Stewardship Code

Question 1

What does the Stewardship Code 2020 provide?

Answer 1

• Core Aim: To encourage long-term, responsible investment and active stewardship
  -> primarily focused on institutional investors
• Improves upon 2012 version, by:
  -> Replacing policy statements with outcomes-based reporting i.e. firms are expected to demonstrate what they did, not just what they intend to do
  -> Integrating ESG considerations
  -> Expanding its scope to asset owners and service providers (instead of just institutional investors)
  -> Emphasising long-term value creation, rather than short-term gains

–> these came in response to criticisms e.g. Resiberg (2020) - 2012 Code was ‘Ultimately, an ineffective corporate governance tool’. According to Reisberg, the 2012 Code suffered from:
– A lack of clarity on meaning of ‘stewardship’
– Box-ticking compliance
– A narrow domestic focus, excluding foreign investors
– Voluntary compliance with no real consequences with failure to engage.

• The 2020 Code addresses several of these issues
  BUT
• Voluntary nature remains
• Foreign investors are still not bound by it

Question 2

What are the challenges facing Institutional Investors’ Active Involvement

Answer 2

• Even with the Code, institutional investors face economic disincentives to be engaged:

-> Cost of engagement: Active stewardship e.g. voting, monitoring, engaging with boards - requires time, expertise, resources. These costs are rarely recoverable –> especially passive funds with large portfolios.
-> Agency Problems: If institutional investors are the intermediaries between actual owners (e.g. pension savers) and investee companies, it breaks the link between ownership and control, reducing incentives to engage (Kay (2012)).
-> Short-term performance pressures: Many institutional investors, especially hedge funds and mutual funds, are subject to frequent evaluations based on short term returns -> short-termism is contrary to long-term focus of Stewardship Code

Question 3

How has the Stewardship Code failed?

Answer 3

• Institutional investors (e.g. pension funds, insurance companies) now dominate UK share ownership
  e.g. Vanguard + State Steet + BlackRock own 89% of S&P500 and on average 20% of a S&P500 company
  e.g. Vanguard own 1.3 billion shares in Apple, Tim Cook owns less than 1 million
  –> Shows decline in individual ownership and rise of collective investment (Kay (2012))
  -> But this increased concentration of ownership hasn’t translated to greater accountability
• Stewardship Code in 2025 - Only 297 signatories (although manage £52 trillion in assets: GOOD)
  –> not even 20% of PLCs signing up
  –> only 1k companies on London Stock Exchange
• Concerns remain that the Code is used to enhance reputation rather than affect substantive change
  -> Even FRC research suggests limited behavioural change
  -> Echoes Reisberg’s point that real change depends not on the presence of a Code, but on its enforcement and cultural uptake