1.1 Introduction
In 2019, when we started this research project, the world was a very different place. Not only could we never have anticipated that, as this book went to press, facemasks would be a ubiquitous accessory, but it was beyond our wildest imaginations how much our understanding of shareholder stewardship would expand and evolve. As the excitement of research lies in discovering the unknown, the pages that follow in this book are full of excitement as they reveal many important discoveries.
Upon reflection, perhaps from the outset, we should have been more sanguine about the prospects for this research project. In 2010, the United Kingdom hastily released the world’s first stewardship code (UK Code 2010) in response to the 2008 Global Financial Crisis (GFC).Footnote 1 The UK Code 2010 was designed to cure what was perceived to be the UK’s primary corporate governance malady: rationally passive institutional investors in a country characterized by a dispersed ownership structure. It sought to achieve this by using a ‘soft’Footnote 2 law code to incentivize institutional investors – who own most of the shares in UK listed companiesFootnote 3 – to become actively engaged shareholder ‘stewards’.
In the 2010s, this bespoke solution to the UK’s ‘ownerless corporations’ problem went global. UK-style stewardship codes (in the broad sense) now exist in twenty jurisdictions, on six continents, and are embedded in a panoply of legal systems, shareholder markets and corporate cultures.Footnote 4 In addition, stewardship codes have been developed at international and regional levels,Footnote 5 making shareholder stewardship an international corporate law phenomenon.Footnote 6 The appearance of UK-style stewardship codes and similar initiatives in such diverse and foreign environments should have alerted us to the fact that there was still much to be explored – but the existing Anglo-American-centric scholarship was blinding.Footnote 7
To the best of our knowledge, before this project, never before had corporate law experts from each of the twenty jurisdictions with a stewardship code been brought together to undertake an in-depth contextual, comparative and empirical analysis of shareholder stewardship.Footnote 8 The result of this undertaking – which also includes analyses of stewardship in the world’s two largest economies without stewardship codes (China and Germany) – is the revelation that stewardship is far more complex than originally understood. However, merely revealing that something is complex is of marginal benefit – understanding the drivers and consequences of the complexity is where valuable insights are gained.
Against this backdrop, the goal of this chapter is to explain why shareholder stewardship around the world – global shareholder stewardship – is far more complex than the existing literature suggests, and how this complexity impacts current theories and existing practices. To explain complexity, this chapter provides a loose taxonomy of global shareholder stewardship by categorizing stewardship along three dimensions. The first dimension illuminates how stewardship can be conceived in a variety of ways – which makes the intellectual exercise of understanding stewardship complex and presents a challenge for policymakers to implement an idea with multiple conceptions. The second dimension compares the formal design and the content of stewardship codes globally and reveals that they have largely been modelled after the first version of the UK Code (2010/2012) – creating a mirage of global uniformity based on the UK model of stewardship. The third dimension demonstrates how the different origins of the codes (government codes versus institutional investor codes), a variety of mechanisms for enforcing (or not enforcing) codes, and jurisdiction-specific corporate governance factors that impact how the codes function, result in stewardship serving a variety of functions which would have never been anticipated by the original drafters of the UK Code. This complexity, which has largely been overlooked in the literature, creates distinct varieties of stewardship. Based on the distinct varieties of stewardship in jurisdictions around the world, this chapter concludes by illuminating the challenges and possibilities of global shareholder stewardship. The taxonomy also serves as a useful lens for observing the common themes and points of intersection that make the whole of this book greater than the sum of its individual chapters.
1.2 Multiple Conceptions of Shareholder Stewardship: Intellectual Complexity Revealed
The starting point for any comparative analysis is to identify the subject of comparison. At the outset of this project, we (incorrectly) assumed that this would be relatively simple as the project was focused on a global comparison of ‘shareholder stewardship’. What we quickly realized, however, was that ‘shareholder stewardship’ is an ambiguous term which has come to mean different things, at different times, in different places.
From our review of the chapters in this book, there are at least five conceptions of what the term ‘shareholder stewardship’ means. The first conception is that institutional investors will actively engage as ‘stewards’ in the corporate governance of companies in which they are shareholders. This concept of stewardship fits with the idea behind the original UK Code 2010 and its revised 2012 version:Footnote 9 to incentivize passive institutional investors to become active shareholder stewards by using a ‘comply or explain’ code.Footnote 10 In theory, this concept of stewardship made sense in the UK context as institutional investors own a majority of shares in listed companies and, therefore, collectively have the legal right to steward them if they have the incentive to do so. Although, in theory, the concept was sound, in practice, after a decade, the consensus is that the UK Codes 2010 and 2012 (which are fundamentally the same)Footnote 11 failed to incentivize institutional investors to become actively engaged shareholder stewards.Footnote 12 Surprisingly, despite this domestic failure, this original, corporate governance–focused concept of stewardship appears in the overwhelming majority of the jurisdictions in the world that have adopted a stewardship code (a curiosity that we will examine in detail).
However, despite its global ubiquity, this original, corporate governance–focused concept of stewardship is a misfit in all the jurisdictions that have adopted a code, with the notable exceptions of the UK and the US.Footnote 13 This is because, outside of the UK and the US, institutional investors rarely own a majority of shares in listed companies.Footnote 14 Therefore, even if the code succeeds in transforming institutional investors into actively engaged shareholders, they will not have the collective legal power to ‘steward’ listed companies in most of the jurisdictions around the world. This is reinforced by the fact that, outside of the UK and the US, and a handful of other jurisdictions, a substantial portion of companies have a rationally active controlling-block shareholder who has both the legal rights and the economic incentive to steward the company.Footnote 15 In these jurisdictions, ‘ownerless companies’ are virtually non-existent and passive institutional investors – who own only a minority of shares in listed companies – are more akin to ‘absentee tenants’ than ‘absentee landlords’.Footnote 16 Thus, in practice, outside of the UK and the US, the original corporate governance–focused conception of stewardship on the part of institutional investors theoretically should have a completely different target.
This is how the second conception of stewardship emerged. While in the UK and the US the direct target of shareholder stewardship is corporate (mis)management, in jurisdictions with increased concentration of equity ownership, shareholder stewardship arguably should be conceived to transform institutional investors into actively engaged shareholders to monitor controlling shareholders and reduce ‘tunnelling’.Footnote 17 Using the economic jargon, while the first conception of shareholder stewardship aims to minimize the agency problems between corporate managers and shareholders, the second conception aims to solve the agency problems between minority and controlling shareholders.Footnote 18 Although controlling shareholders, rather than management, should be the key target of corporate governance–focused shareholder stewardship where concentrated ownership structures prevail, there is surprisingly no stewardship code which has explicitly adopted this second conception of stewardship. Rather, as will be explained, almost all stewardship codes have been modelled on the UK Code 2010/2012, and there are only passing references to the need for engagement by institutional investor-stewards with controlling shareholders in two jurisdictional-specific codes, those of Canada and Kenya.Footnote 19 The International Corporate Governance Network (ICGN) model code also provides that, ‘[i]n the case of controlled companies, investor engagement may also extend to meeting with controlling shareholders’.Footnote 20 But these passing references to controlling shareholders in the current stewardship codes fall short of focusing on the potential of institutional shareholder–driven stewardship to act as a check on controlling shareholder power.Footnote 21
The third conception of stewardship identifies the corporate governance actor who has actual control over the company and creates a code to try to encourage that actor to steward the company in a way that maximizes the benefits for all stakeholders. The most prominent example of this is the ‘Stewardship Principles for Family Businesses’ in Singapore (Singapore Family Code).Footnote 22 The concept at the core of the Singapore Family Code is to use soft law to incentivize family controllers to use their controlling power to benefit all corporate stakeholders and society. This concept of stewardship arguably makes sense in the Singaporean context as a majority of listed companies are family firms with controlling shareholders who have both the legal right and the economic incentive to steward the company.Footnote 23 Stewardship Asia, which is based in Singapore and released the Singapore Family Code, has been promoting it throughout Asia where family firms make up a significant portion of listed companies in many jurisdictions.Footnote 24 While the Family Code has not yet gained traction in other jurisdictions, conceiving of controlling shareholders, such as family controllers or the state, as stewards is not alien to the way in which shareholder stewardship is, in reality, already practised in many jurisdictions with concentrated ownership structures.Footnote 25 Private benefits of control may jeopardize the effectiveness and efficiency of this type of stewardship,Footnote 26 but what becomes clear is that current stewardship practices are indicative of the conventional boundaries between the different stewards – ‘institutional investor stewards’ versus ‘non-institutional investor stewards’ – already being blurred in most non-UK/US jurisdictions, as they tend to have an abundance of controlling shareholders.
A fourth conception of stewardship – which only recently began to increase in prominence – is institutional investor–driven stewardship with the aim of advancing the environmental, social and governance (ESG) movement. This conception of stewardship differs from the previous ones in two respects. First, the primary target of stewardship is not to solve any specific agency problem but rather to incentivize the companies in which institutional investors invest to adopt an ESG agenda.Footnote 27 Second, it aims to provide the ultimate beneficiaries of institutional investors with the information and means to channel their funds towards ESG investments. Although this concept of stewardship was non-existent in the UK Code 2010 and received only a fleeting reference in the UK Code 2012, it is at the core of the latest version of the UK Code (UK Code 2020).Footnote 28 This recent shift in the focus of stewardship in the UK has been described by a pre-eminent UK corporate law academic as a movement ‘from saving the company to saving the planet’.Footnote 29 It is also noteworthy that, over the last decade, this ESG concept of stewardship has found its way into stewardship codes around the world. Empirical evidence based on a review of the text of the latest versions of stewardship codes reveals that 84 per cent of the codes now refer ‘at least once to ESG factors’ and that only four current codes (i.e., Danish Code 2016, Korean Code 2016, Swiss Code 2013 and US Code 2017) do not mention ESG factors at all.Footnote 30
The fifth – and final – conception of stewardship is about what stewardship means ‘inwards’ for the institutional investors themselves. This conception is focused on the ‘investment management’ side of stewardship, that is, the relationship between the institutional investor – an investment intermediary – and their ultimate beneficiaries/clients. Most investors are organized on the basis of what has been described as a ‘separation of funds and managers’.Footnote 31 This means that the investors’ assets and liabilities are placed into one entity, the fund, whereas the fund’s assets are managed by a separate entity, the management company.Footnote 32 The primary goal of this conception of stewardship is to reconcile a constructive stewardship role with the investors’ own internal business models. The inaugural UK Code 2010/2012 incorporated good investment management practices within the notion of shareholder stewardship, such as managing conflicts of interest (between funds, between managers and fund investors, and between investors) in discharging stewardship and promoting transparency across the investment chain. These principles travelled well around the world,Footnote 33 but, even though the corporate governance and investment management sides of stewardship are intertwined,Footnote 34 the investment management side of stewardship has remained at the periphery of the academic and policy debates.Footnote 35 One explanation may be that the original UK Code did not make it clear whether institutional investors, by discharging their stewardship obligations as shareholders in their investee companies (i.e., the ‘corporate governance side’ of stewardship), were concurrently discharging their duties to their clients and ultimate beneficiaries (i.e., the ‘investment management side’ of stewardship). The failure to explicitly identify the difference between the corporate governance and investment management sides of stewardship, and how they interrelate, has often resulted in the importance of the investment management side of stewardship being overlooked.Footnote 36
Against a largely monolithic literature and practice with a narrow focus on the first conception of shareholder stewardship as good corporate governance by institutional investors in dispersed-owned companies – and more recently on ESG – our taxonomy adds significant value in capturing a variety of stewards (institutional investors and various controlling shareholders) and targets (corporate governance, ESG, and investment management) which all contribute to how shareholder stewardship is conceived. Indeed, without all five conceptions it is impossible to accurately understand the past or anticipate the future of global shareholder stewardship. By recognizing the existence of and the problems and possibilities raised by the five conceptions of global shareholder stewardship and their overlap, this book adds significant insight and detail to what we know of stewardship around the world.
