Governing the Purpose of Investment Management: How the ?Stewardship' Norm is Being (Re)Developed in the UK and EU

• Author: Iris H-Y Chiu
• Pages: 99-146

Governing The Purpose Of Investment

Management: How The “Stewardship” Norm

Is Being (Re)Developed In The UK And EU

I

RIS

H-Y C

HIU

*

I. Introduction

Since the development of the UK Stewardship Code in 2010, as a result of

both private sector and public sector coordination,

1

the practice of

institutional shareholder engagement has become “normified” for

investment management conduct in the UK and globally. Commentators

show that such “normification” is not limited to the UK, as bodies with

transnational reach such as the International Corporate Governance

Network (ICGN) and European Fund and Asset Management Association

(EFAMA) have also spurred the global normification of shareholder

engagement as stewardship and have influenced the adoption by many

jurisdictions of Stewardship Codes.

2

But over the last decade, a plethora of critiques have been levied at

institutions

3

in relation to how the expectations of stewardship have been

met (or otherwise). Such critiques range from theoretical discussions of the

nature of engagement (or lack of incentives to so engage),

4

to empirical

* Professor of Corporate Law and Financial Regulation, University College London. The

support of the UCL Centre for Ethics and Law is gratefully acknowledged. The article covers

legal developments up to the end of June 2021. It is noted that the UK has since consulted on a

Green Taxonomy similar to the EU’s reforms discussed in Section C of this article.

1. See generally HM G

OVERNMENT

, G

REENING

F

INANCE

: A R

OADMAP TO

S

USTAINABLE

I

NVESTING

(Oct., 2021). The Code was adapted from the Institutional Shareholder

Committee’s statement on the responsibility of institutional shareholders. It was introduced by

the Financial Reporting Council. See Iris H-Y Chiu, Turning Institutional Investors into

‘Stewards’ – Exploring the Meaning and Objectives of ‘Stewardship’, 66 C

URRENT

L

EGAL

P

ROBS

.

443, 444 (2013) for a general introduction and critical discussion of the meaning of stewardship.

2. Dionysia Katelouzou & Mathias Siems, The Global Diffusion of Stewardship Codes 8 (Eur.

Corp. Governance Inst., Working Paper No. 526, 2020).

3. Pension and mutual funds, their asset managers, excluding alternative funds such as hedge

or private equity funds which employ different strategies. See Simon CY Wong, Why

Stewardship is Proving Elusive for Institutional Investors, 1 (Nw. L. & Econ. Research Paper No.

10-28).

4. See Ronald J. Gilson & Jeffrey N. Gordon, The Agency Costs of Agency Capitalism: Activist

Investors and the Revaluation of Governance Rights, 113 C

OLUM

. L. R

EV

. 863, 867 (2013) (on

institutions’ reticent corporate governance roles, contrasting with shareholder activists); see also

Lucian Bebchuk & Scott Hirst, Index Funds and the Future of Corporate Governance: Theory, Policy,

and Evidence, 119 C

OLUM

. L. R

EV

. 2029, 2037 (2019) (on the lack of incentives to engage by

index funds).

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research findings showing that engagement is feeble,

5

symbolic,

6

or makes

little difference to corporate behavior

7

or performance.

8

The UK Kingman

Review,

9

which was commissioned to examine the role of the Financial

Reporting Council (FRC),

10

also levied critique at the Stewardship Code,

stating

A fundamental shift in approach is needed to ensure that the revised

Stewardship Code more clearly differentiates excellence in stewardship.

It should focus on outcomes and effectiveness, not on policy statements.

If this cannot be achieved, and the Code remains simply a driver of

boilerplate reporting, serious consideration should be given to its

abolition.

11

The FRC issued a majorly revised Stewardship Code in 2020.

12

The UK

Stewardship Code 2020 (“The Stewardship Code”) seems to be a product of

tacit acknowledgment that the earlier normification of shareholder

engagement needs to be refined. As the Stewardship Code 2020 has taken a

markedly different approach from previous iterations, the investment

management community may not be entirely certain what signals are being

sent to them regarding the expectations of stewardship.

13

This article argues

that the earlier normification of shareholder engagement reflects a relatively

narrow understanding of stewardship.

14

This seems to be giving way to an

acceptance of a variety of investment management practices that can also

deliver good stewardship. In this manner, regulators and policymakers seem

5. Jan Fichtner & Eelke M. Heemskerk, The New Permanent Universal Owners: Index Funds,

Patient Capital, and the Distinction Between Feeble and Forceful Stewardship, 49 E

CON

.

AND

S

OC

’

Y

493, 508 (2020).

