New stewardship code shifts emphasis to disclosures and ‘outcomes’

By Gavin Hinks

investors, stock markets, stewardship

If you thought only companies were required to be clear about their “purpose”, think again. This morning the UK’s governance regulator has given fair warning to asset managers that they too will need to define what their “purpose” is when they make their investment decisions.

The news comes as part of the Financial Reporting Council’s (FRC) consultation on a new stewardship code for investors, a code that was recently described as failing.

“We believe the the changes proposed put [the new code] at the forefront of stewardship internationally.”

–Sir Win Bischoff, FRC

As well as purpose, the new code also asks investors to focus on environmental, social and governance topics. As a press notice says: “Signatories are expected to take material ESG issues into account when fulfilling their stewardship responsibilities.”

Sir Win Bischoff, chairman of the FRC, says the new stewardship guidance is in line with the UK’s governance code, renewed last year, and demands better quality disclosures, a measure designed to address recent criticism.

“It recognises the significant changes in the investment industry and stewardship landscape since the 2012 revision,” says Sir Win.

“It sets both higher expectation for stewardship practice and introduces more rigorous public reporting with a focus on outcomes and effectiveness. We believe the the changes proposed put it at the forefront of stewardship internationally.”

Criticism

It was a review published in December last year by Sir John Kingman that levelled criticism at the stewardship code and called for a new regulator to replace the FRC.

The Kingman review set a bar on what a new stewardship code should achieve after concluding the existing code was “not effective in practice” and that a “fundamental shift” was needed so that it focused on “outcomes and effectiveness”, not dry policy statements. If “boilerplate” reporting continued coming from asset managers, the authorities should consider abolishing the code, he said.

“Asset managers have been clear that any new code should require signatories to report against actual stewardship activity, rather than just the policy that sits behind them…”

–Andrew Ninian, Investment Association

The new code asks asset managers to “regularly” report to clients on how they have “discharged’ their duties. Institutional investors should set out the reasons for active intervention at an investee company, and “regularly assess the outcomes of doing so.”

According to some, the new code should meet the needs of critics. The Investment Association (IA), a professional body representing asset managers, says the new code delivers on a need to deal with outcomes. Investors should also disclose publicly their voting records.

Andrew Ninian, stewardship director at IA, says: “Asset managers have been clear that any new code should require signatories to report against actual stewardship activity, rather than just the policy that sits behind them, and should also reflect the growing range of issues that asset managers engage on, such as diversity and ESG.

“The new proposed code recognises these key issues and provides a platform for them to be firmly embedded in the final version of the stewardship code.”

Praise

Elsewhere there was praise for the new code’s focus on accountability, in addition to disclosure. According to Fergus Moffatt, head of policy at ShareAction, a campaign group, the revised code has the potential to “boost effective stewardship.”

ShareAction is also happy that the new code makes explicit mention of ESG issues. But it wants investors to “consider how investments materially impact savers’ lives as workers, consumers and citizens.”

ShareAction says stewardship may therefore be a role for the FRC.

There are also concerns about the body proposed to replace the FRC—the Audit, Reporting and Governance Authority (ARGA)—and that it may be too close to investors given its role in policing audit and corporate reporting. ShareAction says stewardship may therefore be a role for the FRC.

That all adds up to a warm welcome. There may be more news to come on how the code will be enforced and by whom. For now however, stewardship appears set for a step change.

Consultation is open until 29 March.

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New stewardship code shifts emplasis to disclosures and ‘outcomes’

By Gavin Hinks

investors, stock markets, stewardship

If you thought only companies were required to be clear about their “purpose”, think again. This morning the UK’s governance regulator has given fair warning to asset managers that they too will need to define what their “purpose” is when they make their investment decisions.

The news comes as part of the Financial Reporting Council’s (FRC) consultation on a new stewardship code for investors, a code that was recently described as failing.

As well as purpose the new code also asks investors to focuson environmental, social and governance topics. As a press notice says: “Signatories are expected to take material ESG issues into account when fulfilling their stewardship responsibilities.”

