Event Report: Global Shareholder Stewardship Conference
The worldwide expansion of institutional investors’ share of public equity has given a new impetus to the discussion of the corporate governance role of shareholders and has triggered policy measures aimed at monitoring managerial performance and embedding sustainability goals into investment management, especially following the global financial crisis of 2007-9. The UK was a pioneer in this field, adopting the first Stewardship Code in 2010 (and revised it in 2012 and 2019). Many countries have since followed suit, using the UK Stewardship Code as a template. The Global Shareholder Stewardship Conference, which was held at King’s College London on 23-24 September 2019, unpacked shareholder stewardship by looking at 19 different national stewardship codes/principles as well as the amended EU Shareholder Rights Directive (SRD II), the EFAMA stewardship code and the ICGN Global Stewardship Principles. The event was co-hosted by the Dickson Poon School Law, King’s College London, the Transnational Law Institute, King’s College London and the European Corporate Governance Institute (ECGI) and co-sponsored by the Dickson Poon School of Law, King's College London, the Transnational Law Institute, King's College London, the British Academy's Partnership with the Department for Business, Energy and Industrial Strategy, and the ESRC Social Science Impact Fund.
The conference brought together 38 academics, policymakers and market players to share experiences, enhance dialogue, disseminate good practice, guide scholarship, and shape future stewardship policy through evidence-based recommendations. During the conference, it became apparent that there are deeper issues relating to the adoption and practice of stewardship, such as the proliferation of stewardship codes around the world despite the widely different corporate governance systems and market structures and the diversity in stewardship practices despite the apparent, global convergence of stewardship codes, especially in terms of their form and content.
Global Shareholder Stewardship: What, Who Why & Where
The conference reflected on the many ‘faces’ of stewardship. On the surface, stewardship is mainly a corporate governance mechanism for institutional investors to improve the performance of their investee companies, and thereby, generating financial returns for their beneficiaries. Broadly speaking, stewardship focuses on two relationships namely that between the multiple actors in the investment chain such as asset managers, asset owners and beneficiaries, and the other being the relationship between investors who hold equity and the investee companies. However, the matter is not as clear-cut, and stewardship serves functions that go beyond mere corporate governance. Over the past three years or so, there has been increasing regulatory complexity in the context of stewardship that reaches beyond the contours of corporate governance. For example, never before have companies and investors shown as much awareness about their role in society as they do now. Even in countries which traditionally have championed a shareholder-centred approach to corporate law and corporate governance – particularly the US and the UK – the idea of stewardship specifically relating to environmental, social and governance (ESG) factors takes prominence. Another factor adding to the complexity surrounding stewardship is the question of whether the UK Stewardship Code (2012) has indeed gone global or whether the phenomenon of ‘faux convergence’ takes place. While many countries followed the UK example, they invariably have different market structures necessitating other responses than the UK stewardship template. One of the factors highlighted is the so-called ‘halo-signalling’, that is, countries want to demonstrate to investors that they have adopted best-practice in the context of stewardship to attract investment, among other things. This begs the question: ‘are we even talking about the same thing from jurisdiction to jurisdiction?’
The potential of stewardship
The analyses of the various stewardship codes worldwide almost invariably revealed that countries had followed the UK example when enacting their respective codes. For instance, the ‘magic’ seven principles of the UK Stewardship Code 2012 feature in many of the national stewardship codes, such as the Danish one. The observation was also made that many countries that have adopted stewardship codes, especially in Europe, have experienced positive impacts and improved stewardship practices. In the Netherlands, for instance, hand-collected data presented revealed high, stable turnouts of institutional investors in Dutch annual general meetings. Similarly, in Italy a high record share capital was documented at annual general meetings after the adoption of the Italian stewardship code. In Japan, evidence was presented showing increasing proxy voting disclosure by institutional investors following the introduction of the Japanese Stewardship Code.
While these examples illustrate the potential of stewardship in spurring engagement between the board and the institutional shareholders, there are some outliers in the field, most notably Germany. The country made an interesting case-study as it is one of the major world economies which do not have any code mandating stewardship or shareholder engagement. While there are many path-dependent corporate governance features explaining the lack of a code, some potential benefits in enacting a German stewardship code post SRD II were identified, including clarifying the obligations of investee companies and defining the expectations for domestic investors.
Moreover, in a time where sustainability has taken a centre stage in corporate governance reforms, stewardship codes by incorporating ESG factors into investment and risk management processes have raised awareness to key global challenges, like climate change. The recently revised UK stewardship code did precisely that by staking out an ethical case to institutional investors for stewardship. Investment practices are also reflective of this emphasis on sustainability. The Norwegian Sovereign Wealth Fund, for instance, was discussed as a representative example of taking due regard to ESG factors when making investment decisions.
