UK Stewardship Code Research Articles

Do Institutional Investors Play a Meaningful Role in the Effective Implementation of Corporate Governance on SDG?

Objective: Corporate governance is a recent development in Kuwaiti financial markets. Corporate governance principles have created several new concepts, such as the independence of directors, the establishment of various committees, the separation of the CEO from the chairman of the board, and other related principles. This article will discuss how institutional investors can play a meaningful role in the effective implementation of Corporate Governance Principles. The primary aim of this research article is to seek a detailed understanding of the Kuwait Corporate Governance Code (KCGC) as it relates to instituting a special code for institutional investors. Method: Solving legal problems and finding the best way to apply special laws can best be highlighted by using a comparative legal analysis. This methodology allows scholars to compare the laws of several countries to find alternative ways of addressing legal issues. This research article will compare legislation in the developed market in the UK to evaluate its potential effectiveness in averting future problems and bringing a better understanding of this subject in Kuwait. Result & Conclusion: The institutional investor plays an influential role in increasing the effectiveness of the principle of commitment to the ‘Comply or Explain’ regime. In the UK, the stewardship code for financial institutions was issued to give them control and responsibility over the application of the governance system. The article suggests that institutional investors should play a more active role in insisting on the application of corporate governance principles. It considers the ‘Comply or Explain’ regime and how it is being used effectively by companies backed by institutional investors. In addition, a new corporate governance code for institutional investors should be developed, similar to the UK Stewardship Code.

International best practice and a revised Code for Responsible Investing in South Africa

The much anticipated Second Code for Responsible Investing in South Africa (‘CRISA 2’) was published in September 2022. This article explores the evolution of the soft-law environment in which the code operates and reaches the conclusion that the revision was both timely and necessary. A comparison between CRISA 2 and recent trends in investor stewardship codes and regulation shows that CRISA 2 has kept pace in some respects but still lags in others. The move to ‘apply and explain’ falls in line with King IV and the approach of the UK Stewardship Code 2020. The extension of its application to all investment types rather than solely shares is an improvement. The code retains its focus on responsible investment — an aspect only recently adopted internationally in comparative codes — but has opted not to shift to sustainability language despite contemplating this approach in the draft. This may have been a missed opportunity. Aspects that could improve include considering engagement outside of voting; more express duties for service providers, including proxy advisors; the need to ascertain client and beneficiary needs; and more accessible language. Annual reporting and oversight remain with an industry body, which makes greater reporting doubtful.

Debtholder Stewardship

Debtholder stewardship refers to the involvement of corporate creditors in a firm's governance framework with the aim of improving corporate decision‐making. This article develops the theory of debtholder stewardship by identifying the mechanisms of debtholder influence, assessing their effectiveness in modern capital markets, and outlining the implications of this analysis for investor stewardship and regulatory efforts to support it. The impetus of this study is the expansion of the UK Stewardship Code across a broader range of asset classes, stewardship activities, and topics. The code has moved away from the traditional focus on shareholders by adding investors in other assets to the list of the stewards of corporate activities. Also, the revised concept of stewardship covers broader topics, including environmental, social, and governance (ESG) factors. But our understanding of debtholder stewardship, especially on sustainability matters, is inadequate. This article explains whether corporate creditors, both public and private, can promote responsible business practices through the stewardship of borrowers.

Financial return or social responsibility? An investigation into the stakeholder focus of institutional investors

AbstractSince the financial crisis, regulators have put emphasis on encouraging institutional investors to take their governance responsibilities more seriously. In the UK, the Stewardship Code was introduced to enhance the engagement of institutional investors with shareholdings in UK listed companies. In the literature, institutional investors have been predominantly conceptualised as owners, although a number of authors have rejected this view, arguing that traders would be more appropriate. The UK Stewardship Code adds a third view: the institutional investor as steward. The literature generally considers the stewardship concept to be the ownership role combined with wider stakeholder responsibilities. By focussing primarily on this new stakeholder element, this study examines empirically the new stewardship concept by undertaking a content analysis of the published Stewardship Statements of 81 asset managers. The results find support for both the ownership and stewardship role but also highlight significant variations in practices that point toward different competitive strategies.

