Stewardship Code

Abstract: As the dominant owners of listed companies in many developed markets, institutional investors have been under increasing pressure to act as responsible shareholders. In the UK, Canada, France, the Netherlands, and other markets, stewardship codes have been developed or are under consideration to encourage pension funds, insurance companies, and their asset managers to monitor and engage investee companies actively with the view to protect and enhance shareholder value.However, attempts in recent decades to convince institutional investors to act as active, long-term oriented “stewards” have fallen short. This is because modern investment management practices and characteristics – such as financial arrangements that promote trading, excessive portfolio diversification, lengthening share ownership chain, misguided interpretation of fiduciary duty, and flawed business model and governance approach of passive funds – make genuine stewardship challenging for institutional investors.Although these deficiencies are extremely serious, they may be remedied through a combination of actions, including by eliminating unnecessary intermediation, developing in-house investment management capabilities, revamping performance metrics, and rationalizing portfolio holdings.While not all investors need to be stewards and stewardship obligations should be allowed to be discharged in different ways, tackling the underlying structural impediments will make it easier – and more natural – for asset owners and asset managers to adopt an active, long-term oriented mindset.

Abstract: This paper analyses the role that the Stewardship Codes can play in regulating the voting decisions of institutional investors in the shareholders’ meetings of the companies in which they have invested. The issue is particularly relevant if we consider that the European directive on the rights of the shareholders, starting from the assumption that the lack of interest of shareholders in listed companies has been one of the factors behind the financial crisis of 2007/2008, insofar as it encouraged speculative behavior by managers, assigns to institutional investors the task of monitoring the conduct of directors and exercising their voting rights (‘engagement’) in order to ensure the balanced growth of the value of the shares that is sustainable in the long term. However, this approach of the European legislator comes up against a series of uncertainties. Firstly, the technical meaning of terms such as ‘engagement’, ‘stewardship’ or ‘activism’ of institutional investors is unclear. Secondly, there is doubt as to whether institutional investors have adequate incentives to exercise careful and continuous monitoring of investee companies. At least in the case of traditional investors, in fact, the diversification of investment portfolios and the consequent reduced size of the shareholdings held in each individual company could render the option of disinvestment (exit) more efficient than the option of voting in the shareholders’ meeting (voice), which requires the costly acquisition and processing of information on subjects on the agenda of the various shareholders’ meetings, with the further disadvantage that other investors could take advantage of the increase in value resulting from such activities without incurring any economic burden (so-called ‘free riding’). Finally, one can raise legal doubts about the possibility for multiple ‘activist’ investors to adopt forms of functional coordination to counteract directors’ decisions considered inefficient or to activate insider information channels with the board of directors of the issuer in order to start a dialogue on the strategies that the issuer intends to pursue in the management of the company. Therefore, against the framework described above, this study is aimed at understanding how stewardship codes can stimulate institutional investors’ ‘engagement’ activities. After a brief historical reconstruction of the origins of shareholder activism and clarification of the meaning to be attributed to the definitions of ‘engagement’ (understood as a technique of dialogue with the issuer management) and ‘stewardship’ (understood as a set of initiatives with which asset managers protect the value of their beneficial owners’ investment), this paper tackles both the problem of the lack of engagement incentives, emphasizing the role that the so-called. ‘passive’ funds (i.e. those that pursue investment policies intended to reproduce faithfully the composition of the market indexes) can play in guiding the management of the issuer in a long-term perspective and the problem of the legislative and regulatory rules applicable to institutional investor engagement. In addition, the paper emphasizes the ‘signposting’ function that adherence to a stewardship code is able to develop with regard both to the market and the issuer itself, in terms of the seriousness of the commitment with which the investor intends to foster the prospect of sustainable creation of value in the long term. Finally, certain solutions are analyzed that could help to enhance the role of the stewardship codes: i) the assignment of a rating to the methods with which the code has been implemented by the individual institutional investor; ii) the anticipation of regulatory obligations of transparency concerning these method; iii) the formulation of a rule, based on the law or case law, which promotes the timely and continuous application of the corporate governance provisions as a relevant index of adequacy of the investment processes and organizational structures of the intermediary.

Abstract: Structural reform, the “third arrow” of the Abe administration’s policy for revitalizing the Japanese economy, centers on corporate governance reform. In recent years, Japan has adopted a Stewardship Code in the hopes of invigorating institutional investor engagement, a Corporate Governance Code recommending that Japanese firms have at least two independent directors, and amendments to the Companies Act to create a new board structure option, the so-called Company with an Audit and Supervisory Committee. In this essay, I take preliminary, impressionistic stock of these reforms. First, I comment on the voluntary “comply or explain” and menu-driven approaches adopted in these reforms. While this approach is politically expedient and avoids one-size-fits-all solutions, it has a status-quo bias, particularly if market forces are insufficient to compel Japanese firms to adopt efficient governance structures. Substantively, I suggest that board composition and enhancement of the “monitoring board” – focal points of the reform effort – are not well suited to address the problems of low profitability, cash hoarding, and loss of global market leadership afflicting Japanese firms. While the recent reform package is well intentioned and may produce some improvements at the margins, transformative change will require more fundamental changes to Japanese capitalist institutions, including most prominently the employment system, the labor market, and incentive structures within firms. Corporate governance reflects, rather than determines, a country’s variety of capitalism. Rather than focusing on details such as the number of independent directors a company should have, a bold revitalization policy would address larger questions about what type of corporate capitalism Japan needs and finds acceptable for the twenty-first century.

Abstract: This book presents a practical guide to corporate governance best practice as it applies to publicly quoted and some private companies, as well as the public and not-for-profit sectors. With contributions from a number of leading experts in their fields, the fifth edition gives a straightforward account of governance law, regulations and practice, and the background to this, for in-house counsel and corporate lawyers, as well as company secretaries, accountants, and others working or interested in the world of governance in all its aspects. It is introduced by a preface from Lord Harrison of Chester, Vice Chairman of the All Party Parliamentary Corporate Governance Group. Explains the law relating to corporate governance, what it entails, what the requirements are for compliance, and what constitutes best practice Sets out the framework of the EU agenda on corporate governance Looks at how the board operates and goes through the rules governing board meetings, the legal and regulatory issues concerning directors' remuneration and the topic of diversity at board level Looks at the issues for governance in small and medium-size companies Details public companies' financial reporting and the internal and external audit process and the role of the audit committee Examines the current UK regime for directors' remuneration and explains the remuneration package Explains the legal and regulatory framework in the UK and discusses the roles of the new UK regulatory authorities under the Financial Services Act 2012 Considers practical issues concerning risk management and internal control Reviews the world of D&O insurance in the context of governance Covers shareholder relations as a major driver of corporate governance Clarifies the rules affecting reporting to and communicating with shareholders, their rights and conduct of the AGM Tackles institutional shareholder activism Addresses corporate social responsibilities Identifies the special cases of the public and voluntary sectors, and of pension funds Includes coverage of US law and regulation affecting UK businesses with US interests Takes into account the development of the UK Corporate Governance Code and the establishment of the separate UK Stewardship Code, the Walker review on corporate governance in the banking sector, the amendment of the Companies Act 2006 by the Shareholders' Rights Regulations Examines in detail key guidelines and legislation and contains references and links to a full range of sources and materials giving depth to its coverage Looks at the duties and personal liabilities of directors, including the role of the chairman and non-executive directors, and their remuneration Provides a reference and a day-to-day practical guide to the challenges and hurdles around modern corporate governance Offers a source of primary interest when advising clients or participating in corporate affairs themselves