Sir Win Bischoff, chairman of the FRC, says the new stewardship guidance is in line with the UK’s governance code, renewed last year, and demands better quality disclosures, a measure designed to address recent criticism.

“It recognises the significant changes in the investment industry and stewardship landscape since the 2012 revision,” says Sir Win.

“It sets both higher expectation for stewardship practice and introduces more rigorous public reporting with a focus on outcomes and effectiveness. We believe the the changes proposed put it at the forefront of stewardship internationally.”

It was a review published in December last year by Sir John Kingman that levelled criticism at the stewardship code and called for a new regulator to replace the FRC.

The Kingman review set a bar on what a new stewardship code should achieve after concluding the existing code was “not effective in practice” and that a “fundamental shift” was needed so that it focused on “outcomes and effectiveness”, not dry policy statements. If “boilerplate” reporting continued coming from asset managers, the authorities should consider abolishing the code, he said.

The new code asks asset managers to “regularly” report to clients on how they have “discharged’ their duties. Institutional investors should set out the reasons for active intervention at an investee company and “regularly assess the outcomes of doing so.”

According to some the new code should meet the needs of critics. The Investment Association (IA), a professional body representing asset managers, says the new code delivers on a need to deal with outcomes. Investors should also disclose publicly their voting records.

Andrew Ninian, stewardship director at IA, says: “Asset managers have been clear that any new code should require signatories to report against actual stewardship activity, rather than just the policy that sits behind them, and should also reflect the growing range of issues that asset managers engage on, such as diversity and ESG.

“The new proposed code recognises these key issues and provides a platform for them to be firmly embedded in the final version of the stewardship code.”

Elsewhere there was praise for the new code’s focus on accountability, in addition to disclosure. According to Fergus Moffatt, head of policy at ShareAction, a campaign group, the revised code has the potential to “boost effective stewardship.”

ShareAction is also happy that the new code makes explicit mention of ESG issues. But it wants investors to “consider how investments materially impact savers’ lives as workers consumers and citizens.”

There are also concerns about the body proposed to replace the FRC—The Audit, Reporting and Governance Authority (ARGA)—and that it may be too close to investors given its role in policing audit and corporate reporting. ShareAction says stewardship may therefore be a role for the FRC.

That all adds up to a warm welcome. There may be more news to come on how the code will be enforced and by whom. For now however, stewardship appears set for a step change.

Consultation is open until 29 March.

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Secret Ned: The long (long) list

By The Secret Ned

Secret Ned

FINALLY AN EXCITING task for the new non-exec, one he/she can truly contribute to: Finding a new chair.

After an exhausting beauty parade of various top headhunters, one is appointed, and a detailed specification provided for them. The spec is for an experienced chair with no ego (is that possible, I ask myself?), with time (but not too much), a challenging but empathetic style, strategic, with an appreciation of the day-to-day. In summary, Robo Chair.

Armed with this helpful aide the headhunters go forth into the wide world of known contacts to prepare their longlist—quickly and discreetly. With true disregard to GDPR, they return in good time with a longlist of people they are “sure will be interested, available and suitable for the role.” No, they haven’t spoken to them, “but we know them really well and…”

The shortlist

Our valiant new non-exec, armed with printed summaries of each candidate’s CV, plus headhunter evaluation, proceeds to the boardroom to consider with his colleagues the relative merits of each prospect, who didn’t even know they were interested in this job, and come up with a shortlist.

To our relief, a candidate that no-one seems to know, or have a view about, comes up. He goes on the shortlist.

But “STOP!” cries the chief exec, “I want to understand the process first.” The senior independent director (SID), takes a deep breath and asks what part of the process the CEO is referring to. “Interviewing; I think it’s important I am involved early on, and the CFO too, by the way.” The SID tactfully agrees that it is important but, perhaps, not the first interview, and suggests we come back to it after the shortlist is agreed.

