Something Old, Something New: Cultivating Institutional Investor Engagement Through Shareholder Stewardship
Shareholder engagement has been at the heart of the corporate governance debate for a very long time now. Ranging from sporadic and incidental forms of managerial monitoring to more systematic and strategic forms of shareholder activism, including firm-specific and portfolio-level activism, shareholder engagement is considered a key mechanism to enhance corporate governance, improve value and more recently to ‘save the planet’ or even to ‘save capitalism’. Institutional investors have always featured prominently in this debate. Scholars, regulators, and policymakers have held out hope that institutional investors, including hedge-fund-style activists, would use their voting power to collectively act as the ‘real’ or ‘universal’ ‘owners’ of public listed companies, thereby minimizing shareholder-manager agency costs, improving long-term corporate performance or even addressing negative externalities. What is often overlooked, however, is that the role of institutional investors in corporate governance has been portrayed and debated differently in different time periods from ‘passive risk-bearers’ to ‘sleeping giants’, from ‘rationally reticent’ investors to ‘shareholder stewards’ and from firm-specific to ‘systematic’, portfolio-, or even market-level shareholder activists. Conceptually and normatively these varying portrayals of institutional investors as shareholders of public companies have taken shape within oscillations between the contractarian or ‘nexus of contracts’ paradigm of corporate governance and the neoliberal emphasis on shareholder value on the one hand, and more recent calls for stakeholderism and sustainability, on the other.
Against this background, my paper, which will be published as a chapter in the book ‘Board-Shareholder Dialogue: Policy Debate, Legal Constraints and Best Practices’ (Luca Enriques & Giovanni Strampelli eds, Cambridge University Press, forthcoming), troubles scholars and practitioners to critically consider the policy-driven development of shareholder stewardship, that is, institutional investors using their shareholder status to monitor and influence portfolio companies, and places it against older notions of institutional investor engagement. While shareholder stewardship is currently exercised at different levels, in my paper I concentrate on only one level, that of micro-level shareholder stewardship. Micro-level shareholder stewardship is about how institutional investors qua shareholders monitor and engage with individual portfolio companies to increase value. My paper makes three main contributions to the understanding of micro-level shareholder stewardship.
First, the main argument developed is that micro-level shareholder stewardship is a refinement and an extension of ‘older’ notions of firm-specific institutional investor engagement founded on a tripartite rationale of: (i) engaging (formally or informally) at the firm-level to improve long-term firm (and portfolio) value on the basis of the private agency paradigm of corporate governance, (ii) with a commitment to the ultimate beneficiaries’ investment needs on the basis of the private trusteeship relationship that governs the investment funds’ relationships with their beneficiaries, and (iii) with the overall aim to serve public interests, including the saver needs and more recently mitigation of climate and other externalities. My paper articulates how the development of shareholder stewardship revamped the ‘old’ notion of shareholder engagement on the part of institutional investors and how stewardship has been progressively twisted from a ‘right’ to a ‘duty’ and from the micro- to the market-level.
Second, my paper is looking for the ideal, firm-specific shareholder steward. At first glance, ‘hedge-fund-style’ activists (a term I use to refer to the familiar activist hedge funds and other alternative asset management firms that act like them) can be prime candidates for micro-level shareholder stewardship. They engage at the firm-level with a commitment to their beneficiaries, thereby meeting two out of three criteria of micro-level shareholder stewardship, but they mainly focus on alpha. In turn, unless the incentives of ‘hedge-fund-style’ activists are aligned with the stewardship goals, hedge-fund-style activists cannot qualify as stewards.
Third, on the practical front, not only do I provide fresh empirical evidence that ‘hedge-fund-style’ activism has continued to disproportionally dominate shareholder activism over the last decade (suggesting that there is a large scope for micro-level shareholder stewardship), but also I empirically study stewardship disclosures and find evidence that there is indeed a breed of hedge-fund-style activists—the activist shareholder stewards—who can fill the ‘stewardship bill’. Future research should cast light on the extent to which those activist stewards ‘walk the stewardship talk'.
Dionysia Katelouzou is a Reader in Corporate Law at King’s College London.
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