Governing The Purpose Of Investment Management: How The "Stewardship" Norm Is Being (Re)Developed In The UK And EU.

• Author: Chiu, Iris H.-Y.

1. 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 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 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.

Section B explores the Stewardship Code 2020 as a platform to reset the normification of investment management behavior. It argues that the Code should be appreciated against the broader context of governance concerns surrounding the conduct of investment management more broadly. These include (a) market failure findings with regard to relations within the investment chain in the Financial Conduct Authority (FCA)'s Asset Management Market Study; (19) and (b) policy-makers' expectations of the allocative roles of investment managers and funds in relation to economy and market-building, particularly in long-term, (20) sustainable, (21) and developmental finance. (22) This Section argues that the Stewardship Code 2020 articulates certain wider and socially-facing expectations in relation to investment purpose, although it provides only general guidance as to the contractual governance within the investment chain toward these purposes. Although the Code is soft law, it provides a meta-level governance as a starting point to signal policy steering. There is nevertheless potential to influence private implementation and transform investment management practices according to purpose-based norms.

Section C then turns to the governance initiatives for sustainable finance and how these further shape new normification in investment management stewardship. The EU has introduced new Regulations for sustainable finance, (23) and the UK will introduce its own version of regulation for sustainable finance. (24) The EU sustainable finance reforms may go further in re-orienting investment management conduct according to the expectations of "double materiality." (25) Double materiality refers to the importance of attaining sustainable, non-financial outcomes as such and not merely tied to financial outcomes in investment management. (26) We examine whether there is a clear purpose-based pivot in investment management regulation and what this achieves in relation to normification for investment management, or shareholder engagement. This Section reflects on how the articulation of public interest purpose and the regulation of investment management conduct may be taken forward in the future. Section D concludes.

1. THE 'NORMIFICATION' OF INSTITUTIONAL SHAREHOLDER ENGAGEMENT AND THE NARRATIVES THAT LED TO ITS RE-SETTING.

   In the wake of the global financial crisis of 2007 through 2009, which also saw the near-failure of two large listed banks in the UK (the Royal Bank of Scotland and Halifax Bank of Scotland), institutional shareholders were accused of being "asleep," (27) being too uncritical of risky business practices in their investee banks, and neglecting to monitor Board risk management. (28) The Walker Review on corporate governance in banks and financial institutions took the view that such institutional shareholder apathy provided a tolerant context for misjudgments of risk made at the Board level of the failed UK banks. (29) The UK banking and global financial crisis provided an opportunity for reflections upon corporate and investment culture, and the role of institutional investors in fostering general economic and social well-being. (30) Against this context, stewardship was articulated and developed to characterise in particular, the role of institutional investment. (31) In 2010, the FRC reframed the Principles of Responsibilities of the Institutional Shareholders Committee (32) to introduce a Stewardship Code for institutional shareholders on a comply-or-explain basis. The first Stewardship Code contained seven principles that revolved around institutions having policies and implementing engagement with their investee companies, including voting, informal engagement, escalation of engagement, and collective engagement. (33) Institutions also needed to disclose how they managed conflicts of interest in carrying out their engagement roles. (34)

   The normification of shareholder engagement by institutions is arguably a result of crystallizing blame upon the state of institutional shareholder behavior which had already been subject to criticism prior to the events of the global financial crisis. It has been observed that institutional shareholder holding periods have declined over the years. (35) This is largely due to trading becoming a focus for asset management, as trading gains are more easily exploited and quicker to achieve than investing for longer term capital growth. (36) Although dispersed ownership structures naturally entail shareholder apathy, as was pointed out decades ago in Berle and Means' original work, (37) it was not until the 1970s and the rise of law and economic scholarship in corporate governance that the lack of shareholder monitoring in dispersed ownership companies...