The headhunter talks through the first of 15 candidates. These include Frugal Fred from Scotland (might not choose the correct board dinner beverage) and then moves on to Golden Oldie, Hugh (might not live until dessert). Fiona the Fickle might distract the CEO, and Edward the ex-CFO might “out-CFO” our CFO.

To our relief, a candidate that no-one seems to know, or have a view about, comes up. He goes on the shortlist. Next we have an ex-Car Crash. That’s a “no” too, but the one from Dubious Governance gets a look in as he will have had great experience of difficult shareholders. Then a few more who are known and not known appear, and are added to a shortlist of five. The new non-exec is happy that he/she has been able to suggest that at least two out of the five should be gender-diverse.

The B list

Unfortunately, when the headhunter returns the following week, it appears that four out of the five are not available for various reasons (maybe they did not know them as well as they thought?) including both of the women, so back to another longlist. Exit headhunter to find the B list, and the SID sets about agreeing an interview process that is not run by the CEO.

On a serious note it is extremely difficult to judge whether a chair (or a non-exec) is any good because “good” is so subjective; subjective to the person providing the view and to the job context upon which the view is made. When one is recruiting an executive, a level of reliance can be placed on salary growth, previous job performance, and third-party references. All much more accessible than the “inside” of a boardroom environment.

Wouldn’t it be interesting if there were balanced scorecards for boards that attempted to evaluate “good”? I am thinking of such headings as meeting market expectations, governance, diversity, tax compliance, tenure, legal claims, gender pay gap, etc. To be concluded…

A word on NDAs

So, to another subject; a brief note on non-disclosure agreements (NDAs) that have recently been in the press. Please can I suggest that you have a conversation with your HR departments to understand under what circumstances NDAs are utilised with employees? Clearly there are the standard non-competes, confidential data, etc., that need to be covered, but where an agreement is broader than normal, commercial business information, then a higher level of sign-off should be required.

Although there are whistleblowing policies in place they are not very effective if employees are effectively gagged by signing compromise agreements in return for small and/or large financial settlements that they may, or may not, have been entitled to anyway. This is an area for a good remco chair to be aware of.

The Secret Ned is a British board director with 30 years’ experience on the boards of the FTSE 250, small-cap companies and private, family-owned businesses.

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Fit for growth: Steve Hewitt, Gymshark

By Maggie Pagano

Steve Hewitt, Gymshark

Every Monday morning, Steve Hewitt takes a stroll around Gymshark’s HQ, or GSHQ, as he nicknames the fitness brand’s sparkling new offices in Solihull.

Chief executive Hewitt takes about two hours chatting to the 200 or so staff to find out how they are doing, and make sure they are happy. With him on the tour is David Parry, his chief people officer.

“I want staff to feel on a Sunday night like it’s Christmas Eve, that they are looking forward to the next day.

“I want staff to feel on a Sunday night like it’s Christmas Eve, that they are looking forward to the next day,” he says. “I don’t want anyone coming to work on Monday, thinking ‘I hate my life. That we will soon be introducing a strict ‘no holiday policy’.”

Then he stops himself, and laughs: “What I mean to say is that no one is allowed not to take their holidays.”

Yet working at GSHQ sounds like Christmas all year. All the staff working in the new 42,000-square-foot office space have their own gym, cinema, TRX (suspension weight training) and yoga studios as well as treatment centres to use.

Sharp-nosed

But don’t be fooled. Gymshark is as sharp-nosed as its name suggests. The young fitness brand is fast becoming one of the best-known sports retailing companies in the world, and said to be the UK’s fastest-growing young company. Here’s the story, or should one say, fairytale.

Gymshark was created in a Birmingham garage just six years ago by teenager Ben Francis and a group of his school friends. Francis worked out in a local gym, but didn’t like the sports clothes he found on the high street or indeed online. They were neither athletic nor sleek enough for the sort of body-building workouts he was doing.

Last year the business turned over sales of £42m, and this year sales are forecast to be an astonishing £100m.