Finally, before moving on, two important points concerning the terminology used for this comparative and contextual analysis must be explained. We chose to use the term ‘shareholder stewardship’ over the term ‘investor stewardship’ for two reasons: first, we do not solely focus on ‘institutional investor stewards’ but also consider ‘non-institutional investor stewards’ (e.g. different types of controlling shareholders); and second, our focus is on the roles of these stewards as shareholders of public companies and does not take into account stewardship in other assets beyond equities. We also prefer the term ‘shareholder stewardship’ over merely the term ‘stewardship’, which is too broad to be analytically useful.
1.3 How the Seven Principles of the UK Code Went Global
1.3.1 The Historical Roots of the UK-cum-Global Stewardship Code Model
In 1991, the Institutional Shareholders’ Committee (ISC), a private body composed of four prominent UK institutional investors and fund managers, released a statement entitled ‘The Responsibilities of Institutional Shareholders in the UK’.Footnote 37 This statement, which was only three pages long and included nine principles of good practice, can be seen as the genesis of the first corporate governance–focused conception of shareholder stewardship – despite the intriguing absence of the word ‘stewardship’ from its text. It was revised three times, in 2002, 2005 and 2007, until in 2009 it was reformulated into seven principles – ‘The ISC Code on the Responsibilities of Institutional Investors’ – which formed the basis for the UK Code in 2010.Footnote 38
Although the ISC Code can be seen as the genesis of shareholder stewardship codes, the UK Code 2010 is often referred to as the world’s first stewardship code. This is largely because the UK Code 2010 was released by the Financial Reporting Council (FRC), a quasi-government body, which gave it the imprimatur of the UK government. By 2010, the UK had established itself as a global corporate governance leader by creating the world’s first corporate governance code, which had by then been transplanted around the world. In this context, the UK Code 2010 seemed like an encore by the UK to reaffirm its status as a global corporate governance leader – but this time by focusing on shareholder stewardship.Footnote 39 The position of the UK Code as the global ‘gold standard’ has been reinforced by European and international bodies (both public and private ones)Footnote 40 adopting to a large extent the UK Code 2010/2012 model of the seven principles – part of a larger movement which has recently been coined ‘international corporate governance’.Footnote 41 Several chapters in this book analyze the seven principles of the UK Code 2010/2012 so the details will not be repeated here. Table 1.1 provides a snapshot of the seven core principles of the UK Code 2010, which were transferred almost completely into the revised UK Code 2012.
| Principle 1 | Publicly disclose their policies on how they will discharge stewardship responsibility |
| Principle 2 | Have a robust policy on managing conflicts of interest |
| Principle 3 | Monitor investee companies |
| Principle 4 | Establish clear guidelines on when and how to escalate stewardship activities |
| Principle 5 | [Be] willing to work collectively with other investors |
| Principle 6 | Have a clear policy on voting and disclosure of voting activity |
| Principle 7 | Report periodically on stewardship and voting activities to their clients/beneficiaries |
The UK Code 2010/2012 has had a significant impact globally. Before the publication of the UK Code in 2010, the only trace of shareholder stewardship outside the UK was in the 2005 Canadian Coalition for Good Governance statement on shareholder involvement by a group of Canadian institutional investors.Footnote 42 Internationally, some early stewardship traces can be found in the ICGN ‘Statement on Institutional Shareholder Responsibilities’ published in 2003.Footnote 43 However, these two pre-2010 stewardship initiatives bear little resemblance to the stewardship codes that proliferated after 2010 based on the UK Code 2010/2012.Footnote 44
Following the publication of the UK Code in 2010, stewardship codes have been issued in twenty jurisdictions on six continents (eight in Asia, six in Europe, two in Africa, two in North America, one in Australia and one in South America).Footnote 45 In three jurisdictions, more than one type of stewardship code has been issued to deal with either different types of institutional investor (Australia/India) or different types of shareholder (Singapore).Footnote 46 In addition, in several jurisdictions (Canada, India, Italy, Japan, the Netherlands, Norway and the UK) a subsequent amended version(s) of the inaugural stewardship code has been issued – resulting in a total of thirty-five codes having been issued in twenty jurisdictions.Footnote 47 To this impressive list one should add the European Fund and Asset Management Association (EFAMA) and ICGN codes which were issued by regional and international bodies respectively – resulting in a total of thirty-nine stewardship codes being issued after 2010.
1.3.2 Evidence from the Formal Design and Content of Non-UK Stewardship Codes
1.3.2.1 The Core Principles of the UK Code Have Been Transplanted Around the World
Prior to this book project, it was often assumed that UK-style stewardship had been transplanted around the world.Footnote 48 However, this claim had never been tested. This assumption likely arose for good reasons. First, the UK Code 2010 has widely come to be considered the world’s first stewardship code and stewardship codes began to appear around the world following its release. Second, over the previous two decades, UK-style corporate governance codes had been adopted in ninety jurisdictions around the world and stewardship codes were seen to likely follow the same path.Footnote 49 Third, and perhaps most importantly, in jurisdictions that adopted codes, leading academics, government officials and/or the text of the code itself explicitly recognize the influence of the UK Code 2010/2012.Footnote 50 Indeed, in the main conference which brought together leading corporate governance scholars and policymakers from all the jurisdictions with codes for this book project, perhaps the most common theme was that jurisdictions had modelled their codes on the UK Code 2010/2012. This theme was based primarily on repeated references to stewardship codes around the world being modelled on the seven core principles contained in the UK Code 2010/2012Footnote 51 – which, over the course of the conference, were coined the ‘UK’s Seven Magic Principles’.Footnote 52
It is one thing for academics and policymakers to say that their jurisdiction intended to use the UK Code 2010/2012 as the model and another to verify whether this general impression was put into practice. To determine this, it makes sense to analyze the formal design of non-UK stewardship codes along three dimensions: their (1) core concept, (2) primary content and (3) text/language.Footnote 53 As explained, the core concept of the UK Code 2010/2012 was to incentivize passive institutional investors to become active shareholder stewards by using a ‘comply or explain’ code. An examination of all thirty-six jurisdictional and inter-jurisdictional non-UK codes published after 2010 reveals that the only code that does not conceptualize institutional investors as being the focus of stewardship is the Singapore Family Code.Footnote 54 In addition, in the thirty-five stewardship codes that see institutional investors as the ‘stewards’, twenty-nine out of thirty-five are designed overwhelmingly around the first conception of stewardship, that is, that institutional investors will actively engage as ‘stewards’ in the corporate governance of companies in which they are shareholders; the small minority of other codes (six out of thirty-five) see institutional investors as playing more of a role promoting ESG or focus more on the investment management conception of stewardship.Footnote 55
In this sense, it is clear that the core concept of the UK Code 2010/2012 has served as a model which has shaped the primary target of stewardship around the world: institutional investors. This finding is significant because this concept of stewardship does not appear to fit into jurisdictions with controlling shareholders which, as will be explained in detail,Footnote 56 is the shareholder landscape in all the non-UK jurisdictions that have adopted stewardship codes (with the notable exception of the US). It has also meant that the ESG and investment management conceptions of stewardship have not been the primary focus in the vast majority of non-UK jurisdictions – but, as will also be explained,Footnote 57 this may change in the near future with the UK Code 2020 adding ESG as one of its primary focal points.
In terms of the primary content, the vast majority of non-UK codes around the world adopted all, or almost all, of the seven principles in the UK Code (see Table 1.2).Footnote 58 If we consider all thirty-five non-UK stewardship codes (i.e., jurisdiction-specific, regional and international codes) that focus on institutional investors, 74.29% have adopted all seven principles – with 91.43% of the codes adopting five or more principles. Thus, it is clear that the primary content of the UK Code 2010/2012 has been significantly embraced by stewardship codes globally – definitive evidence of a UK-cum-global stewardship code model. This evidence is even more overwhelming if one considers the latest versions of all non-UK codes focused on institutional investors, with 83.3% adopting all seven UK principles and 95.8% adopting five or more principles. Definitively, 100% of the regional and international codes have adopted the seven UK principles. This reaffirms how the seven principles served as the model for the primary content of codes globally as these non-jurisdiction specific codes were intended to promote the dissemination of stewardship around the world – which empirical evidence in Chapter 30 proves was indeed the case.