The Emperor's New Code? Time to Re‐Evaluate the Nature of Stewardship Engagement Under the UK's Stewardship Code

AbstractJohn Kingman's review of the Financial Reporting Council (FRC) doubted the effectiveness of the UK's Stewardship Code in encouraging informed and engaged stewardship by institutional investors of the companies in which they invest (issuers). Accordingly, the FRC updated the Stewardship Code in 2020 in a final bid to prove its effectiveness and relevance, and, in particular, to enhance issuer‐specific engagement by institutional investors. The update has enhanced the reach and substance of the Code. However, the legal, regulatory, contractual and competitive environment in which institutional investors exist will constantly forestall soft‐law attempts to foster greater issuer‐specific engagement, a point perhaps tacitly acknowledged by the 2020 Stewardship Code with its wider scope. Instead, in relation to engagement, stewardship disclosure should focus on the types of engagement that institutional investors are motivated to exercise in practice, such as engagement in response to hedge fund activism, and engagement on systemic risks.

Sustainable Corporate Governance: A Way Forward?

Abstract This article looks at proposals to improve sustainable corporate governance of companies. These include: how to deal with shareholder primacy; a proposed requirement for companies to have an overarching purpose “to create sustainable value within planetary boundaries;” a directors’ duty to promote the undertaking’s interests to fulfil its overarching purpose; a directors’ duty to balance stakeholders’ interests; a duty to undertake a due diligence sustainability assessment; company and director liability for breaches; stakeholder enforcement of directors’ duties and public enforcement of directors’ duties. It considers problems with the proposals. It suggests alternative ways to make companies’ corporate governance more sustainable, including: improved corporate reporting relating to engagement with key stakeholders and how this contributes to the company’s long-term sustainability; better viability reporting by companies; reporting on capital allocation; better stewardship similar to the UK Stewardship Code 2020; more collaborative engagement by shareholders with companies in a manner similar to that promoted by the UK Investor Forum; making requisitioning of resolutions work better in practice; and, possibly, a vote on whether the company is creating sustainable value in the long term (a say on sustainability).

A Review Paper on Governance for Takaful Operators (Islamic Insurance Companies)

The article reviews past literature on the governance aspect of takaful operators. This aspect has been given limited attention in literature on Islamic finance compared to other components such as Islamic banking and Islamic capital market. Therefore, major articles concerning governance issues of takaful operators are discussed and special consideration has been given to the UK Stewardship Code and the Malaysian Rating Corporation (MARC) guidelines for Islamic financial institutions. Interestingly, this article suggests that the Malaysian Rating Corporation (MARC) guidelines for Islamic financial institutions and the UK Stewardship Code should be used as references in order to develop dedicated stewardship guideline for Islamic financial institutions like takaful operators. The stewardship theory is compatible with the Islamic notion of al-falah. Therefore, by having specific stewardship guidelines for the takaful operators it can further encourage policyholders’ engagement with the takaful operators’ management. Last but not least, this article contributes to discussion in this area especially on the possibility of having a set of stewardship guidelines for the Islamic financial institutions (IFIs)such as takaful operators.

Governing the Purpose of Investment Management: How the ‘Stewardship’ Norm is being (Re)Developed in the UK and EU

From the introduction of shareholder engagement as a ‘norm’ for stewardship, the regulatory governance of investment management conduct has been ramping up. As investment funds and asset managers assume control of increasing global assets under management and enjoy significant allocative power, public interest in the exercise of such power increases correspondingly. It is inevitable that societal and public expectations would be augmented and the governance needs for the industry would rise. This article argues that the UK Stewardship Code 2020 is a ‘graduation’ from an earlier experimental period which focused on the narrower and process-based ‘norm’ of shareholder engagement. The Code has broken new ground by articulating purpose-based steers for investment management, providing the starting point for a type of governance that may come to define the regulation of investment management in the future. Indeed, sustainable finance reforms such as in the EU and UK may provide the crucial kickstart to introducing non-optional integration of sustainability risks and goals into mainstream investment management in due course. Purpose-based governance, albeit in its soft law beginnings, is arguably a new trajectory for calibrating the relationship between private investment management and regulation, reflecting the public interest and expectations for the future of the industry.

