From Shareholder Stewardship to Shareholder Duties: Is the Time Ripe?

In the context of the increasing institutionalisation of global equity, this chapter examines the development of the soft law of shareholder stewardship originating in the UK Stewardship Code and provides insights into its prospective evolution into hard law standards of behaviour for institutional shareholders. We argue that the time is ripe for the development of shareholder duties on the part of institutional investors. We contend that the proposed Shareholder Rights Directive is already taking a step towards that direction by introducing a semi-hard law of a fiduciary duty to demonstrate engagement at a pan-European level. We argue that such a duty is relevant to different European jurisdictions; even if ownership structures are still rather different across the EU there is a shifting balance between traditional blockholders, such as families, and institutional investors

Alternatives within corporate ‘ownership’

Institutional investors have long played a central role in corporate governance but no more so than since the financial crisis of 2007-09. To counteract short-termism, the UK Stewardship Code (Financial Reporting Council, 2010) encouraged investors to engage with the companies in which they invest came first and develop a sense of ownership. France (Commission Europe, 2010; ORSE, 2011) and Germany (discussed in Roth, 2012) took similar actions. The European Union (European Commission, 2011, 2013) included investor engagement in its review of corporate governance, while in the US the Dodd-Frank Act (Library of Congress, 2010) gave shareholders new voting powers and made it easier to raise shareholder resolutions. Some funds that favour this approach now call themselves “shareowners” rather than “shareholders” (Butler & Wong, 2011). This approach assumes shareholders are able to prevent corporate excess and might want to. But obstacles arise from the changing structure and power balances in institutional investment: hedge funds, funds-of-funds, sovereign wealth, and the revival of shareholder activism. This paper takes its cue from a parallel debate about changes in structure and power in corporations. In his paper “After the corporation”, Davis (2013) provocatively argues that scholarship on organizations and industrial policy are based on an outdated conceptualization of the corporation. He describes how companies including Apple, Google, Facebook and Amazon are now giants in the eyes and portfolios of institutional investors. They are giants by market capitalization, but pigmies by employment. The disaggregation of production functions across industries makes the corporation of yore a relic of a previous industrial age. In the US at least, the old giants made up a large part of the social structure and services that has held society together. What happens to the structure of society “after the corporation”, he asks? This paper turns that spotlight on investors. The policy push towards stewardship evokes both a bygone era of family-owned enterprises and corporations controlled by grand financiers. But the patient capital of Warren Buffett is a model few follow, or could. New money from end-investors flows instead into funds-of-funds, detaching the end beneficiary even further from control. Setting public policy to make finance serve the whole economy as envisaged in the “universal owner” (Hawley & Williams, 2007; Urwin, 2011) - modelled – on the large pension fund seems a laudable goal. The economic interests of these investors lie more in long-term social advances than short-term trading profits. But such policy prescriptions may privilege a dying class of investor against other more vibrant ones. Moreover, they may legitimate shareholder primacy at a time when scholars and the rest of the policy framework question it (Armour, Deakin, & Konzelmann, 2003; Bainbridge, 2010; Stout, 2013). We – scholars, policymakers and practitioners alike – need to consider alternatives. Within the system of wealth creation and like the corporation, the traditional investor – that is, the universal owner – remains an important economic force. But what alternatives within the system will work as these investors decline as a social force? What alternatives arise “after the owner”

Ownership, Activism and Engagement: Institutional Investors as Active Owners

Research Question We research two questions: First, why do some institutional investors operate at a distance from organizations seemingly acting only to “exit” and “trade” shares while others actively engage through various means of “voice”? Second, what processes and behaviour are associated with active ownership? Research Findings/Insights We develop the concept of active ownership by drawing on contrasting theories and images of ownership, identifying antecedents of active ownership and distinguishing between alternative processes of active ownership. Theoretical/Academic Implications Alternative pathways to active ownership contrast the distant, sometimes adversarial nature of shareholder activism with an engaged, collaborative relationship between investors and corporations. Few studies examine active ownership as a process of engagement and mutual exchange between parties taking a generally longer-term perspective towards investment in the firm and its affairs. After modelling active ownership, we develop a research agenda of substantive issues ranging from market and institutional conditions, through investment organization and practice, to board and investor relations. Practitioner/Policy Implications Opening up the multidimensionality of engagement and relations between investors and corporations is crucial to promoting good corporate governance. Policymakers and practitioners require such knowledge when anticipating and developing adjustments to institutions of corporate governance. This article is protected by copyright. All rights reserved

Institutional investors and corporate governance

We provide a comprehensive overview of the role of institutional investors in corporate governance with three main components. First, we establish new stylized facts documenting the evolution and importance of institutional ownership. Second, we provide a detailed characterization of key aspects of the legal and regulatory setting within which institutional investors govern portfolio firms. Third, we synthesize the evolving response of the recent theoretical and empirical academic literature in finance to the emergence of institutional investors in corporate governance. We highlight how the defining aspect of institutional investors – the fact that they are financial intermediaries – differentiates them in their governance role from standard principal blockholders. Further, not all institutional investors are identical, and we pay close attention to heterogeneity amongst institutional investors as blockholders