareholders have (or more precisely lack) to step forward.  It is therefore perhaps unsurprising that with the Stewardship Code and shareholder engagement, brevity didn’t work, nor, apparently, did detail and prescription. Now brevity prevails again. Perhaps an emphasis on prescription will return at some point. Any attempt to explain such a move, however, in terms of fostering institutional investor involvement in the affairs of companies in which they own shares will not be credible: been there, done that. Hence, with respect to shareholder engagement, the way in which the Stewardship Code 2026 deals with the issue sends a clear message: it is the end of the road. If shareholder engagement is going to feature in UK public companies, other catalysts will be required.   

The authors’ article can be found here. 

Brian R. Cheffins is a Professor of Corporate Law at the University of Cambridge. 

Bobby V. Reddy is the Professor of Corporate Law and Governance at the University of Cambridge.