Table 1.2 Percentage of codes that adopted the UK Code 2010/2012’s seven principlesFootnote 60
| Types of code | Number of codes | Percentage that adopted all 7 principles | Percentage that adopted 5 or more principles |
|---|---|---|---|
| All Stewardship Codes | 36 | 72.2% | 88.89% |
| Latest Versions of All Stewardship Codes | 25 | 80% | 92% |
| All Institutional Investor Focused Codes | 35 | 74.29% | 91.43% |
| Latest Version of Institutional Investor Focused Codes | 24 | 83.3% | 95.8% |
| All Interjurisdictional Codes | 4 | 100% | 100% |
| Latest Interjurisdictional Codes | 2 | 100% | 100% |
| All Jurisdiction Specific Codes | 32 | 68.75% | 87.5% |
| Latest Jurisdiction Specific Codes | 23 | 78.26% | 91.3% |
In terms of the text of non-UK codes, an automated textual analysis of the specific wording used in non-UK codes in Chapter 30 confirms that much of the text of non-UK codes has been copied from the UK Code 2012. The UK Code 2012 is found to be the most influential text in a sample of forty-one UK and non-UK stewardship codes – particularly among Asian common law jurisdictions.Footnote 59 However, the same chapter confirms that diffusion of stewardship norms is multidimensional with the intra-jurisdictional codes of EFAMA and ICGN playing an influential role in the travelling of stewardship principles and with regional clusters, such as the one between Korea and Japan, also explaining jurisdictional variety in stewardship codes.Footnote 61 While studying the text of stewardship codes with computational tools revealed more complicated patterns of stewardship diffusion than a unidimensional transfer from the UK Code 2010/2012, it is admitted that a textual analysis may underestimate the extent to which core concepts or principles have been transplanted from the UK Code 2010/2012 to other codes because the same concepts are sometimes described using different words or are lost in translation when expressed in non-English languages – suggesting that the influence of the text of the UK Code 2010/2012 on codes globally may be even greater than the automated textual analysis suggests.Footnote 62
Another point is that the linguistic choices for the titles of the codes add further evidence of the influence of the UK Code 2010/2012 as the model for stewardship codes around the world. Out of the thirty-six jurisdictional-specific codes, twenty-five include the word ‘stewardship’ in their title. This demonstrates how the term ‘stewardship’, which was coined in the title of the UK Code 2010, has been disseminated around the world. It is interesting that policymakers and academics from the jurisdictions that did not include the word ‘stewardship’ in the title of their codes still tend to colloquially, and in their chapters in this book, refer to their codes as ‘stewardship’ codes – demonstrating that the UK Code 2010/2012 made ‘stewardship’ the lingua franca for describing these codes around the world.
1.3.2.2 Outliers and Deviations from the UK Model
Despite the strong evidence that the UK Code 2010/2012 has served as the model for stewardship codes around the world, there are interesting observations that can be drawn from jurisdictions which have chosen to deviate from the UK model in terms of the core concept, primary content or text of their codes.
In terms of the core concept, as highlighted already and explained in detail in Chapter 14, the Singapore Family Code is the only stewardship code that does not mention institutional investors.Footnote 63 Instead, it focuses on family controllers, which fits Singapore’s corporate governance context as family-controlled companies comprise the vast majority of companies on the Singapore Exchange.Footnote 64 As most non-UK jurisdictions have shareholder landscapes dominated by controlling shareholders (and not institutional investors), an interesting question is why other jurisdictions have not taken such an approach and whether other jurisdictions will follow the Singapore Family Code model in the future – which has been promoted for export by Stewardship Asia.Footnote 65 Also, it is noteworthy that from the thirty-five non-UK codes treating institutional investors as ‘stewards’, six do not focus on the corporate governance–oriented core concept of the UK Code 2010/2012.Footnote 66 The Norwegian Codes, the Swiss Code 2013, the Australian (FSC) Code 2017 and the ICGN Code 2013 appear to place more of an emphasis on the investment management conception of stewardship than other codes, raising the question of whether this conception of stewardship will be stressed more in other codes in the future. Finally, the South African Code, which was released in 2011, adopts ESG – instead of the corporate governance of investee companies – as its core concept to be advanced by institutional investors.Footnote 67 As already mentioned, the UK Code 2020 added ESG as a major focal point, in addition to its original core concept on transforming institutional investors into actively engaged shareholder stewards. At the same time, the UK Code 2020 is much more focused on the investment management side of stewardship compared to its predecessors.Footnote 68 This, combined with the rise of the ESG movement, raises another interesting question, which we discuss in Section 1.5: will ESG become the core concept of stewardship codes in the future and, if so, will the UK Code 2020 serve as the new model for this movement?Footnote 69
In terms of the primary content, in the small minority of non-UK codes that have not adopted all seven principles, two principles are most often the ‘missing principles’: (1) escalating monitoring activities in investee companies (Principle 4 of the UK Code 2010/2012); and (2) collective action and collaboration among institutional investors (Principle 5 of the UK Code 2010/2012).Footnote 70 This may be because the codes which lack these principles are in jurisdictions where institutional investors collectively are minority shareholders – which, as explained by Puchniak elsewhere, makes the concepts of escalation and collective action less meaningful.Footnote 71 It is also likely that because escalating activities and collective action are closely associated with shareholder activism, these principles are not well-perceived by local market and governmental actors with more stakeholder or ‘communitarian’ views of the firm, which in turn may explain the absence of such principles from stewardship codes in jurisdictions like Japan.Footnote 72 It is also noteworthy that two early non-UK codes (Canadian Code 2010 and Italian Code 2013) did not include an equivalent of the conflicts of interests principle (Principle 2 of the UK Code 2010/2012) and two (Canadian Code 2010 and Norwegian Code 2012) did not include an equivalent to Principle 7 of the UK Code 2010/2012, which refers to periodic reporting of the stewardship activities to ultimate beneficiaries of institutional investors.Footnote 73 Both Principles 2 and 7 are part of the investment management aspect of stewardship and their absence in earlier versions may be attributed to the fact that codes have generally de-emphasized the investment management conception of stewardship. However, all three codes have now been amended to include equivalents of Principles 2 and 7 – suggesting that, although investment management is not the core concept of any code, it is still an important aspect of stewardship (the reasons for which are explained in detail later in this book).Footnote 74 Finally, it is important to note that twenty-three out of the thirty-six non-UK codes (63.9%) have adopted principles that are not included in the UK Code 2010/2012.Footnote 75 Among these non-UK originated principles is a principle on ESG investing which is found in ten stewardship codes including the UK Code 2020 – suggesting the importance of ESG in the future of stewardship.Footnote 76
In terms of the text, while Chapter 30 provides clear evidence of the diffusion of the text of the UK Code 2012 around the world (especially among Asian common law countries but also through diffusion to the EFAMA Code 2011 and Japanese Code 2017), there are interesting observations that can be drawn from codes that significantly deviate from the text used in the UK Code 2012. Four codes are found to be textually detached from the UK Code 2012 even though they all include the seven UK principles: the Australian (FSC) Code 2017, the Australian (ACSI) Code 2018, the South African Code 2011 and the Taiwanese Code 2018.Footnote 77 There are three reasons for these – perhaps surprising at first – linguistic deviations. First, textual differences may be attributed to the manner in which the seven UK principles are expressed in each code, which tends to differ significantly – in that some principles are combined together in a single ‘combine principle’ and others are split up into several smaller parts.Footnote 78 Second, that a non-UK code may have all seven UK principles does not necessarily mean that it has only these seven principles. Rather, the majority of non-UK codes also include principles that are not included in the UK Code 2010/2012. For instance, the Australian (ACSI) Code 2018 includes a principle addressed to policymakers with the aim of encouraging them to ‘better align the operation of the financial system and regulatory policy with the interests of long-term investors’.Footnote 79 Finally, as we have seen, the Australian (FSC) 2017 Code and the South African Code 2011 differ from the UK Code 2010/2012 in terms of their core concept, which explains why, despite adopting the seven UK principles, these codes also have many additional principles which reflect their different core concepts, investment management and ESG.
Another important observation is that while textual differences, when the primary content of non-UK codes is similar to the UK 2010/2012 model, do not challenge the basic proposition that the UK Code 2010/2012 served as the global stewardship model, there are a few codes that are different from the UK model in terms of both text and primary content. Two non-UK codes stand out here: the Brazil Code 2016 and the Swiss Code 2013. They are both found to be textually dissimilar to the UK model.Footnote 80 And they both differ from the UK model in terms of their primary content.Footnote 81 The Brazil Code 2016 has a principle with no direct correspondence with the UK model; its Principle 3 urges institutional investors to take into account ESG factors.Footnote 82 The Swiss Code 2013 is the code that lacks most of the UK principles (it has only four out of seven) which may be attributed to the fact that the code has a different core concept: it focuses on the investment management side of stewardship and aims to minimize the agency costs between asset managers and their clients when the former exercising their shareholder rights, rather than turning institutional investors into active monitors of investee companies.Footnote 83
1.4 Varieties of Global Shareholder Stewardship: Complexity Revealed
It has been more than two decades since the legal origins theory captivated comparative corporate law scholarship based purely on a comparison of ‘corporate law on the books’ – without any examination into how the corporate law provisions that were being compared across jurisdictions were enforced and actually functioned in practice.Footnote 84 Although the original legal origins research is heavily cited and its progeny spawned an index currently (mis)used by the World Bank,Footnote 85 its validity and ability to accurately explain the reality of how corporate law functions in different jurisdictions have been persuasively debunked.Footnote 86 In the wake of the legal origins debacle, a primary lesson learned is that examining how the law is enforced and analyzing other jurisdiction-specific factors that influence how the law functions in practice are critical for any meaningful comparative corporate law analysis. Based on our review of the chapters in this book, the case of stewardship codes is no exception.
From our analysis in Section 1.3, it is clear that the UK Code 2010/2012 has served as the model for the proliferation of stewardship codes around the world. Outliers and deviations may have been revealed, but this does not alter the fact that the UK-cum-global stewardship model has been adopted in an overwhelming majority of jurisdictions with codes and has significantly influenced the form and/or content of virtually every stewardship code in the world. This finding is important as it confirms that the UK Code 2010 was the genesis of the global stewardship movement. It also suggests why, prior to this book project, the conventional wisdom was that UK-style stewardship had proliferated around the world. However, to stop our analysis here would be to repeat the fundamental flaw in the legal origins scholarship: merely because the UK Code 2010/2012 served as a model for the design of stewardship codes globally does not mean that these codes were adopted for similar reasons, and/or have performed a similar function, as in the UK.
Indeed, as explained in this section, and elaborated upon in several chapters in this book, the opposite is often the case. Most jurisdictions have formally adopted the seven principles of the UK Code 2010/2012 and the UK’s institutional investor, corporate governance–focused, conception of stewardship. However, shareholder stewardship in jurisdictions around the world has often functioned in a way that is different from – and in some cases diametrically opposed to – shareholder stewardship in the UK. This is a core reason for why understanding shareholder stewardship globally appears simple but is, in fact, teeming with complexity. We now turn to an examination of the forces that have driven stewardship to function in a variety of ways around the world.