The Market for Stewardship and the Role of the Government

In this contribution, we focus on the market for stewardship, as this has been developing in the UK. We observe that the 2020 UK Stewardship Code more clearly than previous stewardship codes (both in the UK and elsewhere) articulates the concept of a market for stewardship. The UK Code 2020 now more openly than before takes into account the position of end-investors and beneficiaries. The hope is that stewardship will be delivered because those whose money is invested ask for it. We agree that stewardship does start with those who contribute the funds invested in the market. The focus on end-investors and beneficiaries is, however, not enough. As this paper explains, by limiting the analysis to these groups, the UK government overlooks the fact that it is itself a financial contributor to the market. A study commissioned by the Competition and Markets Authority (CMA) finds, for example, that 90% of the revenue of investment consultants and fiduciary managers derives from pensions. The government contributes to pension investments through the provision of tax credit. It is a significant financial investor in the market. Tax credit also deprives end-investors and beneficiaries of a financial incentive to oversee asset owners, asset managers and other service providers. We, therefore, suggest that the UK government should act as a steward in relation to its own investment and tailor tax credit to investments that are stewardship active.

한국 스튜어드십과 주주행동주의의 고찰 -영국 스튜어드십 코드의 개정과 주주행동주의-

스튜어드십 코드는 2008년의 세계금융위기의 원인을 ‘소유 없는 회사’에서 찾은 영국에서 제정한 것이다. ‘소유 없는 회사’는 회사의 이사회와 경영진을 적절히 견제하지 못한 기관투자자들에 대한 책임론과 함께 책임투자 원칙을 강조한 것이다. 특히, 국내는 다른 국가와는 다른 독특한 기업환경인 가족경영에서 주주권의 하락과 더불어 기업가치의 손실, 나아가 국가적 신뢰 하락에도 영향을 주고 있는 상황에서 국내 기관투자자의 소극적 주주 활동이 바람직한 방향이 아니라는 반성에 의하여 도입되었다. 게다가, 재벌 기업이라는 특징으로 다른 기관투자자들보다 준정부기관인 NPS의 적극적인 주주 활동이 두드러지고 있다.BR 영국은 스튜어드십 코드를 제정한 이후, 개정과 평가, 인증을 통하여 스튜어드십의 효과를 극대화하고자 하고 있다. 스튜어드십 코드 2020의 개정은 제정 후 7년 만에 이루어진 것으로, 스튜어드십의 개념을 EGS로 확대한 점, 스튜어드십의 대상을 상장 주식으로 제한하지 않은 점, 기관투자자의 스튜어드십 이행설명서의 공시를 강화함을 주된 내용으로 한다.BR 아직 도입 초기 단계인 국내 스튜어드십 역시, 중간 점검을 통하여 더욱 발전된 방향성을 가지고 미래지향적인 스튜어드십 코드의 정착을 위하여 영국 코드 2020은 시사하는 바가 크다.

영국 스튜어드십 코드의 개정과 그 시사점

영국 스튜어드십 코드의 개정과 그 시사점

The Global Diffusion of Stewardship Codes

n today's world, the transfer of laws and regulations between different legal systems is commonplace. The global spread of stewardship codes in recent years presents a promising, but yet untested, terrain to explore the diffusion of such norms. This paper aims to fill this gap. Employing the method of content analysis and using information from 41 stewardship codes enacted between 1991 and 2019, we systematically examine the formal diffusion of these stewardship codes. While we find support for the diffusion story of the UK as a stewardship norm exporter, especially in former British colonies in Asia, we also find evidence of diffusion from transnational initiatives, such as the EFAMA and ICGN codes, as well as regional clusters. We also show that the UK Stewardship Code of 2020 now deviates from these current models; thus, it remains to be seen how far a second round of exportation of the revised UK model into the transnational arena will follow.