The stewardship paradox
The conference looked beyond the apparent similarities in the principles of the various stewardship codes. The discussions revolved around the market, legal and cultural specificities of the various countries. While dispersed shareholding and institutional investors have for long dominated the UK equity market prompting it to adopt a stewardship code, of the countries examined during the conference – predominantly in Asia – family-controlled groups prevail. This is a target group beyond the contemplation of the UK Stewardship Code. The discussions, therefore, unravelled a paradox: despite national specificities, many countries chose to adopt stewardship codes akin to that of the UK. Japan, for instance, where long-termism and vast cash reserves have been the daily diet for companies, has deployed the exact same tool as the UK to promote shareholder-orientated governance and short-termism, a goal that stands in stark contrast to the goals of the stewardship code ‘founder’, the UK. Another illustration of this paradox is Singapore. The discussions pointed out that institutional investors play a minor role in the Singaporean equity market; they are neither the problem nor the solution. Here, the concept of ‘halo-signalling’ is at its most apparent. Singapore, as a leading corporate governance hub, has an incentive to show the world that it is ‘best in class’. It was concluded that the prime reason for the enactment of a toothless stewardship code without any enforcement mechanisms was to unduly disrupt management and highlight that Singapore is a country where it is easy to do business.
Stewardship in developing countries
By the same token, in Brazil, the question surrounding the adoption of a UK-style code was whether it is ‘merely for the Englishmen to see’. The discussions reported little institutional activity post-implementation of the Brazilian Stewardship Code, indicating that the code is there only for the sake of appearance. Kenya, on the other hand, provided ground for discussions relating to short-termism and the potential of stewardship codes in contexts where there is no shareholder engagement. Rather than holding onto underperforming assets, institutional investors in the country tend to dispose them rejecting to act as active owners. In such a context where shareholder engagement is virtually non-existent, the enactment of the Kenyan Stewardship Code ignites hope for more shareholder participation in the future. The conference also explored stewardship in South Africa, a country with unique social realities such as high levels of unemployment, poverty and crime. These realities have a significant bearing on stewardship activities. Here, the pension fund industry makes up a large proportion of the market capitalisation. This industry is fragmented and the ultimate beneficiaries of these funds – the workers – are often ill-advised and generally passive despite having two soft-law instruments aiming to promote responsible investment.
Stewardship, enforcement and comparative approaches
The last part of the conference examined the challenges of stewardship enforcement and brought together comparative and transnational approaches. The discussions looked at the relationship between SRD II and the national stewardship codes in the EU and pointed to the symbiotic relationship of the two.
On a comparative basis, empirical evidence based on a textual analysis of all the national, regional and international stewardship codes were presented indicating that the UK, has acted as a stewardship norm exporter, particularly in former British colonies in Asia. The Hong Kong Stewardship Code, for instance, shares large textual similarities with the UK code. A key driver behind the implementation of the stewardship code in Hong Kong was to please market actors who expect to see policy treatment akin to what they receive in the UK. This supports the argument that there is an apparent, worldwide stewardship convergence. But then again, while the codes look the same in terms of form and content, they fulfil different functions and have different impact on investment practices, as the different panels during the 2-day conference have unveiled.
In conclusion, while the conference revealed deeper issues regarding shareholder stewardship such as the phenomenon of ‘faux convergence’, the field is still in need of additional analysis based on empirical evidence and policy-recommendations. What is certain, though, is that shareholder stewardship will play a more prominent role as time passes, given the tremendous challenges, like climate change, entering the discussion concerning investment management.
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Dionysia Katelouzou is a Senior Lecturer in Law at the Dickson Poon School of Law, King's College London, specialising in the areas of comparative and transnational corporate governance, corporate law and financial market regulation, with a particular interest in shareholder activism, investor stewardship and empirical legal studies.
To subscribe to the mailing list for the Global Shareholder Stewardship (GSS) Project please visit the project website: https://www.kcl.ac.uk/research/global-shareholder-stewardship
The goal of the Conference is to publish a book on Global Shareholder Stewardship: Complexities, Challenges and Possibilities. The book will contain in-depth jurisdiction-specific chapters on all major jurisdictions which have implemented a stewardship code or principles. It will also examine the possible rise of stewardship in major economies which may in the future adopt a stewardship code or principles. The in-depth analysis in the jurisdiction-specific chapters will be analysed from multiple perspectives and using several methodological approaches to derive some fresh comparative corporate governance lessons and useful academic theories from this research project.
The conference and wider project were co-sponsored by the Dickson Poon School of Law, King's College London, the Transnational Law Institute, King's College London, the British Academy's Partnership with the Department for Business, Energy and Industrial Strategy, the ESRC Social Science Impact Fund and the European Corporate Governance Institute (ECGI).