1.4.1 The Origins of Stewardship Codes: A Bifurcated World
Although stewardship codes globally have overwhelmingly adopted the formal design and content of the UK Code 2010/2012, the ostensible simplicity of this global legal transplant is only skin-deep. If we drill down a bit by examining the origins of the codes, the largely unified global rise of stewardship becomes bifurcated into two worlds: (1) there have been nineteen codes in eleven jurisdictions issued by government or quasi-government bodies (public or governmental codes); and (2) there have been sixteen codes in nine jurisdictions issued by private organizations composed of, or supported by, mainly institutional investors (private or institutional investor codes). In addition, the four inter-jurisdictional codes are all private in nature.Footnote 87
The motives for adopting a stewardship code and the mechanisms available to enforce a code may differ significantly between public (governmental or quasi-governmental) bodies and private institutional investor organizations. Governments may be driven by a desire to demonstrate that they are acting in response to an economic crisis and/or to signal that their jurisdiction is at the cutting-edge of global norms of good corporate governance.Footnote 88 Governments can survey their jurisdictions’ corporate governance landscape and tailor the stewardship code to the stakeholder that has de facto or actual control of most listed companies.Footnote 89 Governments can use the coercive power of the state to bind institutional investors – or another type of steward – in their jurisdiction to the code.Footnote 90 Governments may create codes to advance their own political agenda, using a stewardship code as a form of policy-channelling that may have little to do with any of the conceptions of stewardship, and everything to do with politics.Footnote 91
In contrast, the motives for institutional investor organizations to come together to create a code appear to be narrower as they will naturally be focused on promoting the interests of institutional investors.Footnote 92 Institutional investors will only draft codes that consider institutional investors to be the ‘stewards’ regardless of the shareholder landscape of a jurisdiction.Footnote 93 Institutional investor organizations can only create codes that use the coercive power of membership in the organization to enforce their codes.Footnote 94 Institutional investors may be driven by a desire to create a code to promote self-regulation and avoid being regulated by the government.Footnote 95 Institutional investors may create codes to serve as vehicles for overcoming the collective action problems that they tend to face as small minority shareholders.
In this context, the fact that fifteen out of the twenty codes adopted by institutional investors include all seven UK principles is unsurprising.Footnote 96 As the UK Code 2010/2012 was designed with institutional investors at its core, it fits well with the agenda of institutional investor organizations. Also, as the UK Code 2010/2012 has gained the status of being the ‘gold standard’ for stewardship codes globally, adopting this gold standard sends a signal that institutional investors in a jurisdiction are taking stewardship seriously – an effective method for promoting self-regulation and pre-empting the government issuing a code. Indeed, there is no non-UK jurisdiction in which institutional investors have adopted a UK-style stewardship code where the government has subsequently attempted to issue a public code – suggesting that this pre-emptive strategy has been effective so far.
Another notable observation is that institutional investors are more likely to adapt the original UK model to their specific needs by adding ‘additional principles’:Footnote 97 from the twenty-three codes with additional principles, fifteen are issued by a private drafter. In addition to principles on ESG and long-termism, which are included in many non-UK Codes, it is not surprising that several non-governmental codes address the investment management side of stewardship, including specific principles on internal governance and organization. For instance, this is the case with all four of the jurisdictional codes focusing on the investment management conception of stewardship, that is, the Australian (FSC) Code 2017, the two Norwegian Codes and the Swiss Code 2013. Other additional principles included in private codes reflect the stakeholder orientation of some jurisdictions and ask institutional investors to communicate with stakeholders and exercise their shareholder rights, including the right to request a special meeting (e.g. the Dutch Code and the Swiss Code), which may allow institutional investors to demonstrate their understanding of trends within a jurisdiction and to expand their client base in this manner. Finally, some non-governmental codes ask institutional investors to work with policymakers and regulators (e.g. Canadian Codes), perhaps in an attempt to co-regulate and pre-empt future governmental regulation.
While the adoption of private codes closely resembling the UK model is unsurprising, from a narrow corporate governance perspective, the widespread transplantation of the UK Code 2010/2012 by government or quasi-government bodies is, at first blush, more puzzling. This is because, when viewed through a narrow corporate governance lens, one would expect that governments would create stewardship codes to fit the corporate governance context in their respective jurisdictions. As institutional investors collectively do not comprise a majority of shareholders in any non-UK jurisdiction with a government code – and most non-UK jurisdictions with government codes are dominated by controlling-block shareholders who have the incentive and the voting rights to steward most listed companies – one may expect that governments would adapt codes to be targeted towards controlling shareholders (rather than institutional investors) as the natural stewards of companies.
However, as noted earlier, the Singapore Family Code is the only stewardship code that has taken such an approach.Footnote 98 Rather, as explained in several chapters in this book and confirmed in our hand-compiled data, the overwhelming majority of public codes (eleven out of sixteen) have adopted all seven UK principles. The extensive adoption of the UK model by government or quasi-government bodies is also confirmed by the fact that all sixteen of the government codes adopt the core corporate governance–focused concept of the UK model to transform institutional investors into active shareholder stewards. This is paradoxical because, as will be explained in detail, stewardship has functioned in a wide variety of ways in these jurisdictions owing to the influence of jurisdiction-specific factors.Footnote 99
Before moving on, it is noteworthy that there is a stark geographic divide in terms of governmental codes versus institutional investor codes.Footnote 100 All the Asian codes (fourteen codes in eight jurisdictions) are governmental codes, while outside of Asia only two non-UK jurisdictions – Denmark and Kenya – have governmental codes. In this respect, Asia has adhered more closely to the design of the UK model of a governmental code than other parts of the world – a finding that has been entirely overlooked. There are three reasons why this geographic divide may have arisen. First, in non-Asian jurisdictions, institutional investors tend to have a larger ownership stake in listed companies,Footnote 101 which may provide institutional investors with greater incentives to create a code. Second, governments and public regulation tend to play a larger role in Asian economies and corporate governance than in many Western jurisdictions. Third, there is less of a history of shareholder activism by private institutional investors in most of Asia than in the West.Footnote 102 The centrality of governments in Asian corporate governance systems – combined with the general weakness of institutional investors throughout most of Asia – may explain why all the codes in Asia have been issued by government entities or entities supported by the government.Footnote 103 This contrasts with a litany of institutional investor organizations outside of Asia, which have developed from the ground up, without any government involvement, and have produced stewardship codes driven by free-market forces.Footnote 104
1.4.2 Stewardship in a World of Lax Enforcement: The UK as a Global Outlier
Surprisingly, although an overwhelming majority of jurisdictions with stewardship codes adopted the seven principles of the UK Code 2010/2012, none of them have adopted the UK’s model for enforcing their stewardship codes. In the UK, since December 2010, all asset managers authorized by the Financial Conduct Authority (FCA) have been required to publicly disclose their commitment to the UK Code, or explain where they do not commit.Footnote 105 As most UK authorized asset managers are ‘domestic’ investors,Footnote 106 this has effectively meant that all domestic asset managers in the UK are bound to commit to the principles and reporting obligations in the UK Code.
In stark contrast, seventeen out of the nineteen jurisdictions that have adopted UK-style stewardship codes have made them entirely voluntary in scope – with one of the codes in AustraliaFootnote 107 and all four Indian codes being the only non-UK codes that are non-voluntary for a certain portion of institutional investors in their respective jurisdictions.Footnote 108 The implications of almost all the world’s stewardship codes being entirely voluntary in scope – that is, with institutional investors free to decide whether or not to be signatories of the code – are difficult to overstate. It makes stewardship entirely optional for institutional investors – or family controllers in the case of the Singapore Family Code. As discussed in Chapter 27, this distinguishes stewardship codes from corporate governance codes – almost all of which are linked to a stock exchange or other mandatory regulations which do not allow listed companies to ignore corporate governance codes even if they would prefer to.Footnote 109
The most extreme example of the deleterious impact that the voluntary scope of stewardship codes can have on translating a code into practice comes from Kenya. Since the Kenya Code was issued in 2017, not a single institutional investor has volunteered to be bound by it.Footnote 110 As such, Kenya has a stewardship code that applies to no one – the archetypal example of a code that formally creates shareholder stewardship, with no functional effect in practice. Interestingly, the Kenya Code is a government issued code, which raises the question of why a government, which has the coercive power of the state, would issue a code that binds no one. Although the Kenya Code 2017 is highlighted as the only voluntary code to which no one has agreed to be bound, its voluntary scope is typical of non-UK governmental codes – and also institutional investor codes – which are almost all entirely voluntary. For institutional investor codes, their voluntary scope makes sense as the private organizations that issue the codes lack the coercive power of the state, and membership in the private organizations themselves is almost always voluntary. However, the failure of governments to use their coercive power – distinct from what most have done in the case of corporate governance codes – to make codes binding on a certain constituency of shareholders is a puzzling development in the evolution of global shareholder stewardship that has gone largely unrecognized and which we address here.
