The arguments for and against stewardship codes. Whose side are you on?
The UK’s Stewardship Code was introduced in 2010 and a consultation on a new Code will be published later this month, so now is an opportune time to look at whether this pioneering piece of ‘soft’ regulation has worked as hoped. Here RI’s Carlos Tornero and Daniel Brooksbank debate the issue. You can judge for yourself with an anonymous vote at the bottom of both articles, at the bottom of the page (don’t forget to use the slider bar to scroll downwards).
For: Carlos Tornero, Senior Reporter
Despite all their apparent flaws, particularly their voluntary nature, the value of Stewardship Codes should not be underestimated.
Let us focus on the pioneering UK case. True, the UK code faces a catch-22 situation here. The Financial Conduct Authority just requires asset managers to disclose if they apply the comply-or-explain Code, with many giving copy-and-pasted explanations about their deviation from it.
The Code has brought investment fiduciaries closer than they’ve ever been to taking a sort of Hippocratic Oath
Even those institutional investors that choose to be signatories can make a mockery of its provisions, while still posing as fully compliant (it goes without saying that this is not always the case).
But the Code has brought investment fiduciaries closer than they’ve ever been to taking a sort of Hippocratic Oath, with which to develop a minimum level of ethics across the industry.
Even if the breach of its provisions does not involve immediate punishment, the Code reads as a powerful reminder that investors cannot sit on their hands: they have duties to fulfil too.
Governance works both ways. Investors should apply to themselves the expectations they request from their portfolio companies. In other words, the Code calls on investors to practice what they preach.
As much as directors must promote the success of the company – and be held accountable if not – investors should also give account to their beneficiaries of how they are taking care of their assets.
That involves extending to investors similar reporting and disclosure duties as those they expect from corporates. For example: Do they vote all the shares they hold? Do they publicly disclose their voting records? Do they recall stock if they have lent it? Do they monitor how the companies comply with the Governance Code? Do they report substantially enough about the impact of their engagement?
The Code, published in the aftermath of the financial crisis, encompasses also a paradigm shift which challenges a previously untouchable dogma: that of shareholder primacy.
Underpinned by Milton Friedman’s theories, shareholders seemed not to have duties, just privileges. As he wrote in his book Capitalism and Freedom, the only social responsibility of companies is to maximise profits, as long as it is done lawfully “in open and free competition without deception or fraud”.
Thus, it would follow that the role of shareholders was just to indolently reap such benefits. But this reeks of the outdated capitalism that everyone, from Left to Right, is attempting to reform.
And after decades of Thatcher’s ‘Big Bang’ and New Labour’s light-touch regulation, green shoots of legislation sprang in the form of a EU’s Shareholder Right Directive II (a misnomer for a piece of legislation that brings to life some of the investors’ duties proposed in the Code).
But apart from reporting duties, disclosure of voting records, more transparency, the chance to hold asset managers to account, statements about securities lending policies, challenging the shareholder supremacy and Friedman’s doctrines, reforming capitalism, and the SRDII, what have the Stewardship Codes ever done for us?
(PS: Agreed, they haven’t brought peace)
The vote is anonymous and voter details will not be disclosed.
Against: Daniel Brooksbank, RI Editor
Staying on the UK Stewardship Code, nine years is surely long enough to gauge whether something is working or not, and it would be very charitable indeed to say there’s been a huge, measurable improvement in how asset managers ‘steward’ the companies they own.
Responsible Investor was a supporter of the UK Code from the outset and covered it extensively.
It’s a comply-or-explain regime, and the absurd boilerplate declarations unearthed by Tom Powdrill, and mentioned already by Carlos, show how facile the whole process is.
The first problem is with definitions: ‘stewardship’ is simply not part of investment language.
But the main stumbling block is the lack of a way to measure stewardship. While you can put a number on risk and return, you cannot do so for stewardship. It’s qualitative and non-comparable.
It’s not the principle of stewardship itself that’s the problem – rather the idea of a Code, trying to codify something which is inherently nebulous.
While it’s clear that a firm like Hermes (purely as an example) does stewardship – that is not in doubt – how do you judge its effectiveness? What is Hermes’ “stewardship ratio”? I’m not picking on Hermes, I am an admirer.
Indeed, it’s not the principle of stewardship itself that’s the problem – rather the idea of a Code, trying to codify something which is inherently nebulous.
There’s no metric to enable clients (i.e. pension funds) to analyse how, and how well, stewardship is performed. In the almost 10 years since the Code first emerged, there is still a huge information gap that the market has not filled.
That the Code is overseen by the Financial Reporting Council has not helped. The FRC faces being disbanded, hampered by having too much on its plate and under attack from all sides. Corporate (stewardship?) failures like Carillion have also not done it any favours.
At launch it was hoped that that the UK Code would attract global sovereign wealth fund signatories and other overseas investors, but despite supportive words from the likes of CalPERS, they did not materialise as signatories. The only non-UK asset owner signatory is the Ontario Teachers’ Pension Plan, which signed up on 2011 saying it was “logical and appropriate”. But it remains the sole foreign pension signatory.
Indeed, it was no less an institution than Norges Bank Investment Management that doubted the code from the start, with its then-Head of Ownership, Anne Kvam, asking: “Who is the beneficiary of this code? I can see ways it won’t work.” The intervening years have presented little or no evidence to the contrary, and Norges remains a non-signatory.
Yes, the UK code did spark a worldwide craze for similar codes across the world, and to be fair, brought the concept to the forefront. But a Japanese Stewardship Code did not prevent the Carlos Ghosn affair.
For Hermes, writing in the Financial Times recently, investing “has to be more than buying low and selling high”. “It is also about leaving the asset in a better state” by avoiding “dramas, upsets or dead ends”. We wholeheartedly agree with this, but trying to capture that in a code is like trying to put a genie into a bottle.
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