The Emperor's New Code? Time to Re‐Evaluate the Nature of Stewardship Engagement Under the UK's Stewardship Code

Abstract

John Kingman's review of the Financial Reporting Council (FRC) doubted the effectiveness of the UK's Stewardship Code in encouraging informed and engaged stewardship by institutional investors of the companies in which they invest (issuers). Accordingly, the FRC updated the Stewardship Code in 2020 in a final bid to prove its effectiveness and relevance, and, in particular, to enhance issuer‐specific engagement by institutional investors. The update has enhanced the reach and substance of the Code. However, the legal, regulatory, contractual and competitive environment in which institutional investors exist will constantly forestall soft‐law attempts to foster greater issuer‐specific engagement, a point perhaps tacitly acknowledged by the 2020 Stewardship Code with its wider scope. Instead, in relation to engagement, stewardship disclosure should focus on the types of engagement that institutional investors are motivated to exercise in practice, such as engagement in response to hedge fund activism, and engagement on systemic risks.

Institutional Investor Heterogeneity and Corporate Response to the Covid‐19 Pandemic

“…In other words, not only will managers be inclined to caution, but they will also be under pressure from institutions to signal this to their investors, and perhaps to the government. Given the severity of the Covid-19 crisis, this caution is also consistent with the updated (2020) UK stewardship code that lays emphasis on safeguarding the long-term value of investments (Reddy, 2021). However, our analysis shows that institutions who have historically been shown to be more passive (e.g.…”

“…Indeed, as Becht, Franks and Wagner ( 2019 , p. 7) point out, the UK stewardship code that lays emphasis on institutions’ role in corporate governance has been emulated by many other countries, including the USA. However, more critical accounts have suggested that the existing competitive, contractual, legal and regulatory environment will exert pressures that outweigh the impact of ‘soft law’ measures such as the code (Reddy, 2021 ). Indeed, at the time of its inception, it was argued that the need to be competitive would outweigh any restraints imposed by the code (Cheffins, 2010 ).…”

“…Indeed, at the time of its inception, it was argued that the need to be competitive would outweigh any restraints imposed by the code (Cheffins, 2010 ). Accordingly, in 2020, the scope of the code was broadened to make it relevant to more discretionary areas (Reddy, 2021 ), in time to have a possible impact on institutional investors’ behaviour after the onset of the pandemic.…”