The outlier status of the UK’s enforcement model becomes even starker when the increasingly onerous obligations that institutional investors have under the UK Code are compared with the surprisingly lax, and even non-existent, obligations under most other non-UK codes. The UK Code 2010/2012 employed a ‘comply or explain’ mode of enforcement – which allows institutional investors who are bound by the code (whether because they fall within its scope or because they voluntarily signed up) to deviate from it if they provide an explanation for doing so. However, as the quality of commitment and that of disclosure in the UK were seen as lacking, in 2016 the FRC introduced a public tiering system of the signatories to the UK Code 2012, dividing institutional investors into tiers based on the quality of their disclosure.Footnote 111 Most recently, the UK Code 2020 adopted an ‘apply and explain’ principle which suggests more strongly that those who are bound by the code should apply it.Footnote 112
In sum, the story of the UK enforcement regime has three key components. First, domestic institutional investors are legally bound to commit to the code or explain otherwise (i.e., it is non-voluntary for domestic asset managers). Second, the obligation to ‘comply or explain’ is evaluated and explicitly subjected to market pressure, previously by the public tiering exercise conducted by the FRC and currently with the outcomes-focused reporting approach of the UK Code 2020. Third, recently the ‘comply or explain’ obligations have been replaced with ‘apply and explain’ obligations which move the obligation to conform to the principles in the UK Code a step closer to becoming mandatory rules.Footnote 113
In stark contrast, as reported in Table 1.3, ten codes in seven non-UK jurisdictions with stewardship codes and three inter-jurisdictional codes provide that those who voluntarily agree to be ‘bound’ by the code have no obligations under it.Footnote 114 It is shocking that in a significant portion of jurisdictions that have adopted UK-style stewardship codes, those who have agreed to be ‘bound’ by the code are required to do nothing at all – a game-changing reality of global shareholder stewardship that has been completely overlooked.Footnote 115 These codes are merely suggested principles issued to those who voluntarily sign up; they do not require the signatories to comply, explain or do anything at all. This mode of enforcement – which more correctly should be called a mode of ‘non-enforcement’ – makes such codes more like statements of best suggested practices. These ‘no-obligations’ codes, which are drafted by both governmental (as in Singapore) and private issuers (as in the US), are perhaps the most deceptive codes – and the most difficult to understand – as signing up to something which requires nothing from one seems like an exercise in futility. However, our examination of jurisdiction-specific factors illuminates some possible rationales for this ostensibly futile exercise.Footnote 116 There is also some evidence of ‘hardening’Footnote 117 in terms of the mode of enforcement as the latest versions of the Italian and Canadian codes moved from a no-obligations mode to a comply-or-explain one.Footnote 118
Table 1.3 Enforcement of stewardship codesFootnote 120
| Degree of coerciveness | SCOPE | |||
|---|---|---|---|---|
| Voluntary | Non-voluntary (for some) | Total | ||
| MODE | No obligations | 13 (7) | 0 (0) | 13 (7) |
| Comply or explain | 17 (13) | 4 (2) | 21 (15) | |
| Apply and explain | 1 (1) | 1 (1) | 2 (2) | |
| Mandatory | 0 (0) | 3 (3) | 3 (3) | |
| Total | 31 (21) | 8 (6) | 39 (27) | |
In fact, Table 1.3 confirms that, outside the UK, only the Australian (FSC) Code 2017 and the Indian (IRDAI) Code 2017 adopt the original enforcement model of the UK Code 2010/2012, that is, non-voluntary scope and the comply-or-explain mode. In seventeen non-UK codes, institutional investors who are bound by the code are required to comply or explain with the principles in the code.Footnote 119 At first blush, these jurisdictions may be seen to have adopted the UK-style comply-or-explain enforcement regime. However, upon closer examination, the enforcement regimes in these comply-or-explain jurisdictions differ significantly from UK-style enforcement. To start with, as all the codes which adopt the comply-or-explain enforcement mode – except for the Australian (FSC) Code 2017 and the Indian (IRDAI) Code 2017 – are voluntary, those institutional investors who do not want to comply or explain can simply decide that they no longer want to be bound by the code – which is not an option for domestic institutional investors in the UK.
The UK’s experience with foreign institutional investors, for which the UK Code is voluntary, demonstrates how institutional investors opting out of a voluntary code when it suits their self-interest is a real risk. After the UK adopted its public tiering exercise of the signatories to the UK Code 2012, a significant number of institutional investors (some of which were foreign) who wanted to avoid the embarrassment of being placed in the bottom tier simply opted to no longer be bound by the UK Code.Footnote 121 As one of the UK’s most prominent corporate law scholars has persuasively argued, the fact that the UK Code is voluntary for foreign institutional investors has rendered it virtually nugatory for this important class of institutional investors in the UK.Footnote 122 However, what has gone almost entirely unnoticed prior to this book project is that, with two exceptions (Australian (FSC) Code 2017 and Indian (IRDAI) Code 2017), globally all the jurisdictions that have adopted the UK’s comply-or-explain standard have done so in the context of codes which are voluntary codes for all (both domestic and foreign) institutional investors – while all other codes, aside from the three latest Indian codes (Indian (PFRDA) Code, Indian (SEBI) Code and Indian (IRDAI) Code 2020), are no-obligations codes which require nothing at all from those who volunteer to be ‘bound’ by them.
As if the UK enforcement system was not already enough of an outlier, there is not a single non-UK jurisdiction that has adopted anything in its enforcement regime that even comes close to approximating the UK’s public tiering exercise. This suggests that the UK stands alone as having the only enforcement system which evaluates the quality of commitment to and disclosure of the principles in its stewardship code, with a market mechanism to explicitly sanction poor performers.Footnote 123 Moreover, the UK’s recent adoption of its stricter ‘apply and explain’ standard, which has not yet been followed by any other jurisdiction, and its emphasis in the UK Code 2020 on stewardship outcomes rather than mere policies further accentuate its outlier status as having an enforcement regime that places considerably more pressure on institutional investors (or other shareholders bound by a code) to take stewardship seriously. This is somewhat ironic because the UK Code has faced harsh criticism for its ‘soft law’ approach – but, when viewed through a comparative lens, the UK’s shareholder stewardship regime is the ‘hardest’ in the world.Footnote 124
This observation is important because the global ubiquity of stewardship codes with the UK’s seven principles has resulted in the widespread misunderstanding that UK-style stewardship has been transplanted around the world. Indeed, a recent prominent article on ‘The Agency Problems of Institutional Investors’ lumps the UK Code together with non-UK codes as being ‘nonbinding stewardship codes which various institutional investors have pledged to follow’.Footnote 125 An important insight from this prominent article is that most often institutional investors lack the economic incentives to properly invest in stewardship. While we agree with this general observation, the variety in enforcement regimes that we have identified suggests that a finer grained analysis – which differentiates among the different types of enforcement regime in different jurisdictions with stewardship codes – is required.
Given the extremely lax and non-existent enforcement regimes in almost all non-UK jurisdictions, there is an acute risk that UK-style stewardship codes in these jurisdictions will be ineffective in motivating institutional investors to adequately invest in corporate governance. However, in the UK, where the regime is binding on domestic institutional investors and places real obligations on all institutional investors bound by the code, the analysis is different. In the UK, the success of corporate governance–focused stewardship will depend on whether this regulatory nudge will be enough to change the economics of investing in stewardship for institutional investors in the UK. The widespread consensus is that the regulatory nudge under the UK Code 2010/2012 was insufficient. However, it is important to recognize that, different from non-UK jurisdictions, the UK has developed an enforcement regime that provides a stronger regulatory nudge than in almost any other jurisdiction and that it has recently been strengthened further by replacing the comply-or-explain with the apply-and-explain standard. Moreover, as will be discussed, the economic incentive problem preventing institutional investors from investing in stewardship may be less acute when the focus of stewardship is ESG rather than corporate governance.Footnote 126 This, combined with the UK Code’s new stricter apply-and-explain standard, may provide a glimmer of hope for the new ESG-focused UK Code 2020.
Finally, a clear question that arises from the totality of this comparative analysis of stewardship enforcement regimes around the world is: Why have almost all jurisdictions departed from the UK’s enforcement model? There are at least five reasons that may explain this development. First, the original conception of stewardship, which focuses on transforming institutional investors into actively engaged shareholders, is contrary to the business models of several types of institutional investor – which makes a voluntary code more tenable as those institutional investors which have a business model that suits the code can choose to join (and, perhaps more importantly, those with incongruent business models are not bound). Second, from a corporate law perspective, shareholders normally have no obligation to be actively engaged in corporate governance and, therefore, making codes voluntary avoids stewardship conflicting with a fundamental tenet of corporate law. Third, the ambiguity of what stewardship is – which, as described earlier, has five different conceptionsFootnote 127 – is more conducive to a voluntary regime as ambiguous principles are hard to strictly enforce. Fourth, with the UK Code 2020 making ESG obligations a central component of stewardship, some jurisdictions may be hesitant to require institutional investors to follow these principles when their corporate law may still be centred on a narrower conception of corporations focusing on maximizing shareholder value.Footnote 128 Fifth, a UK-style stewardship code may not fit with the shareholder environment in jurisdictions that are dominated by controlling shareholders – a voluntary code may allow such jurisdictions to formally adopt the code to signal compliance with a global standard of ‘good corporate governance’, without it having much impact in practice. It is to this critical aspect of global shareholder stewardship – the transplantation of UK-style codes to a world in which institutional investors are normally collectively minority shareholders and controlling-block shareholders are normally predominant – to which we now turn.
1.4.3 UK-Style Codes: Misfits in a World of Minority Institutional Investors and Controlling Shareholders
It is now time to play a thought experiment. Assume that non-UK stewardship codes around the world were not hobbled by the lax and non-existent enforcement problems just highlighted. In fact, let us go one step further. Assume that institutional investors around the world followed the principles in their UK-style stewardship codes to a tee. At first blush, one may expect that this would produce similar results around the world as almost all codes have adopted the UK’s seven principles and enforcement would be moot. However, in reality, the opposite would be the truth – the corporate governance effect in the UK would be dramatically different from that in most non-UK jurisdictions.
This is because, as explained in detail by Puchniak elsewhere and elaborated on in Chapter 28 of this book, for the UK Code to have its intended corporate governance effect, a jurisdiction’s shareholder landscape must have two foundational features: (1) institutional investors collectively have the legal rights to control most listed companies; and (2) a single or small group of block shareholders does not have the voting rights to control most listed companies.Footnote 129 As will be explained, the UK and the US are virtually the only two jurisdictions in the world in which these two features exist. As such, they are the only two jurisdictions where if a stewardship code succeeds in incentivizing institutional investors to become actively engaged shareholders, those institutional investors will be able to ‘steward’ most listed companies.
For decades, it has been well-known and widely accepted that if institutional investors act collectively they have the legal rights to control the corporate governance in most UK listed companies.Footnote 130 As a result, this assumption was the intellectual starting point for the idea to create a stewardship code in the UK and has been at the core of the UK’s stewardship regime ever since.Footnote 131 This assumption was embedded in the design of the UK Code 2010, which assumes that if institutional investors act collectively they normally have the legal rights to intervene in a company’s corporate governance by taking measures such as replacing the board of directors.Footnote 132 The UK Code 2020 also assumes that if institutional investors act collectively they have the ability to control a wide-enough swath of UK listed companies to ‘respond to market-wide and systemic risks to promote a well-functioning financial system’.Footnote 133 In fact, the entire idea of making institutional investors – rather than another corporate stakeholder – the focus of the UK Code is predicated on the fact that if institutional investors act collectively they have the legal right to steward most UK listed companies.
