Good Activist/Bad Activist: The Rise of International Stewardship Codes

Jennifer G. Hill is Professor of Corporate Law at the University of Sydney Law School and a Director of the Ross Parsons Centre of Commercial, Corporate and Taxation Law. This post is based on her recent article, forthcoming in the Seattle University Law Review.

Conflicting attitudes toward shareholder engagement and activism have colored the ongoing debate about the effect of shareholder influence on corporate governance. In the US, a distinctly negative view of investor engagement underpins much recent discussion on this topic—from the shareholder empowerment debate to current concerns about investor activism and private ordering through shareholder-initiated bylaws.

Outside the United States, however, a powerful alternative narrative about the benefits of increased shareholder engagement in corporate governance has gained traction in many major jurisdictions. This positive narrative treats investors as having an important participatory role in corporate governance, which is integral to accountability. It supports a radically different regulatory response to its negative counterpart, suggesting that shareholders should be granted stronger rights and/or encouraged to make greater use of their existing powers to engage with the companies in which they invest.

In my recent article, Good Activist/Bad Activist: The Rise of International Stewardship Codes, I examine a particularly important recent manifestation of this positive view of shareholder engagement—stewardship codes. My article, which will appear in 41 Seattle U. L. Rev. (special issue on Investor Time Horizons, forthcoming December 2017), charts the rise of international Stewardship Codes and discusses the implications of this development for the balance of power between shareholders and boards in public corporations.

International Stewardship Codes, which originated in the United Kingdom following the global financial crisis, are now proliferating throughout the world, especially in Asia. These codes indicate that in some jurisdictions, the debate today is less about controlling shareholder power than about constraining board power, by encouraging shareholders to exercise their legal rights and increase their level of engagement in corporate governance. The codes represent a generalized regulatory response to a common complaint following the 2007-2008 global financial crisis—namely, “where were the shareholders?”.

Stewardship Codes seek to ensure that shareholders, particularly institutional investors, are active players in corporate governance. Proponents of these codes have made large claims about their benefits. The UK Stewardship Code has stated, for example, that “the goal of stewardship is to promote the long term success of companies” and that “[e]ffective stewardship benefits companies, investors and the economy as a whole.”

Many countries have now jumped on the Stewardship Code bandwagon. The various Stewardship Codes around the world emanate, however, from different issuing bodies, and this can influence a code’s effectiveness. There are at least three distinct categories of Stewardship Code:

  1. those issued by regulators or quasi-regulators on behalf of the government;
  2. those initiated by certain industry participants; and
  3. codes adopted by investors themselves.

The United States joined this third category in January 2017, when the Investor Stewardship Group (ISG) released its Framework for US Stewardship and Governance (discussed on the Forum here). Although the ISG framework is voluntary, it has the backing of some of the world’s largest asset managers, including founding members, such as BlackRock, State Street Global Advisors and Vanguard.

Many of the Stewardship Codes that now operate around the world are based on the UK Stewardship Code or Japanese Stewardship Code. My article examines similarities and differences in these international Stewardship Codes. As the article shows, the recent adoption of the ISG Stewardship Principles in the US has not occurred in a vacuum. Rather, it is part of a sustained international push for greater investor involvement in corporate governance and exemplifies the increasing globalization of corporate governance.

These developments and competing narratives concerning the role of shareholders in corporate governance have significant regulatory implications. In particular, they pose future challenges to regulators in seeking to differentiate between “good activists” and “bad activists”.

The complete article is available here.

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