The notion of stewardship from a company law perspective. Re‐defined and re‐assessed in light of the recent financial crisis?
| Published date | 10 May 2011 |
| Pages | 126-147 |
| DOI | https://doi.org/10.1108/13590791111127714 |
| Date | 10 May 2011 |
| Author | Arad Reisberg |
| Subject Matter | Accounting & finance |
The notion of stewardship from
a company law perspective
Re-defined and re-assessed in light
of the recent financial crisis?
Arad Reisberg
Faculty of Laws, University College London, London, UK
Abstract
Purpose – The Stewardship Code, the first of its kind for the Financial Reporting Council, seeks to
encourage better dialogue between shareholders and company boards. Given the UK market’s role as a
governance paragon, the code principles will be critical to practices of good stewardship taking root
globally. But this new Code raises concerns, for example, as to how to treat non-UK investors who
collectively now hold upwards of 40 percent of the country’s equity market. Would they voluntarily
adhere to the code, and, if not, how relevant or effective would the code be? The purpose of this paper is to
shed light on these topical questions.
Design/methodology/approach – The paper focuses on stewardship as an important criterion for
assessing the performance of larger shareholders (i.e. institutional shareholders). Section 2 explains the
concept of “stewardship”. It also outlines its growing importance. Section 3 introduces the Stewardship
Code, tracks back its genesis, focusing, in particular, on the underlying themes and the major principles
and guidance in the Code. Section 5 then critically assess the Code, looking in particular at major possible
obstacles. Finally, implications from the preceding discussion are drawn in Section 6.
Findings – Section 4 reveals a hidden truth (the “stewardship spectrum”), i.e. in practice, companies
operate in an ever-changing business world, a more rapidly changing business practice with more
pressures and complexity and with more diverse “players” and conflicting interests at play. It is
submitted that this hidden truth effectively poses a challenge to the success of the Code.
Originality/value – This paper is geared towards providing the reader with critical tools to assess
the likely impact of the Code.
Keywords Shareholders,Directors, Corporate governance,International investments
Paper type Research paper
1. Introduction
Stewardship has been defined as the process through which shareholders, directors and
others seek to influence companies in the direction of long term, sustainable performance
that derives from contributing to human progress and the wellbeing of the environment
and society (Tomorrow’s Company, 2009, p. 3). Writing on the notion of stewardship
from a company law perspective could not have been more timely. In particular, the role
of shareholders in corporate governance has become one of the most debated issues
following the credit melt down and economic crisis. Would more active involvement by
shareholders have helped to prevent or lessen the crisis (Heineman, 2010)? Broadly
speaking, there are those who believe that short-term institutional shareholders,
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
The author owes a debt of gratitude to Professor John Lowry and Jonathan Rushworth for their
insightful comments on an earlier draft of this paper and to Robert E Stott for his assistance in
the editing stages. Responsibility for errors and omissions remains with the author.
JFC
18,2
126
Journal of Financial Crime
Vol. 18 No. 2, 2011
pp. 126-147
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590791111127714
with concern about making their own quarterly or annual numbers, with opaque
governance and improper incentives for fund managers, are part of the problem, and
that they have been one of the causes of short-sighted, risk-indifferent behaviour by
financial institutions (Heineman, 2010). On the other hand, there are those who believe
that longer-term institutional shareholders are part of the solution, i.e. that increased
shareholder involvement in governance, not just through exercise of marke t power, is
essential to creation of sustainable, long-term corporate value, and to holding boards of
directors and senior business leaders accountable[1].
A “third way” emerged very recently in the UK in the form of a “Stewardship Code”
(or “the Code”) for institutional investors. The Stewardship Code, the first of its kind for
the Financial Reporting Council (FRC)[2], seeks to create greater transparency around
the way investors oversee the companies they own by encouraging better dialogue
between shareholders and company boards. The Code “aims to enhance the quality of
engagement between institutional investors and companies to help improve long-term
returns to shareholders and the efficient exercise of governance responsibilities” (FRC,
2010b). The UK Corporate Governance Code has traditionally emphasised the value of a
constructive dialogue between institutional shareholders and companies based on a
“mutual understanding of objectives”. Now, in the Stewardship Code, the FRC sets out
the good practice on engagement with investee companies which it believes institutional
shareholders should aspire to.
The FRC hopes that the new StewardshipCode will create a stronger link betweenthe
governanceand investment process andsaid that it expects the code to evolveover time as
the industrylearns from the experience.But this new Code raises concerns,for example, as
to how to treat non-UK investorswho collectively now hold upwards of 40 percent of the
country’s equity market. Would they voluntarily adhere to a Stewardship Code, and, if
not, how relevantor effective would the code be? And wouldadoption of the code result in
a non-UK investorbeing subject to any FRC rules (Mishar, 2010)?Given the UK market’s
role as a governanceparagon, as can be seen in Figure 1, consensus on code principleswill
be critical to practices of good stewardship taking root globally.
The purpose of this paper is to shed light on some of the topical questionspresented
above. It focuses on stewardship as an importantcriterion for assessing the performance
of larger shareholders (i.e. institutional shareholders) in a company. No attempt will be
made to cover the role of boards of directors as stewards, which, in any case, has
generatedvoluminous discussions and studies in the literature[3]. The paperwill be in six
parts. Section 2 explains the concept of “stewardship”, as well as outlines its growing
importance. Section 3 will introduce the Stewardship Code, tracks back its genesis,
focusing,in particular, on the underlying themes and themajor principles and guidance in
the Code. Section 4 will reveal a hidden truth about the “stewardship spectrum”, i.e. in
practice,companies operate in an ever-changing business world, a more rapidlychanging
business practice with more pressuresand complexity and with more diverse “players”
and conflicting interestsat play. It will be submitted, this hidden truth effectivelyposes a
challenge to the success of this new Code. Section 5 will then critically assess the
Stewardship Code, looking in particular at major possible obstacles. This analysis is
geared towards providing the reader with criticaltools to assess the likely impact of the
Code. Finally, implications from the preceding discussion will be drawn in Section 6.
The notion
of stewardship
127
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