However, the fact that collectively institutional investors have the legal right to control most listed companies makes the UK exceptional and cannot be assumed to be the case in almost any other jurisdiction. With the notable exception of the US, institutional investors do not own a majority of the shares in listed companies in any other major economy.Footnote 134 To the contrary, based on the hand-calculated data in Table 1.4, at the end of 2017 the mean share ownership of institutional investors in the jurisdictions that have adopted a stewardship code, excluding the UK and the US, was 23% – a stark contrast to 68% in the UK and 80% in the US. In Asian jurisdictions, where UK-style stewardship codes have proliferated, at the end of 2017 the mean shareholder ownership of institutional investors was just 15%. Thus, the global corporate governance reality is the opposite of that in the UK: in most jurisdictions, institutional investors collectively hold a minority of shares in most listed companies and do not have the legal rights to control them. In short, the assumption embedded in the UK Code’s design – that institutional investors collectively have the legal rights to act as stewards in most listed companies – does not fit the global corporate governance reality.
Table 1.4 Shareholding statistics in jurisdictions that have adopted stewardship codes
| Region | Jurisdiction | Percent of shares owned by institutional investors | Percent of listed companies with 3 largest owners controlling majority of shares | Institutional ownership | 3 largest owners as controllers | ||
|---|---|---|---|---|---|---|---|
| Mean for region | Median for region | Mean for region | Median for region | ||||
| Asia | Japan | 31% | 15% | 15% | 13% | 56% | 66% |
| Korea | 13% | 45% | |||||
| India | 19% | 66% | |||||
| Hong Kong | 12% | 75% | |||||
| Thailand | 8% | 51% | |||||
| Malaysia | 11% | 72% | |||||
| Singapore | 6% | 70% | |||||
| Taiwan | 18% | N.A. | |||||
| Europe | UK | 68% | 12% | 38% | 38% | 37% | 33% |
| Netherlands | 39% | 31% | |||||
| Norway | 26% | 35% | |||||
| Italy | 16% | 71% | |||||
| Denmark | 33% | N.A. | |||||
| Switzerland | 23% | N.A. | |||||
| North America | US | 80% | 4% | 62% | 62% | 10% | 10% |
| Canada | 43% | 15% | |||||
| Africa | South Africa | 33% | 38% | 33% | 33% | 38% | 38% |
| Kenya | N.A. | N.A. | |||||
| South America | Brazil | 22% | 72% | 22% | 22% | 72% | 72% |
| Australia | Australia | 29% | N.A. | 29% | 29% | N.A. | N.A. |
| All jurisdictions | 29% | 25% | 45% | 45% | |||
| All jurisdictions (excl. UK/US) | 23% | 23% | 50% | 51% | |||
| Jurisdictions with public codes (excl. UK) | 17% | 13% | 56% | 66% | |||
| Jurisdictions with private codes | 37% | 31% | 38% | 35% | |||
As would be expected, there is some variation in the level of institutional shareholder ownership across jurisdictions and there are a handful of jurisdictions in which institutional investors collectively own a sizable minority of shares in listed companies. For instance, as reported in Table 1.4, in Canada and Australia the mean share ownership of institutional investors is 43% and 29%, respectively, while block holders are fading. It is, therefore, likely that in these jurisdictions institutional investors may, in some cases, possibly be able to make use of company law rights to block corporate actions pursued by controlling shareholders.Footnote 135 However, in jurisdictions where the collective shareholder ownership of institutional investors is in the small single digits, the company law remedies available to block actions pursued by the controlling shareholders and the benefits of acting collectively will be considerably more limited.
While the variation in the size of the minority share ownership stake of institutional investors is meaningful, it should not obscure the reality that institutional investors acting primarily as minority shareholders does not fit the assumption embedded in the UK Code or its ambitious goals. It does not provide institutional investors with the legal rights to steward companies if they act collectively – let alone to be ‘guardians of market integrity’ who ‘respond to market-wide and systemic risks’, as contemplated in the UK Code 2020.Footnote 136 Nor does institutional shareholders collectively acting as minority shareholders fit with the goal of solving the systemic problems of excessive risk taking and short-termism revealed by the GFC in UK listed companies – which was the impetus behind the UK Code 2010’s goal of transforming rationally passive institutional investors into actively engaged shareholder stewards.Footnote 137 However, in the UK’s corporate governance reality, where institutional investors collectively own a sizable majority of shares, the UK Code’s aim of transforming institutional investors into the solution for the UK’s core corporate governance – or even societal – problems makes sense.
The rationale for transplanting a UK-style stewardship code to other countries appears even more curious considering the game-changing fact that in most countries, with the notable exception of the UK/US, a single or small group of block-shareholders, who are not institutional investors, controls the voting rights in most listed companies. These controlling shareholders – who are often wealthy families or individuals, the state, or other corporations – have the voting rights and the economic incentive to control the corporate governance in their respective listed companies.Footnote 138 As ‘stewardship’ has become a global buzzword to signify good corporate governance, some of these rationally active, non-institutional, controlling-block shareholders have begun to label themselves as ‘good stewards’ of the companies they control – giving life to the third conception of stewardship explained earlier.Footnote 139 However, nothing in the history, policy rationale or content of the UK Code suggests that it was ever intended to apply to such controlling shareholders.Footnote 140
Nevertheless, as is clear from Table 1.4, listed companies are dominated by non-institutional controlling shareholders in most non-UK jurisdictions that have UK-style stewardship codes: in 50% of companies outside the UK/US the three largest shareholders control a majority of shares, whereas in the UK and the US it is 12% and 4%, respectively. Moreover, if one considers smaller block shareholders and the mechanisms they use to maintain control, outside of the UK/US, in most jurisdictions most listed companies are controlled by controlling shareholders.Footnote 141 Therefore, UK-style codes in jurisdictions with controlling shareholders are legal misfits as they target institutional shareholders (the original conception of stewardship), rather than non-institutional controlling shareholders (the third conception of stewardship), as the stewards of listed companies – which fits the corporate governance realities in the UK/US, but not in almost any other jurisdiction with a stewardship code.
A final important observation relates to the origin of stewardship codes. As we have seen,Footnote 142 stewardship codes have been issued either by government or quasi-government bodies (public or governmental codes) or by private organizations composed of, or supported by, mainly institutional investors (private or institutional investor codes). It is clear from Table 1.4 that private codes – as opposed to public codes – have tended to arise in non-UK jurisdictions in which institutional investors control a greater percentage of the stock market and controlling-block holders are less pronounced.
The average percentage of stock market capitalization owned by institutional investor ownership in non-UK jurisdictions with private codes is 37% – compared to 17% in non-UK jurisdictions that have public codes – while the average percentages of block-holders in the two camps are 38% and 56%, respectively.Footnote 143 This makes sense because in jurisdictions where institutional investors have a greater ownership stake, they will have a greater incentive to act collectively as they may be able to use their collective power to form a significant minority block of shares which may give them access to important veto rights. In addition, in jurisdictions in which institutional shareholders have a larger presence, they may have a greater ability to organize and to pre-empt government regulation by creating a self-regulatory stewardship regime. This is not surprising: institutional investors have the incentives to adopt a code as a pre-emptive device in order to maintain self-regulation.Footnote 144 In the absence of controlling shareholders, institutional investors have not only the incentives, but also the abilities, to adopt such a code and formalize collective engagement.
In sum, a game-changing fact, which was entirely overlooked prior to this book project, is that UK-style stewardship codes have been largely transplanted into jurisdictions in which institutional investors are collectively minority shareholders and controlling shareholders predominate, making them ‘legal misfits’.Footnote 145 What is more, this legal misfit has been mainly driven by government or quasi-government bodies rather than by private actors. This fact, however, has not rendered the impact of the global proliferation of UK-style stewardship codes nugatory. To the contrary, as we explain in Section 1.4.4, these misfitted UK-style stewardship codes have served diverse, often jurisdictionally contingent functions – many of which would have been beyond the wildest imaginations of the original drafters of the UK Code. Understanding these functions, which prior to this book project were entirely overlooked, is necessary to have an accurate picture of the global proliferation of shareholder stewardship. It is to this that we now turn.
1.4.4 Jurisdictional-Contingent Drivers of Global Shareholder Stewardship
1.4.4.1 Politics as an Important Driver of Public Stewardship Codes
In the binary world of private versus public codes, one may have to look for jurisdictional-contingent factors to explain the observed paradox of the proliferation of UK-style stewardship codes in terms of formal design and content but not in terms of enforcement. One such factor in the case of the adoption of UK-style codes by governmental and quasi-governmental bodies has been political motives. Several chapters in this book provide rich examples of the role of politics as a driver of the adoption of public stewardship codes, especially in Asia where, as we have seen,Footnote 146 all stewardship codes have been issued by governmental or quasi-governmental bodies. Sometimes governments appear to implement a UK-style code as it is considered the gold standard of stewardship, to signal that their jurisdiction complies with global standards of good corporate governance. Sometimes adopting a UK-style code demonstrates the government’s responsiveness to an economic crisis or a scandal by adopting a corporate governance mechanism which almost universally has been seen as an indicium of good corporate governance. Sometimes a UK-style code allows the government to promote its own political agenda, with the code serving as a cover for policy channelling.
First, contributions in this book reveal that in some Asian jurisdictions the adoption of UK-style codes by governmental or quasi-governmental bodies has been driven by the government’s motive to signal that their jurisdiction embraces cutting-edge global norms of ‘good’ corporate governance. The rationale behind such government action is to attract foreign investment by bolstering the jurisdiction’s image and to strengthen the local investment market, without significantly changing how the jurisdiction’s corporate governance actually works in practice – a corporate governance reform strategy which is described in Chapter 14 as ‘halo signalling’.Footnote 147 As halo signalling does not involve the corporate governance mechanism effecting actual change, importance is placed on the jurisdiction’s formal adoption of a mechanism that is considered to be the global gold standard of ‘good’ corporate governance.
As we have explained, where stewardship is concerned, the gold international standard is the UK Code 2010/2012.Footnote 148 The fact that the UK Code 2010/2012 is a poor fit in jurisdictions with controlling shareholders is irrelevant for the public drafters of stewardship codes, as the impetus for adopting a code is to signal formal compliance with the gold standard, and not to effect actual change. That public stewardship codes follow the UK model only as far as the formal design and content are concerned but deviate in terms of enforcement is a further indicator of signalling. Adopting the UK stewardship model only as far as its formal content is concerned, while turning its scope and compliance to voluntary standards and sometimes no obligations at all, makes it easy for governments to signal compliance while they limit their code’s bite.
