Institutional Investors, Corporate Governance and Stewardship Codes: Problems and Perspectives.
CONSOB Legal Research Papers (Quaderni Giuridici) No. 19, January 2019
78 Pages Posted: 6 Jun 2019
Date Written: January 15, 2019
This paper analyses the role that the Stewardship Codes can play in regulating the voting decisions of institutional investors in the shareholders’ meetings of the companies in which they have invested. The issue is particularly relevant if we consider that the European directive on the rights of the shareholders, starting from the assumption that the lack of interest of shareholders in listed companies has been one of the factors behind the financial crisis of 2007/2008, insofar as it encouraged speculative behavior by managers, assigns to institutional investors the task of monitoring the conduct of directors and exercising their voting rights (‘engagement’) in order to ensure the balanced growth of the value of the shares that is sustainable in the long term. However, this approach of the European legislator comes up against a series of uncertainties. Firstly, the technical meaning of terms such as ‘engagement’, ‘stewardship’ or ‘activism’ of institutional investors is unclear. Secondly, there is doubt as to whether institutional investors have adequate incentives to exercise careful and continuous monitoring of investee companies. At least in the case of traditional investors, in fact, the diversification of investment portfolios and the consequent reduced size of the shareholdings held in each individual company could render the option of disinvestment (exit) more efficient than the option of voting in the shareholders’ meeting (voice), which requires the costly acquisition and processing of information on subjects on the agenda of the various shareholders’ meetings, with the further disadvantage that other investors could take advantage of the increase in value resulting from such activities without incurring any economic burden (so-called ‘free riding’). Finally, one can raise legal doubts about the possibility for multiple ‘activist’ investors to adopt forms of functional coordination to counteract directors’ decisions considered inefficient or to activate insider information channels with the board of directors of the issuer in order to start a dialogue on the strategies that the issuer intends to pursue in the management of the company. Therefore, against the framework described above, this study is aimed at understanding how stewardship codes can stimulate institutional investors’ ‘engagement’ activities. After a brief historical reconstruction of the origins of shareholder activism and clarification of the meaning to be attributed to the definitions of ‘engagement’ (understood as a technique of dialogue with the issuer management) and ‘stewardship’ (understood as a set of initiatives with which asset managers protect the value of their beneficial owners’ investment), this paper tackles both the problem of the lack of engagement incentives, emphasizing the role that the so-called. ‘passive’ funds (i.e. those that pursue investment policies intended to reproduce faithfully the composition of the market indexes) can play in guiding the management of the issuer in a long-term perspective and the problem of the legislative and regulatory rules applicable to institutional investor engagement. In addition, the paper emphasizes the ‘signposting’ function that adherence to a stewardship code is able to develop with regard both to the market and the issuer itself, in terms of the seriousness of the commitment with which the investor intends to foster the prospect of sustainable creation of value in the long term. Finally, certain solutions are analyzed that could help to enhance the role of the stewardship codes: i) the assignment of a rating to the methods with which the code has been implemented by the individual institutional investor; ii) the anticipation of regulatory obligations of transparency concerning these method; iii) the formulation of a rule, based on the law or case law, which promotes the timely and continuous application of the corporate governance provisions as a relevant index of adequacy of the investment processes and organizational structures of the intermediary.
Keywords: say-on-pay, remuneration, shareholder activism, institutional investors, corporate governance, concentrated ownership, shareholders' meeting
JEL Classification: G34, G38, J33, K22, M52
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