So Francis bought a sewing machine, and with the help of his grandmother, taught himself how to sew but also how to screen-print designs. Crucially, he used elastane in the garments to give them more figure-hugging elasticity and shape.

Going on to study at Aston University (one of the rooms at GSHQ was named Aston) Francis continued building up the business. Friends designed the website—Francis came up with the distinctive Gymshark logo—and they soon found that people loved their clothes as much as they did.

By now, Francis was triple-tasking. As well as studying and working at Gymshark, he worked long hours delivering pizzas for Pizza Hut to fund the enterprise. It was a wise decision.

In year one, Gymshark turned over £500,000. He soon found that Americans loved his clothing range, which was unashamedly marketed through every social media channel from YouTube to Instagram. He was smart too, sending free clothing to well-known athletes, including body-builders such as Lex Griffin and Nikki Blackketter, who became brand ambassadors.

Word spread rapidly around the fitness world from body-building to football. Sales soared. By the second year, the 20-year-old Francis went by himself to the Far East to find manufacturers that were able to provide him with the volume of clothes he needed, so strong was demand for his products. He also left university early to focus on growing the brand.

“Being part of a social community is intrinsic to Gymshark’s brand appeal for the young.”

Today Gymshark has 800,000 active customers in 131 countries, and manufactures its own garments around the world. The brand now operates 11 international online stores and is aiming for 25 by 2020.

Over those six years, the brand has attracted an almost cultish devotion. Around 5.2 million youngsters follow its every twist and turn on social media channels. Even the design and fitting-out of the new GSHQ building had a prime-time slot on the internet as Francis filmed it for his followers to see on YouTube.

“Being part of a social community is intrinsic to Gymshark’s brand appeal for the young,” explains Hewitt.

So too is being part of the local community, and Gymshark works closely with the LoveBrum charity for homeless people, as well as with other Birmingham charities.

Skyward growth

Hewitt came on board two years ago to run Gymshark, whose growth has been nothing short of phenomenal. Last year the business turned over sales of £42m, and this year sales are forecast to be an astonishing £100m. Its sportswear is bought by customers from Europe to Japan and Australia. Hewitt reckons he will be employing another couple of hundred people over the next 18 months to cope with future demand.

“Ben was very smart,” Hewitt says. “He knew exactly what he wanted—to create a brand like the US UnderArmour clothing. Something to show off in, but practical too.”

“Growth…always comes down to people. That’s why making sure that staff can cope with the pace is a priority.”

But Francis also acknowledged that he needed professional help to grow the business further. Lady Luck came to the rescue. Francis met Paul Richardson, a local businessman who had been on the board of Birmingham City football club.

Richardson and Francis hit it off immediately. Richardson went on to invest in the business, and is now chief strategic officer. He introduced Francis to Hewitt, who was working for Sandee Worldwide sportswear, a Midlands-based sportswear brand, having worked for rivals TigerTurf and Reebok, where he headed up the commercial division for EMEA.

When asked if managing such rapid growth must bring its own challenges, Hewitt replies: “Growth is fantastic but it can also be a real pain. It always comes down to people. That’s why making sure that staff can cope with the pace is a priority.”

One of the biggest challenges is ensuring that production in the Far East and Europe is of the highest quality and on time. They recently set up a sourcing hub in Hong Kong to ensure the flow of orders. He gives the example of a recent huge order they placed for 50,000 units of new product ranges.

“That was quite a risk. But we use our customer insights team crunching data to inform our forecasts.” Hewitt has been careful about getting the right balance for Gymshark’s board structure to ensure a good dynamic between youth and experience, and making sure that everyone plays to their strengths. Ben Francis, for example, is now chief brand officer, concentrating on the social media and brand awareness side of the business.

So far, the business has been entirely self-funded, and Francis is still the majority shareholder. But what’s next? Any ambitions to head for the stock market?

Hewitt says there are no plans to float for now: “Our legacy will not be the bank balance. It will be more meaningful than that.”

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