The False Hope of Stewardship in the Context of Controlling Shareholders: Making Sense Out of the Global Transplant of a Legal Misfit

Abstract

In 2010, the United Kingdom issued the world’s first stewardship code. Since then, stewardship codes have been issued in many of the world’s leading economies and now exist in 20 jurisdictions on six continents, with more jurisdictions considering adopting them. In the UK, stewardship codes were promised to transform rationally passive institutional investors into actively engaged shareholders to prevent another Global Financial Crisis. More recently, the new 2020 UK Code has been promoted as a mechanism to save the planet by incentivizing institutional investors to pressure listed companies to focus on ESG. There is a vigorous debate and developed literature on whether the UK Code will achieve these goals. However, what has been lost in this debate is that outside of the UK/US it may not matter nearly as much if stewardship succeeds in changing the behavior of institutional investors. This is because, with the notable exception of the UK/US, institutional investors are collectively minority shareholders in most listed companies in almost every jurisdiction in the world. Moreover, in almost every jurisdiction, with the notable exception of the UK/US, most listed companies already have a rationally active – non-institutional – controlling shareholder as their “steward”. Why then have jurisdictions around the world adopted UK-style stewardship codes which are designed based on the assumption that institutional investors collectively control most listed companies? This Article answers this question by undertaking the first in-depth global comparative analysis of the curious transplant of UK-style stewardship codes into jurisdictions dominated by controlling shareholders and examines the role that stewardship plays in these jurisdictions. It does this by drawing on a unique collection of recent in-depth case studies on stewardship in 22 jurisdictions by leading corporate law experts, hand-collected data analyzing the content of every stewardship code that has ever been issued, and fresh hand-compiled data on shareholder ownership structures in listed companies around the world. It reveals that stewardship has been coopted by governments and institutional investors to serve their own diverse purposes – a troubling trend which will likely be exacerbated post-Covid-19, when an authentic focus on an inclusive society and the environment will be more critical than ever.