Shareholder Stewardship Enforcement
An edited version of the paper will be published as a chapter in Global Shareholder Stewardship: Complexities, Challenges and Possibilities (Dionysia Katelouzou & Dan W. Puchniak eds, Cambridge University Press, Forthcoming)
44 Pages Posted: 13 Apr 2020 Last revised: 26 May 2020
Date Written: March 30, 2020
One of the central problems of shareholder stewardship around the world is rendering institutional investors good monitors of their investee companies and improving their accountability to both companies and their own beneficiaries and clients. The co-existence of soft norms (stewardship codes or principles) as well as semi-hard and hard law rules across the globe raises important questions about the future of shareholder stewardship frameworks and their enforcement. In this paper, we investigate this problem focusing on the availability (or not) of strategies to enforce shareholder stewardship. We adopt a broad approach to enforcement mechanisms in the area of shareholder stewardship and set out a simple conceptual taxonomy based on three dimensions. The proposed taxonomy takes into account the nature of the norm enforcer and distinguishes between self-enforcement and third-party enforcement. In the latter we consider public, quasi-public, private, market and social norm-enforcers. These actors may or not be the standard setters of the relevant norms. We then distinguish between formal – in the sense of either (quasi)judicial proceedings or membership/adherence sanctions within stewardship networks – and informal enforcement mechanisms. Finally, we take into account the temporal dimension of enforcement and distinguish between ex ante (monitoring and deterrence) and as ex post compliance.
Our starting point is that, for market actors to be able to absorb bottom-up or, most importantly, top-down regulation, flexibility in adapting to best shareholder stewardship practices is needed. Indeed, examining the enforcement mode of shareholder stewardship across 25 countries we confirm that informal enforcement by market actors is the preferred option. Looking forward, we sketch the broad contours of an optimal shareholder stewardship enforcement framework based on our proposed taxonomy. We caution against administrative sanctions and support instead a facilitating role for public and quasi-public actors in two distinct ways. First, public and quasi-public actors can facilitate shareholder stewardship enforcement via membership/adherence sanctions taking place within stewardship networks (such as public tiering) or informal mechanisms (including public information diffusion through annual reports and guidelines, public reputational mechanisms, such as ‘name and shame’, and private dialogue). Secondly, where ultimate investors have suffered damages from deficient disclosure of engagement policies, we support the introduction of a facilitating system of civil claims initiated by public or quasi-public authorities that can serve both restorative-compensatory objectives and public interests. We also advance the importance of promoting and refining enforcement by market and social actors. Our proposed enforcement framework is not intended to be applied in a uniform fashion around the world. Rather its multi-actor, multi-modal and temporally continuous fashion can adjust to any national or supranational framework.
Keywords: shareholder stewardship, corporate governance, institutional investors, enforcement, formal enforcement, informal enforcement, Shareholder Rights Directive
JEL Classification: K22, G30
Suggested Citation: Suggested Citation