UK Stewardship Code's power: Market pressure drives action without penalties

The United Kingdom's Stewardship Code, a pioneering framework established in 2010, continues to evolve, offering valuable lessons for countries like South Korea as they refine their own corporate governance standards. Maureen Beresford, Director of Corporate Governance and Stewardship at the UK's Financial Reporting Council (FRC), and Senior Policy Manager Bridget Freer, shared insights from their 15 years of experience in a recent interview.

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If you give lifetime qualification with one-time sign-up, institutions will just sign up and forget about stewardship.

Beresford highlighted three core messages for effective stewardship. Firstly, she stressed the importance of regular renewal of code adherence, suggesting a minimum of every two to three years if annual renewals prove too burdensome. This ensures institutional investors remain actively engaged rather than treating initial sign-ups as a one-time commitment. The true power of periodic reporting, she noted, lies in compelling institutions to publicly disclose concrete examples of their stewardship activities over the past year.

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The real power of regular reporting is in making institutions disclose vivid examples of what they actually did over the past year.

Secondly, Beresford clarified that Environmental, Social, and Governance (ESG) factors are not the 'purpose' of stewardship but rather a 'means' to achieving long-term value creation. The UK's code was amended in 2025 to shift the definition from 'ESG performance' to 'long-term sustainable value creation.' This change aims to prevent the perception of regulators dictating investment strategies and instead encourages investors to articulate their own investment objectives. Freer added that actual ESG reporting has not decreased since the wording change, as institutions often integrate it into their sustainability reports.

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ESG is not the 'purpose' of stewardship, but a 'means' to create long-term value.

Thirdly, Beresford asserted that the code functions effectively without direct penalties, relying instead on market pressure. The FRC employs a 'soft power' approach, refraining from publicizing reasons for exclusion or imposing sanctions. Instead, the revised code introduces specific principles for asset owners to consider stewardship performance when selecting, appointing, and monitoring investment managers. The implicit threat of losing mandates due to code non-compliance acts as a significant deterrent, demonstrating the power of market mechanisms in driving corporate accountability.

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The code is not about prescribing 'what' signatories should do, but showing 'how' they implement it according to various asset classes and regions.