英国のコーポレートガバナンス・コード及びスチュワードシップ・コードの改訂の背景・内容とわが国への示唆

英国のコーポレートガバナンス・コード及びスチュワードシップ・コードの改訂の背景・内容とわが国への示唆

The Danish Stewardship Code – The Past, the Present and the Future

Along with companies all over Europe, Danish companies suffered during the financial crisis from 2008 and onward. However, contrasting to what was seen in other Member States, notably in the UK, the post-crisis discussions on who and what caused the crisis only to a very limited extent included the role of the shareholders. Even though the development of the Stewardship Code in the UK, and later the process on the amendment of Shareholder Rights Directive, was followed on the sideline by the Danish Committee on Corporate Governance, stewardship was a concept that was given very little attention in the public. In 2016, the Danish Committee on Corporate Governance adopted a Stewardship Code following a public consultation. The Code is heavily inspired by the UK Stewardship Code, and it consists of seven principles. The aim of the Code is to promote Danish listed companies’ long-term value creation and thereby contribute to maximising long-term return for investors. In this respect, the Stewardship Code shares a mutual purpose with the Danish Recommendations on Corporate Governance, which seeks to ‘support value creation and accountable management, thus strengthening the long-term competitiveness of the companies.’ The Stewardship Code does not intend to establish a uniform approach for institutional investors’ exercise of stewardship activities. Rather, the Code aims to increase transparency as to how the individual investor chooses to exercise stewardship activities. This is emphasised by the application of the comply-or-explain principle. On the face of it, the Danish Stewardship Code is not significantly different from the UK Code. However, as stated above, the rationale behind the Danish Code is mainly linked to the listed companies’ value creation for the good of investors, and the stewardship element that is an embedded part of the UK Stewardship Code, and which builds on fiduciary relations between institutional investors and their beneficiaries, is seemingly missing in the Danish Code. Consequently, the Danish Stewardship Code appears to serve as a parallel to the Recommendations on Corporate Governance aimed at listed companies’ board of directors. The effect of stewardship in Denmark mainly depends on two factors. The first is the regulatory framework, which allows shareholders, and in particular institutional investors and asset managers, to contribute to establishing and maintaining good corporate governance in listed companies. Most important in this respect is the Companies Act which sets the scene for stewardship activities (section 2). The other important factor is that stewardship has to be taken to heart by the institutional investors and asset managers. If they do so, the potential effect may be significant as Danish company law grants shareholders very extensive rights in relation to their influence at the general meeting. However, experience shows that engaging institutional investors and asset managers may be a long haul, and this is further complicated by stewardship in Denmark being a recent development that is closely related to the introduction of the Stewardship Code. Thus, we continue our contribution with a presentation of the Danish Stewardship Code; not only the Code as it stands (section 3), but also its genesis, and the experience with the compliance so far (section 4). The institutional investors and asset managers that have signed up for the Code were required to submit their first report on stewardship in 2018. Given the very limited lifespan of the Code, it is difficult to make any conclusions regarding the development of stewardship in Denmark. However, the past AGM seasons do not leave us with much optimism regarding the effect of the Code, and the emerging question is whether this is likely to change. In this respect, the implementation of the amended Shareholder Rights Directive (SRD II) in Danish law could be a major factor (section 5). Consequently, the final part of our contribution is forward-looking (section 6). We discuss whether the adoption of the SRD II may have an effect on stewardship in Denmark. We argue that it is unlikely due to the many parallels to the existing Stewardship Code. Therefore, new initiatives may be required. In this respect, we discuss whether the corporate governance origin may serve as a catalyst to more and better engagement by institutional investors by establishing a stronger interplay between the Recommendations on Corporate Governance and the Stewardship Code.

Institutional Investor Stewardship in the UK and Malaysia: Functionally Similar, Contextually Challenged

AbstractInstitutional investors are acknowledged as an influential force in markets worldwide. As a result of increased focus on the impact from the investing and shareholding practices of institutional investors, stewardship codes were first introduced in the UK, followed by Malaysia. This article evaluates the theory and practice of institutional investor stewardship in Malaysia through functional and contextual lenses, as juxtaposed against the more established position of stewardship in the UK. Notwithstanding an analogous legal framework for shareholder rights and the textual similarities of the UK Stewardship Code and Malaysian Code for Institutional Investors, the dominance of government-linked investment companies and government-linked companies in Malaysia results in a distinct set of issues in relation to institutional investor stewardship. This article then argues that the stewardship codes are in themselves insufficient in increasing the quality and scope of institutional investor engagement as they fail to address the underlying agency conflicts between the institutional investors and ultimate beneficiaries or clients. In learning from the UK's experience, it is important that Malaysian policymakers pay attention to the overarching structural factors and incentives driving institutional investor engagement alongside the development and take-up of the stewardship code.