6. Jun Li & Di (Andrew) Wu, Do Corporate Social Responsibility Engagements Lead to Real

Environmental, Social, and Governance Impact?, 66 M

GMT

. S

CI

. 2564, 2566 (2020); see also

Finchtner, supra note 5, at 509 (for ESG engagement).

7. Li & Wu, supra note 6, at 2584.

8. Matthew R. Denes, Jonathan M. Karpoff & Victoria B. McWilliams, Thirty Years of

Shareholder Activism: A Survey of Empirical Research, 44 J.

OF

C

ORP

. F

IN

. 404, 411 (2017).

9. Sir John Kingman, Independent Review of the Financial Reporting Council 1 (2018), https://

assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/

767387/frc-independent-review-final-report.pdf.

10. Id.; Audit and financial reporting watchdog in the UK, oversight body for the UK

Corporate Governance Code for listed companies and UK Stewardship Code for institutional

shareholders, F

IN

. R

EPORTING

C

OUNCIL

W

HO

W

E

A

RE

, (2021) https://www.frc.org.uk/

getattachment/d5139624-9459-43d1-8e1a-935db13458ec/FRC-Who-we-are-2021.pdf.

11. Kingman, supra note 9, at 10.

12. See The UK Stewardship Code 2020, F

IN

. R

EPORTING

C

OUNCIL

3–4 (Dec. 19, 2020) https:/

/www.frc.org.uk/getattachment/5aae591d-d9d3-4cf4-814a-d14e156a1d87/Stewardship-Code_

Dec-19-Final-Corrected.pdf.

13. Helen Bradley, et. al, The Stewardship Code 2020: is this an opportunity for listed companies to

increase meaningful stakeholder engagement?, B

AKER

M

C

K

ENZIE

2–3 (Nov. 11, 2019), https://

www.bakermckenzie.com/en/insight/publications/2019/11/stewardship-code-2020 [https://

perma.cc/Q2FM-WY4T].

14. Roger M. Barker & Iris H-Y Chiu, C

ORPORATE

G

OVERNANCE AND

I

NVESTMENT

M

ANAGEMENT

: T

HE

N

EW

F

INANCIAL

E

CONOMY

123 (2017).

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2022] GOVERNING THE PURPOSE OF INVESTMENT MANAGEMENT 101

to be moving away from their earlier fixation upon the normification of

shareholder engagement.

The UK Stewardship Code 2020 may be regarded as returning to a point

of re-setting normification. This move has nevertheless been criticized as a

weakening of the Stewardship Code.

15

This paper, however, takes a

different perspective, and regards the Stewardship Code 2020 as providing

for a more holistic platform for norms of investment management conduct

to be developed and scrutinized. The Stewardship Code 2020 is poised to

facilitate discourse for a richer slate of eventual normification in investment

management practices from its starting point as soft law.

16

The meta-

governance provided by soft law can give rise to ripples of discourse and

change in various aspects of investment management conduct and through

the investment chain.

17

Further, we see the Stewardship Code 2020 as being

poised to facilitate discourse that encompasses the range of private,

contractual interests as well as social interests and regulatory objectives.

18

Finally, normification in investment management is far from being

relaxed, although the new Stewardship Code takes a more flexible and

expansive view of investment management practices as stewardship. This is

because the Code is increasingly clearer on the purpose of investment

management, articulating public interest objectives to be internalized within

investment management mandates. The articulation of public interest

objectives in investment management has also been significantly ramped up

in the area of sustainable finance, hence this area of reform may provide a

significant impetus for the increasing framing of investment management

within public interest terms. Arguably the EU has provided regulatory

leadership in this area, and the article discusses the EU’s and UK’s reforms

in sustainable finance and the potential such regulatory initiatives may have

for more purposefully re-orienting investment management practices.

Section A discusses the initial development of institutional shareholder

engagement as a norm in investment management stewardship. This

Section discusses the context and explores the unreconciled and sometimes

contesting narratives that underlie the expectations of shareholder

engagement by institutions. The nature of such unreconciled and contesting

narratives has arguably given rise to vagueness and dissatisfaction regarding

the characterization and conceptualization of engagement behavior. In

unpacking these narratives, the Section shows that assertions that

stewardship is sub-optimally carried out may be founded on certain

assumptions or preferred narratives, without taking into account the rich

context of unreconciled and contesting discourse.

15. Bobby V. Reddy, The Emperor’s New Code? Time to Re-Evaluate the Nature of Stewardship

Engagement Under the UK’s Stewardship Code 32 (Univ. of Cambridge Legal Stud. Rsch. Paper

Series, Paper No. 10/2021, 2021).

16. Id. at 40.

17. Id.

18. See id. at 11.

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