Shareholder stewardship: A case of (re)-embedding the institutional investors and the corporation?

Institutional investors (that is, mutual funds, managed investment trusts, insurance companies, pension funds and alternative collective investment vehicles) steadily grow their share of publicly traded stock in the world’s most developed capital market, including the US, the UK and many parts of Continental Europe and Asia. This continuing rise of institutional investors as owners of corporate equity around the world has given a new impetus to the role of shareholders in corporate governance. In policy circles, the currently prevailing narrative views shareholder engagement as a desirable corporate governance attribute, which is able not only to improve corporate governance and performance, but also to ensure long-term stability and social responsibility. This narrative—also associated with lingering post-global-financial-crisis views that attribute managerial excessive risk-taking and corporate failures to the lack of shareholder engagement and excessive short-termism—found expression in the enactment of the 2010 UK Stewardship Code (revised in 2012 and currently under revision), which aims at making institutional investors serve the whole economy under a long-termism wrapper. Since then, UK-inspired stewardship principles have been exported to eighteen countries (that is, Australia, Brazil, Canada, Denmark, Japan, Hong Kong, Italy, Kenya, Malaysia, the Netherlands, Norway, Singapore, South Africa, South Korea, Switzerland, Taiwan, Thailand and the US) and sparked the 2017 amended EU Shareholder Rights Directive. The International Corporate Governance Network (ICGN), consisting of investors who represent funds of more than US$34 trillion from more than 45 countries, also advocates for effective investor stewardship. In 2016 the ICGN published the ICGN Global Stewardship Principles as a point of reference for regulators and standard setters seeking to establish their own stewardship codes, following the steps of the G20/OECD Guidelines of Corporate Governance.

While shareholder stewardship is moving from the periphery to the mainstream of global policy making and scholarly inquiry, many of its key aspects remain uncertain. Most importantly, and despite many contributions to the subject, two key questions need to be addressed. First, is shareholder stewardship an entirely private concept that merely taps old-fashioned aspirations for the monitoring role of institutional shareholders? Or, does shareholder stewardship connote wider public interests re-embedding market actors into the larger society? Secondly, if shareholder stewardship involves wider societal expectations, how are institutional shareholders to be steered in this direction by regulators?

My paper provides compelling answers to both these questions. To address the first one, I trace the mainstreaming of shareholder stewardship at national, EU and international levels. Departing from previous monolithic views that couch shareholder stewardship as a self-regulating, dis-embedded market mechanism solely protecting and enhancing shareholder primacy, I posit that stewardship (at least on the face of it) conceptualises investor-led governance within a public-interest framing and purports to be a major step in operationalising SRI and ESG-investing through shareholder engagement. Yet, it is admitted that there is a tension between market-based, bottom-up initiatives to governing institutional investors and social-based regulatory approaches. To solve this tension the notion of stewardship is placed within a neo-Polanyian analytical framework and is identified as a policy countermovement to re-embed institutions (and the corporation) back into the wider society. One of the main implications of this analytical framework is that institutions do not account for social dimensions ‘spontaneously’, but regulatory governance is required to steer them in such a direction.

This brings us to the second key argument presented in my paper: despite having the potential to act as one component of a risk-mitigating countermovement, the current stewardship policy developments have emerged within market disciplines. They suffer from a mismatch between the regulatory objectives of promoting long-termism and responsible ownership, on the one hand, and the regulatory means of soft law codes that underpin the wider social norm of shareholder primacy, on the other. In addition, the implicit policy assumption of risk-preferring institutional shareholders as fully embracing stewardship not only as a method of protecting and enhancing shareholder value echoing business as usual, but as a step to increased social re-embedding is rather idealistic, especially in the absence of mandatory governmental regulation. To nudge institutional investors to serve wider public interests in addition to the interests of their own beneficiaries, my paper conflates shareholder stewardship with the concurrent and ongoing theme of strong corporate sustainability. It sketches possible regulatory reforms to sharpen the focus of shareholder stewardship on strong sustainability. Some progress in moving away from the private and closed nature of shareholder monitoring towards constructive shareholder engagement in the public interest has already been made, especially at the EU level. However, some systematic regulatory intervention, which will not result from bottom-up forces and market demand for investor-led norms, such as the imposition of regulatory duties and mandatory disclosure regimes, is essential for the means of shareholder stewardship to meet its ends. The possibilities for regulatory alternatives may be still fluid, I posit, but what is vitally important is that shareholder stewardship and strong sustainability become intertwined.

Dionysia Katelouzou is Senior Lecturer in Corporate Law at The Dickson Poon School of Law, King’s College London. Her paper will be published here.