The Notion of Stewardship from a Company Law Perspective: Re-Defined and Re-Assessed in Light of the Recent Financial Crisis?
University College London - Faculty of Laws
August 18, 2010
Journal of Financial Crime, Vol. 18, pp. 126-147, 2011
Stewardship has been defined as the process through which shareholders, directors and others seek to influence companies in the direction of long-term, sustainable performance that derives from contributing to human progress and the well-being of the environment and society. Writing on the notion of stewardship from a company law perspective could not have been more timely. The Stewardship Code, the first of its kind for the Financial Reporting Council (FRC), seeks to create greater transparency around the way investors oversee the companies they own by encouraging better dialogue between shareholders and company boards. The Code ‘aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.’ The UK Corporate Governance Code has traditionally emphasised the value of a constructive dialogue between institutional shareholders and companies based on a ‘mutual understanding of objectives.’ Now, in the Stewardship Code, the FRC sets out the good practice on engagement with investee companies which it believes institutional shareholders should aspire to.
The FRC hopes that the new Stewardship Code will create a stronger link between the governance and investment process and said that it expects the code to evolve over time as the industry learns from the experience. But this new Code raises concerns, for example, as to how to treat non-UK investors who collectively now hold upwards of 40 percent of the country's equity market. Would they voluntarily adhere to a stewardship code, and, if not, how relevant or effective would the code be? And would adoption of the code result in a non-UK investor being subject to any FRC rules? Given the UK market’s role as a governance paragon, consensus on code principles will be critical to practices of good stewardship taking root globally.
The purpose of this paper is to shed light on some of the topical questions presented above. It focuses on stewardship as an important criterion for assessing the performance of larger shareholders (i.e. institutional shareholders) in a company. No attempt will be made to cover the role of boards of directors as stewards, which, in any case, has generated voluminous discussions and studies in the literature. The paper will be in six parts. Section 2 explains the concept of ‘stewardship’ as well as outlines its growing importance. Section 3 will introduce the Stewardship Code, tracks back its genesis, focusing, in particular, on the underlying themes and the major Principles and Guidance in the Code. Section 4 will reveal a hidden truth about the ‘Stewardship Spectrum’ i.e. in practice, companies operate in an ever-changing business world, a more rapidly changing business practice with more pressures and complexity and with more diverse ‘players’ and conflicting interests at play. It will be submitted, this hidden truth effectively poses a challenge to the success of this new code. Section 5 will then critically assess the Stewardship Code, looking in particular at major possible obstacles. This analysis is geared towards providing the reader with critical tools to assess the likely impact of the Code. Finally, implications from the preceding discussion will be drawn in Section 6.
Keywords: Stewardship, Shareholders, Directors, Long Term, The UK Stewardship CodeAccepted Paper Series
Date posted: August 18, 2010 ; Last revised: June 10, 2011
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