Greedy asset and money managers have been blamed for the financial crisis of 2007-2008, allegedly causing the international banking crisis and losses to the ultimate shareholders in financial firms. After the crisis, voices were raised to set the shareholders stronger in the centre of corporate power structure, instead of boards and managers, as the shareholders were seen as having the most to lose in corporate bankruptcies. This movement, sometimes denoted shareholder ‘empowerment’, was in line with mainstream economic theories explaining the primacy of shareholder interests to other ‘stakeholders’, such as employees, contractual parties and local communities, with the vulnerable, ‘residual’ position of shareholders among the corporate claimants.
The misguided and detrimental shareholder primacy trend
Normatively, the shareholder-centred policy shift targeted corporate managers as accountable to the shareholders who were perceived – contrary to company law – as ‘owners’ of the company. The corporate boards should focus on monitoring on behalf of the shareholders, rather than managing the company independently. Shareholders should ‘engage’ with boards on issues ranging from strategy to corporate responsibility, issues that company law assigns to the board.
However, those promoting this trend of shareholder primacy overlooked that shareholders were not the victim but the cause of financial crisis. The increasing profit demands of shareholders, especially of ‘institutional investors’, firms investing money on behalf of others (the ‘ultimate beneficiaries’), including pension funds, mutual funds, hedge funds, asset managers, insurance companies and investment banks, have forced to boards of the investee firms to adopt short-term profit-maximisation business models, to the detriment of the economy, the society, and the economy.
‘Stewardship’ – the latest shareholder primacy invention
Nevertheless, the shareholder primacy trend has dominated the regulatory landscape since the crisis. This has been reflected not only in corporate governance codes, listing rules, company legislation, European Union directives and transnational regulatory standards but also manifested as ‘stewardship’ policies, which are actions that asset managers can take in order to enhance the value of the companies that they invest in on behalf of their own beneficiaries. Regulatory manifestation of stewardship are the 2017 reform of the 2007 European Union Shareholders’ Rights Directive, and ‘stewardship codes’, as for example the Danish Stewardship Code.
According to the arguments behind the self-regulation and regulation emphasising stewardship, encouraging shareholders to act as ‘stewards’ is a way forward not only towards better corporate governance in the mainstream, economics-focused sense, but also claiming to support more sustainable and responsible companies in light of the environmental and social challenges we as a global community face.
‘Stewardship’ varies across countries
The nature of stewardship varies from jurisdiction to jurisdiction based on shareholder structures. In the Nordic region, the role of states, such as the Norwegian state, sovereign holding companies and wealth funds, such as the Norwegian Government Pension Fund Global and the Norwegian Government Pension Fund Norway, other public market actors including public pension funds, such as the Norwegian public sector occupational pension company KLP, as well as families, family-controlled investment companies and family-based foundations, is significant compared to (other) national and international institutional investors.
In a recent paper I discuss with Beate Sjåfjell and Monica Mee the roots of stewardship, global trends, and what forms it takes in the Nordic countries and especially in Norway, dominated by the state and the municipalities, but also to some extent by private investors. The main question of our paper is whether Norway needs a stewardship code.
Stewardship cannot be equated with corporate sustainability
In stewardship, there is a lot of talk of responsibility and sustainability. However, we do not see concrete actions. In many cases, especially in Asia, stewardship is seen as a tool to fight against traditional lifetime employee, risk-averse, and stakeholder-oriented governance systems towards a more shareholder-oriented, profit maximizing, and less risk-averse system (as in Japan) or as a marketing tool (as in Singapore). As our Danish colleagues Hanne Birkmose and Marina Madsen show, the Danish Code – the only stewardship code proper in the Nordic countries – is based on a Danish government decision to have a stewardship code for Denmark, but at the same time being parallel to the existing Danish Corporate Governance Code and supporting it by binding the shareholders to the Danish corporate governance. For this reason the two codes share a mutual purpose in their aim to support listed companies’ ‘long-term value creation and thereby contribute to maximising long-term return for investors’.
Stewardship has accordingly different meanings in different countries and there is very little basis to say that it is a tool for corporate sustainability, in the social sense or in environmental sense. Neither does it bring much benefit in Norway, where the company law itself is the primary tool to protect minority shareholders, creditors and contractual parties against the abuse of controlling shareholders.
The SMART approach concentrates on the board
What we can say for sure, in line with the work done in the Sustainable Market Actors for Responsible Trade (SMART) project, is that the key to sustainable value creation is not in the shareholders but in strong boards, independent from the shareholders. As we see it, voluntary stewardship does not seem to be not to be a strong enough management tool for handling an issue as important as that of securing the contribution of business to sustainability, in a world with increasingly rapid changes in the businesses’ surroundings and greater uncertainty and volatility in the global markets. To handle this the there is a need for a responsible body, which can demonstrate fast decisions and ensure corporate flexibility. The boards of the investee companies stand out as the right governance structure to place such responsibility, not the shareholders.
Stewardship talk must not be allowed to misdirect attention from core company law issues, notably those of the purpose of the company and the duties of the board. What Norway does need, is a clear and mandatory regulation, as proposed by the SMART project on the European level, to ensure that Norwegian business and finance contribute to the transition to sustainability. A stewardship code would not be a sufficiently strong measure. Conversely, it could hold Norwegian business and finance back in the face of the rapid developments on EU and international level.