The Anatomy Of Investor Stewardship

The Anatomy Of Investor Stewardship Presented by: Dionysia Katelouzou, King's College London Date: 7 March 2024 Why Investor Stewardship Matters? - The UK asset management industry alone oversees £11 trillion of assets (FCA 2023). - Institutional investors account for 62% of market capitalization in UK public equities (OECD 2020). - 'Other people's money' (Kay 2015) - Scholarly and policy circles remain deeply divided on the role of institutional investors: e.g. proposed changes to UK Listing Rules. - Despite global proliferation of stewardship codes, there remains ambiguity surrounding the spectrum and implementation of investor stewardship among policymakers, investors and consumers alike. - Pressing need for an analytical framework of investor stewardship. Tracing the Origins - Etymology: derived from STIWEARD or STIGWEARD, meaning 'house keeper' or 'house guardian' - Stewardship in scholarly literature • Varieties in understandings and terminologies: accounting (Chen 1975); management (Davis, Schoorman and Donaldson 1997); leadership and ethics; ecological dimensions (Folke and others 2019) • Corporate governance: managers as stewards building on the stewardship theory of management (Davis, Schoorman and Donaldson 1997) and earlier writings on social responsibility (e.g. Dodd 1931). • - Legal standpoint: managers neither agents nor stewards. Shareholders as stewards(?) - Generally minimal attention, except for the stewardship-based image of family shareholders The Principal-Agent Narrative - Shareholders typically regarded as principals in their relationships with company managers. - Institutional investors serve dual roles as principals for managers and agents for clients/beneficiaries - Complexity of the investment chain - Separation of ownership (of shares) from both control and nominal shareholders - Resulting in a 'double set of agency relationships' and increased 'agency costs of agency capitalism' (Gilson and Gordon 2013) - A focus on powers rather than responsibilities within this framework. Crafting A Triangular Framework For Stewardship - - Exercise of power • Corporate governance side of stewardship •  • Company law rights On behalf of others • Intermediation  Investment management side of stewardship  Investment management regulation - duties - For others • Intermediation  Investment management side of stewardship • Psychological/ active ownership Who Are The Others? - Presently, regulatory duties imposed on financial intermediaries are centered on client stewardship (1) and overlook other stewardship relationships. - For instance, asset managers' responsibilities are commonly limited to immediate contracting parties. - The question arises: can the others extend beyond those protected by contractual and trusteeship relationships? - The Kay Review (para 9.9) proposed non-excludable fiduciary obligations extending to end-investors. - Dual purpose of asset management encompassing both private and public dimensions. - End investor stewardship, asset stewardship and enlightened stewardship all embody a public purpose, yet none are primarily governed by hard law. Navigating The Gap-Filing Role Of Stewardship Codes - Stewardship codes extend beyond client-centric hard-law obligations to encompass all parties along the investment chain, including end investors, investable assets, and society as a whole. - UK Stewardship Code (SC) 2020 expands the notion of others, evident in Principles 4 and 7 for Asset Owners and Asset Managers. - However, can an investor steward serve others who are not financially material? - And, which others are to be prioritized when conflicts of interests arise? - Does Principle 7 accommodate 'financial materiality, 'double materiality', 'intrinsic materiality'? - The Code's Achilles' heel lies in conditioning the other-serving function of investor stewardship on materiality and the avoidance of conflicts of interests. A Typology of Investor Stewardship - Levels • Micro • Portfolio • Market • - - - - Macro Actors • Direct • Indirect Assets • Public equity • Other (fixed income, infrastructure, real estate, private equity) Means • Integration & investment decision- making (incl. Divestment) • Engagement (formal/informal) Themes • Value-focused (performance/ operational/ strategic) • Values-focused (ESG) Challenges Amidst Varieties - The Anatomy of Investor Stewardship is a testament to the emerging multi-level, multiactor, multi-asset, multi-mean and multi-themed investor stewardship. - However, the Varieties of Investor Stewardship bring forth notable challenges: • The others of whose behalf an investor steward acts are not the same as the others for who an investor steward acts. • Client stewardship aside, all stewardship relationships do not fall under the primary domain of hard law. • Risk of self-interest prevailing, potentially compromising the steward's role. • Risk that the investor steward may (re)turn to an agent serving solely clients and/or beneficiaries.