As this book shows, the two jurisdictions where signalling appears to have played the most significant role as a driver in the adoption of UK-style public stewardship codes are Hong Kong and Singapore.Footnote 149 Both jurisdictions adopted a code that mirrors the core concept, primary content and text of the UK Code 2010/2012, but they significantly deviated from the UK model of enforcement.Footnote 150 In both jurisdictions, for reasons explained elsewhere,Footnote 151 the codes served well the purpose of halo signalling. But that is not to say that signalling is a phenomenon unique to Asian ‘International Financial Centres’.Footnote 152 Rather, there is some evidence that, in other jurisdictions with public codes, adopting the UK model was at least in part driven by an attempt to signal compliance with global corporate governance standards. For instance, the introduction of the Taiwanese Code by governmental bodies appears to be an attempt to signal conformance with Anglo-American-cum-global norms of ‘good’ corporate governance.Footnote 153 A similar force could be at play in Thailand where General Prayut Chan-o-cha’s military junta, which took power in a coup d’état a few years earlier, issued a UK-style code in 2017 to send a message to the world that Thailand was at the cutting-edge of global trends in ‘good’ corporate governance.Footnote 154 Outside Asia, the introduction of a public stewardship code in Kenya has also been described as a political attempt to align with global best practices.Footnote 155
Second, beyond halo signalling, another significant driver for the adoption of a UK-style public code is the political desire of the government to indicate its responsiveness to an economic crisis or scandals by adopting a corporate governance mechanism which almost universally has been seen as an indicium of good corporate governance.Footnote 156 The Japanese Code stands out here. As is thoughtfully explained in Chapter 10 of this book, the Japanese Code was adopted as a key part of the Abenomics strategy to reinvigorate the Japanese economy with the aim of transforming Japanese institutional investors into active stewards in close ties with their overseas counterparts. But serving these political desires via the medium of a UK-style code appears to promote, or at least incentivize, a more short-termist culture among Japanese investors which is antithetical to the original corporate governance–oriented conception of long-term active monitors which is at the heart of the UK Code 2010/2012.Footnote 157
Third, the adoption of a UK-style code by a public body can serve as a cover for policy channelling. Chapter 11 insightfully illuminates that the Korean Code may have been adopted by Korean financial regulators to exert their political agenda and power over private industry. As the authors explain, there is reason to believe that the government has used its influence over the Korean National Pension Service (NPS) – which is the largest institutional investor in Korea and the third-largest public pension fund in the world – to execute a strategy which has been labelled by its critics as ‘pension-fund socialism’ under the guise of stewardship.Footnote 158 Malaysia’s embrace of a UK-style stewardship code may have also been motivated by concerns to cover policy channelling. As illuminated in Chapter 15, the Malaysian government’s position as the controlling shareholder in many of the country’s most powerful investment companies and listed companies has inextricably linked stewardship and the state. As it is explained, there is a real risk that Malaysia’s government is using a UK-style code to achieve its political agenda, such that it is unclear ‘whether the interests of the state are aligned with those of the asset owners, the asset managers and, more importantly, those of the ultimate beneficiaries or clients which are at the end of the investment chain’.Footnote 159
These examples illustrate how the adoption of UK-style stewardship codes by public bodies may have more to do with a government’s desire to execute its political agenda than corporate governance – making the fit of the UK-style code with the jurisdiction’s corporate governance context a subsidiary concern. Beyond politics, however, it appears there are other significant drivers for the adoption of UK-style stewardship codes by both public and private bodies, which will now be explored.
1.4.4.2 Legal Forces as an Important Driver of Stewardship Codes: Complements, Substitutes and Accents
Legal forces have always been an important driver for the adoption (or non-adoption) of soft corporate governance standards. Central to a legal pluralist perspective of corporate governance is the observation of how mandatory and soft laws may operate in complementary or substitute fashion and how corporate governance norms today contain elements of both hard and soft law, or mandatory and voluntary rules.Footnote 160 As Katelouzou (forthcoming) has thoroughly explained elsewhere, rules relating to shareholder stewardship are mixed in nature: some rules are laid down in soft-law stewardship or corporate governance codes, but others (including rules about investment management and shareholder rights) are laid down in statutory instruments.Footnote 161 Stewardship codes, therefore, are part and parcel of a broader, multilayer regulatory framework of mandatory and soft rules relating to corporate governance and investment management, described as ‘stewardship ecology’.Footnote 162 The adoption of UK-style stewardship codes both by public bodies and by private actors appears to be – at least in part – driven by these legal forces.
Sometimes stewardship codes may be introduced to complement mandatory rules or other soft-law standards. Sometimes stewardship codes – especially when they emanate from private actors – may be introduced to fill existing gaps in mandatory rules and substitute for ‘harder’ state-emanated regulation. But, at the same time, mandatory rules may substitute the need for stewardship codes. Sometimes stewardship codes may reinforce and accent distinctive legal features.
First, it appears that the adoption of UK-style stewardship codes has been largely motivated by a desire to complement the jurisdiction’s existing corporate governance code.Footnote 163 The origins of this complementarity can be found in the UK Code 2010/2012 itself. The Preamble of the UK Code makes it clear that one of its aims is to establish a framework of ‘effective stewardship’ for institutional investors which works in parallel with the principles of the UK Corporate Governance Code that underlie ‘an effective board’ and thereby support (in place at the time) the comply-or-explain system.Footnote 164 In addition, under Principle 3 of the UK Code 2010/2012, monitoring companies includes, among other things, evaluating whether companies’ boards adhere to the UK Corporate Governance Code and thus supporting the conformity with good corporate governance standards.Footnote 165 In other words, institutional investors are expected to assess the company’s displayed compliance with the UK Corporate Governance Code as part of their stewardship obligations and give effect to the (then existing) comply-or-explain enforcement model. This need to complement good corporate governance principles – which are mainly aimed at increasing the effectiveness of the board of directors by transforming institutional investors into ‘good stewards’ to be a catalyst for the comply-or-explain regulatory model – can be found in many non-UK codes.
For example, the Danish Code, which was introduced by the same governmental body that adopted the Danish Corporate Governance Code – the Danish Committee on Corporate Governance – works in a ‘parallel’ fashion to and supports its corporate governance counterpart.Footnote 166 The Dutch Code explicitly acknowledges its complementarity to the Dutch Corporate Governance Code. The Guidance to Principle 1 of the original Dutch Code 2011 recommends to investors belonging to Eumedion – the institutional investor association that introduced the Dutch Code – to ‘make a thorough assessment of the reasons provided by the company for any non-compliance with the best practice provisions of the Dutch corporate governance code’.Footnote 167 In a similar vein, the Dutch Code 2018 highlights that the ‘Code should be read in conjunction with the Dutch Corporate Governance Code’.Footnote 168
Outside Europe, this complementarity is recognized by the Kenyan Code which aims, among other things, to reinforce the implementation of the ‘apply-or-explain’ system of the Kenyan corporate governance code.Footnote 169 South Africa is also a prime example of this complementarity. As Chapter 22 skilfully highlights, the South Africa Code 2011 interacts very closely with the King IV report. In Asia, the Thai Code, in a fashion similar to the UK model, provides that, as part of monitoring, institutional investors should ensure that the board of directors and the sub-committees of their investee companies conform to the Thai Corporate Governance Code.Footnote 170 In a less direct way, the Japanese Code 2014 recognizes in its Preamble that ‘the function of the board and that of institutional investors as defined in the Code are complementary and both form essential elements of high-quality corporate governance’.Footnote 171
It seems, therefore, that the adoption of UK-style stewardship codes by both public bodies and private actors has been – at least in part – driven by the perceived need to complement and support the implementation of the jurisdiction’s corporate governance code and give effect to the comply-or-explain system. Beyond that, complementarity runs on other levels too. For instance, non-UK stewardship codes have been adopted to complement various soft and hard law stewardship-related rules, as in the case of the Brazil Code 2016, or investment management rules, as in the case of the South African Code 2011.Footnote 172
Within the EU, another legal factor that appears to impact the adoption – but also the rejection – of the UK stewardship model is the introduction of the amended Shareholder Rights Directive (SRD II) in 2017.Footnote 173 As Chiu and Katelouzou explain elsewhere, the SRD II has largely followed the steps of the UK Code 2010/2012 in introducing an engagement policy for all institutions and a form of disclosure-based regulation of institutions’ investment policies and strategies, their arrangements with asset managers, and the accountability of asset managers to institutions.Footnote 174 Despite the fact that the SRD II does not adopt the term stewardship and refers, rather, to ‘shareholder engagement’, the European notion of shareholder engagement includes monitoring, collaborative activities, conducting dialogue with companies and exercising voting rights and is thereby consonant with the UK-style stewardship.Footnote 175 The SRD II was adopted in 2017, but its first version started to be negotiated in 2014 – long before the spike in the evolution of stewardship codes which Chapter 30 dates as being between the years 2016 and 2017.Footnote 176 Katelouzou and Sergakis have elsewhere illuminated that the stewardship provisions of the SRD II were transposed in a literal and minimalistic fashion despite divergent national specifications.Footnote 177 This was attributed in part to the more apt soft, flexible and mostly bottom-up stewardship codes contained in private stewardship codes in the EU.Footnote 178
Whereas it is plausible that the direction of causality runs from earlier soft stewardship codes to the mandatorily transposed SRD II rules, one cannot exclude the possibility that the relationship between the SRD II and national stewardship codes is not unidirectional and can go both ways. The case of the Netherlands is indicative here. Previous literature suggests that because of the pre-existing Dutch Code 2011, the SRD II was transposed in the Netherlands in a literal and minimalistic fashion.Footnote 179 But, at the same time, the revised Dutch Code 2019 can be viewed as the direct result of the implementation of the SRD II in the Netherlands.Footnote 180 Of course, this two-way exchange of stewardship norms is more difficult to be found in other EU member states with stewardship codes introduced by investor associations with less lobbying power than the Dutch Eumedion.Footnote 181 For instance, in Italy, although the SRD II was transposed in a literal and minimalistic way,Footnote 182 this transposition took place separately from the revisions of the Italian Code, which itself was introduced by an association of asset managers (Assogestioni), and Chapter 6 claims that the SRD II transposed rules do not seem to have a positive impact ‘in enhancing the relevance’ of the Italy Code (2016).Footnote 183
The impact of the SRD II on the appetite of EU member states with no stewardship code, like Germany, to introduce a code is even more questionable. Chapter 9 argues that the SRD II may act as a substitute and thereby make the introduction of a domestic code nugatory. A substituting impact upon domestic codes may also be found in Denmark. Chapter 7 contends that, as a consequence of the implementation of the SRD II engagement provisions, which are very similar to the Danish Code, the Danish Committee on Corporate Governance – the drafter of the Danish Code – made tentative steps to phase out the Code and weaken its enforcement mode.Footnote 184 That the jurisdiction of origin of the global stewardship model (the UK) – which has provided the yardstick and the bedrock of the SRD II – is no longer part of the EU may further negatively impact the future diffusion of the UK model in the EU.Footnote 185
Finally, the adoption of a UK-style code may be motivated by and accent distinctive legal rules. Italy serves as a prime example in this regard. We have already highlighted the paradox of the origins of the Italian code as a private code introduced by an Italian investment management association despite the low presence of institutional investors in Italian public forms and the predominance of controlling shareholders.Footnote 186 Chapter 6 skilfully explains this paradox by reference to the so-called slate (or list) voting system which enables minority shareholders to appoint at least one director on the management and statutory auditor boards. Data show that a significant number of minority-appointed directors has, in recent years, been appointed by institutional investors co-ordinated by Assogestioni, the drafter of the Italian Code.Footnote 187 This suggests that a UK-style code can still fit in a jurisdiction with controlling shareholders if there are other distinctive legal forces that can foster the role of minority institutional investors.