Singapore’s Puzzling Embrace of Shareholder Stewardship: A Successful Secret

In the wake of the 2008 Global Financial Crisis, the UK created the first stewardship code which was designed to transform its rationally passive institutional investors into actively engaged shareholders. In the UK corporate governance context, this idea made sense. Institutional investors collectively own a sizable majority of the shares in most of the UK’s listed companies. In turn, if the UK stewardship code could incentivize them to effectively monitor management – to act as “good shareholder stewards” – the managerial short-termism and excessive risk-taking, which were identified as contributors to the GFC, could be avoided. The UK’s idea to adopt a stewardship code sparked a global shareholder stewardship movement. Unsurprisingly, Singapore as a corporate governance leader in Asia, adopted a stewardship code. Based on a superficial textual analysis, the Singapore Code appears to be a near carbon-copy of the UK Code. However, this article, which provides the first in-depth comparative analysis of stewardship in Singapore, demonstrates how Singapore has turned the UK model of stewardship on its head. Rather than enhancing the shareholder voice of institutional investors, shareholder stewardship has been used in Singapore as a mechanism for entrenching its successful state-controlled and family-controlled system of corporate governance. This development has been entirely overlooked by prominent international observers and would be beyond the wildest imaginations of the original architects of the UK Code. Viewed through an Anglo-American lens, this use of “stewardship” may suggest that Singapore has engaged in a corporate governance sham. However, we argue the opposite: it appears to be a secret to Singapore’s continued corporate governance success and provides a much-needed Asian (as opposed to Anglo-American) model of good corporate governance for Asia.

Fiduciary Duty under the Microscope: Stewardship and the Spectrum of Pension Fund Engagement

AbstractUK pension fund trustees’ interpretations of their fiduciary duties may shape pension fund approaches to corporate stewardship and engagement envisioned by the UK Stewardship Code. Data from interviews with pension fund trustees, executives, investment intermediaries and pensions experts reveals interpretive pluralism of the concept of fiduciary duty in the area of pension funds. This article develops a model identifying the spectrum of pension fund engagement, linking interpretations of fiduciary duty to intensity and methods of engagement in practice. The findings help disambiguate the concept of ‘Fiduciary Duty’, highlighting the practical challenges of Stewardship Code application. These insights are relevant to the ongoing revisions of the Stewardship Code and policy clarifications of the nature of fiduciary duty by the UK Financial Conduct Authority. The paper encourages trustees, regulators and others to consider what role pension fund trustees should have in stewardship, which may not be directly relevant to their fiduciary duties as trustees.