While it is too early to reach a conclusion about the symbiosis of stewardship rules and principles, what our analysis makes clear is that the shareholder stewardship landscape is complex and multilevel and that legal forces can highly influence the adoption and sometimes rejection of UK-style stewardship codes.
1.4.5 ESG Movement: Enriching the UK Model
In addition to jurisdiction-specific factors, a driver which more recently appears to motivate the adoption of both public and private codes is a focus on ESG considerations in investment management. For public codes, the increased focus on ESG increasingly garners political support in many jurisdictions. The increased focus on ESG in private codes also makes sense as ESG is now an important part of the business model for an increasing number of institutional investors in response to the increasing demand by clients.Footnote 188
Indeed, the rise of ESG as a factor mentioned in the latest versions of stewardship codes globally is striking. The original UK Code 2010/2012 hardly mentions ESG, and the South African Code 2011 was an outlier among first generation non-UK codes with the core focus on ESG.Footnote 189 Building on the UN Principles for Responsible Investing, the South African Code 2011 includes five principles aimed at incorporating sustainability and ESG into investment management.Footnote 190 But the South African Code – despite deviating from the UK model along all three of the dimensions identified earlier (i.e., core concept, primary content and text/language)Footnote 191 – did not manage to establish itself as a global stewardship leader.
Nevertheless, Chapter 26 reveals that 84% of the latest versions of stewardship codes now refer ‘at least once to ESG factors’ and that only four current codes (i.e., Danish Code 2016, Korean Code 2016, Swiss Code 2013 and US Code 2017) do not mention ESG factors at all.Footnote 192 This comports with our hand-collected data showing that ten non-UK codes include at least one principle on ESG.Footnote 193 Chapter 26 also, however, highlights that several of these codes mention ESG only in a cursory manner for reasons that have more to do with politics and attracting foreign investment than a genuine commitment to ESG.Footnote 194 This is reinforced by the fact that only a minority of codes link the goal of implementing ESG with fiduciary duties. As Chapter 26 notes, ‘from the nineteen codes that explicitly link stewardship practices to the fulfilment of investors’ legal duties, only four codes … clearly regard the consideration of ESG factors as part of institutional investors’ fiduciary responsibility’.Footnote 195 These four codes are three jurisdictional codes – the Brazil Code 2016, the Kenyan Code 2017 and the Thai Code 2017 – and the latest version of the intra-jurisdictional ICGN Code 2016.Footnote 196
The UK Code 2020, which has itself manifested an expanded, ‘enlightened’ vision of stewardship with its pivot to ESG, makes no mention of fiduciary duties.Footnote 197 This point is important because investor or beneficiary welfare is still the goal of stewardship in the second version of the UK Code.Footnote 198 We will discuss the potential of ESG as a catalyst for stewardship and whether the UK Code 2020 will serve as a new model in this regard, but what is clear is that the rise of the ESG movement provides another possible rationale for the global proliferation of UK-style codes. Public and private codes enriched with references to ESG – sometimes passing but other times more extended – find it easier to adopt the UK-model.
1.5 The Future of Global Shareholder Stewardship: Challenges and Possibilities Revealed
As illuminated in this chapter and detailed in this book, although formally UK-style stewardship codes have been transplanted around the world, the jurisdiction-specific reasons which have driven their adoption, the way in which they have been enforced and the local corporate governance and legal environments in which they exist have combined to produce varieties of stewardship that perform diverse functions – which would have been beyond the wildest imaginations of the original drafters of the UK Code. By revealing these varieties of stewardship, this chapter and this book not only illuminate the untold complexity of global shareholder stewardship but also reveal the diverse roles that it plays – or, perhaps more importantly, does not play – in different jurisdictions around the world.
Despite this diversity and complexity, if we take a step back, there are two features of shareholder stewardship that appear to present serious challenges to its utility globally: (1) lax enforcement regimes designed to change the behaviour of institutional investors in ways that are often contrary to their business models; and (2) a regulatory design that is premised on institutional investors collectively holding a majority of shares in most listed companies when, in fact, they most often are collectively minority shareholders. These two ubiquitous features suggest that the future of shareholder stewardship is bleak as they appear to seriously undercut its ability to solve most firm-specific or systematic corporate governance problems in most jurisdictions around the world.Footnote 199 However, the rise of ESG as a recent focal point of stewardship appears to present a hopeful possibility for its future. This is because it presents a way to overcome the two main challenges to shareholder stewardship and to be part of the burgeoning ESG movement, which may become a mega-trend in the foreseeable future. Providing a more detailed explanation of these two serious challenges and ESG as the possible future of stewardship is what we will now do.
In terms of the first challenge, since the inaugural UK code was released in 2010, the most widely cited feature for its ineffectiveness has been the lax nature of its enforcement regime. This critique was widely discussed and well-known among academics and pundits within the UK prior to this book project. Indeed, as explained earlier, this critique drove UK regulators to make several amendments to the UK’s enforcement regime, moving it towards a more mandatory approach, which now borders on hard law.Footnote 200
This chapter and book project, however, reveal that the enforcement regimes for stewardship codes globally are substantially laxer than the UK’s regime – with the vast majority being entirely voluntary in scope and a significant portion requiring institutional investors to do nothing at all. This revelation is critical as there is convincing theoretical and empirical evidence that it is contrary to the business models of most institutional investors to actively engage in shareholder stewardshipFootnote 201 – which formally, based on the text of codes, is the stated mission of most stewardship codes globally. The revelation that although almost all jurisdictions adopted the UK’s seven principles – but none have adopted the UK’s stricter enforcement regime – strongly suggests that the UK’s failure to change the behaviour of rationally passive institutional investors will be repeated, in an even more definitive way, globally.
The second primary challenge to shareholder stewardship globally is that even if it succeeds in transforming institutional investors into actively engaged shareholders, this will not result in institutional investors acting as the stewards of most listed companies in most jurisdictions globally. As explained in this chapter and this book, this is because in all major economies, aside from those of the UK and the US, institutional investors are collectively minority shareholders. Moreover, in most jurisdictions globally, most listed companies have a controlling shareholder who is a rationally active steward in most listed companies. As such, in the unlikely scenario where stewardship codes transform institutional investors into actively engaged shareholders, they will most often serve as active minority shareholders – but not shareholder stewards. This reality – that the UK’s shareholder stewardship model is a ‘global legal misfit’ – was entirely unknown prior to this book project.Footnote 202 It also may be the nail in the coffin for institutional shareholder–driven stewardship globally – as it demonstrates why it is currently impossible for institutional shareholders to steward most listed companies outside of the UK/US.
However, before resigning this book to being a detailed autopsy documenting the demise of global shareholder stewardship, the transformation of shareholder stewardship into a mechanism to promote ESG may spark its resurrection. As explained in this book, ESG-focused stewardship may not be hobbled by the economic incentive problems inherent in institutional shareholder–driven stewardship focused on improving corporate governance. This is because ESG-focused stewardship may comport with the business models of an increasingly large portion of institutional investors – nudging in the same direction as their business models (rather than being a mechanism reliant on changing their business models). In addition, institutional investors acting as minority shareholders may be able to effectively give voice to the ESG movement and pressure controlling shareholders into becoming part of the movement. This may make the fact that institutional investors normally are not collectively majority shareholders less relevant. However, as Chapter 28 also highlights, there is the possibility that institutional investors and corporate controllers may all signal a concern for ESG without making any changes in practice. If this occurs, it may continue the widespread trend, revealed in this book, of stewardship being a malleable, inexpensive tool co-opted by institutional investors and governments to serve their own self-interests.
Finally, it is possible, but at present unlikely, that the evolution of global shareholder stewardship may surprise us by adopting one of the other conceptions of stewardship, described at the outset of this chapter, as its main focal point. Rather than being a global legal misfit, jurisdictions may start to realize that an important role for stewardship in most jurisdictions is to serve as a check on controlling shareholder abuse, and amend their codes to focus on the role of institutional investors as collective minorities – but there is no evidence that this is occurring in stewardship codes. However, the analyses of China (Chapter 18) and Germany (Chapter 9) suggest that regulators may be inserting provisions into corporate governance codes to incentivize institutional investors to act as checks on controlling shareholders – bringing some life to this conception of stewardship. Another possibility is that jurisdictions in Asia may follow Singapore and draft codes that make controlling shareholders, rather than institutional investors, a focal point of stewardship – which would be more theoretically sound, but which has its own challenges, as highlighted in Chapter 28. Finally, the investment management conception of stewardship may become more prominent if institutional investors drive the future proliferation of shareholder stewardship globally – which does appear to be the trend that is occurring outside of Asia.
If this book project has taught us one thing, it is to keep an open mind and be humble. Indeed, when we started this project, we never anticipated how much about global shareholder stewardship we would discover – particularly how pervasively it would diverge in practice from the original UK model and how many varieties of shareholder stewardship would emerge. This suggests that the future will likely hold some more surprises that we have not anticipated – it is indeed likely the beginning of history for shareholder stewardship.