The Logic and Limits of Stewardship Codes: The Case of Japan

A stewardship code is a set of principles on how institutional investors should act as shareholders of companies in which they invest. Since the first was adopted by the Financial Reporting Council of the United Kingdom in July 2010, a significant number of countries, including Japan, have followed the lead of the United Kingdom in adopting their own stewardship codes. Although the contents of these codes are not identical, they generally are non-mandatory “comply or explain” rules urging institutional investors to engage more actively with their investee companies by exercising their rights as shareholders. One might find the trend of jurisdictions adopting stewardship codes unsurprising considering the global increase in the ownership stake held by institutional investors in listed companies, and the growing expectation that these investors will play a role in the corporate governance of investee companies. However, if the goal of adopting stewardship codes is to promote better corporate governance in investee companies, then this uniform approach is rather puzzling since it is widely acknowledged that different countries have different share-ownership structures and often face different corporate governance challenges. It may well be the case that the true intention behind adopting a stewardship code could be highly contextual and, contingent on jurisdiction-specific factor. From such viewpoint, this article investigates the true intention behind the adoption of stewardship codes in the United Kingdom and Japan by analyzing not only the text of their principles and guidance, but also the contexts in which they were adopted. The main finding is that there is a divergence between the basic goals and orientation of the Japanese and the UK Stewardship Codes that has been largely overlooked in the literature. Although the term “stewardship” suggests that stewardship codes are premised on the logic of fiduciary duties, which compels a fiduciary to forsake its own self-interest and act in the interest of its beneficiary, the goal of the UK Stewardship Code is different. It aims to restrain excessive risk-taking and short-termism by making institutional investors more responsible to the public. In contrast, the Japanese Stewardship Code aims to change the attitude of domestic institutional investors in order to orient Japanese corporate governance towards the interests of shareholders rather than stakeholders. This goal of the Japanese Code is more compatible with the logic of stewardship than that of the UK Code. At the same time, the Japanese Government considers this goal to be in the public interest of Japan. Another finding of this article is that different stewardship codes have different goals and that this must be taken into consideration when assessing their effectiveness. The success of the Japanese Stewardship Code will primarily depend on how well domestic institutional investors are incentivized to act in the interest of their ultimate beneficiaries and to monitor entrenched management. Conversely, the success of the UK Stewardship Code will likely depend on the extent it can prompt institutional investors to consider the interest of the public and stakeholders other than shareholders. Regulatory interventions might be necessary in both cases, but for different reasons.

Institutional Investor Stewardship in the UK and Malaysia: Functionally Similar, Contextually Different

Institutional investors are acknowledged as an influential force worldwide as a result of their large shareholdings and ownership of public equity. Arising from a focus on their investing and shareholding practices and their impact on the listed companies which they have invested in as well as on the economy and society overall, stewardship codes have been introduced in the UK and Malaysia to promote their role as stewards. The key objective of this paper is to evaluate the theoretical and practical issues relating to the relatively recent phenomenon of stewardship of institutional investors in Malaysia through functional and contextual lenses as juxtaposed against the more established practice of stewardship in the UK. It is argued that notwithstanding a similar legal framework for shareholder rights and substantial similarities with regard to the content of the UK Stewardship Code and the Malaysian Code for Institutional Investors and its status as soft law, the market structure and political economic factors which are unique to Malaysia represent a constraint on the effectiveness of the Malaysian Code for Institutional Investors in shaping the practices of institutional investors in Malaysia. As such, recommendations to address issues pertaining to the stewardship of institutional investors in the Malaysian context would need to take into account the theoretical and contextual constraints, although insights may be gained from examining structural issues in the investment industry in the UK.

The Dialogue between the Chairman of the Board and Investors: The Practice in the UK, the Netherlands and Germany and the Future of the German Corporate Governance Code Under the New Chairman

The dialogue of the board and its chairman with investors is an established practice in many countries, such as the United Kingdom, the USA, the Netherlands, Belgium, France and recently also Germany. In the UK this dialogue covers the whole range of relevant board topics, certainly including good corporate governance aspects such as the composition of the board and the remuneration of the directors as well as good corporate culture and ethics in the corporation. In Germany this dialogue may also take place between the chairman of the supervisory board and institutional investors; this is firmly established in the practice of most of the DAX-30-corporations, and some other corporations follow the trend. This practice is taken up by many codes of good corporate governance, for example in the UK Corporate Governance Code 2014 and the UK Stewardship Code 2012 as well as in the Corporate Governance Codes of France, the Netherlands, Belgium, the USA and since 2017 also in the German Code. The investor dialogue involving the chairman of the board, both in the one-tier and the two-tier systems, is legal and legitimate, but it has three main limits: insider trading and market abuse, company secrets, and equal treatment of the shareholders. The latter limit creates practical problems which are met by the various codes in different ways. While the competence for investor relations is primarily with the CEO viz. the chairman of the management board, the chairman of the (supervisory) board should also be available – within reasonable limits – to discuss supervisory board-related issues with investors. This has been rightly suggested by the German Corporate Governance Code, though it has met with certain doctrinal concerns. In many countries this dialogue is not restricted to the chairman of the board but extends to other board committe chairmen, to the senior independent directors and sometimes to all directors. It can be expected that the chairman of the board’s dialogue with investors will sooner or later not only become a general practice, but that it will also be considered to represent good corporate governance.