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Is the Stewardship Code fit for purpose?

Is the Stewardship Code fit for purpose?

Mundy, Julia ORCID: 0000-0001-7970-3507, Jack, Lisa and Einig, Sandra (2019) Is the Stewardship Code fit for purpose? Project Report. CIMA, London.

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Abstract

The Stewardship Code was established by the Financial Reporting Council (FRC) in 2010 following concerns that asset management firms behaved like ‘absentee landlords’. Its stated aim is to enhance engagement by asset management firms (AMs) with their investee companies. We conducted in-depth interviews with 29 participants and observers of the asset management industry to understand the nature of engagement and stewardship as practised in major UK-based AMs with long-term shareholdings. Our findings reveal that AMs have two main approaches in engaging with their investee companies. In line with prior research, we find that fund managers use engagement activities to ask questions to obtain private information that might improve the performance of their funds. In contrast, governance managers within AMs engage with non-executive directors in order to understand environmental, social and governance issues that might affect on the performance of any relevant fund within the AM’s total portfolio. Engagement is not therefore characterised by the ‘purposeful dialogue’ that underpins the Code’s intended aims. Our participants’ concerns about the risky and costly nature of engagement reduces the likelihood that they will undertake the ‘ownership’ behaviours intended by the Code. Consequently, divestment of a shareholding, rather than engagement, is the preferred action when faced with concerns about a company. Collective engagement is both rare and limited in scope because AMs lack incentives to share information with competitors. In the absence of any evidence for the benefits of engagement, attempts to introduce measures or targets are likely to lead to additional cost and ‘gaming’ behaviours.

Item Type: Monograph (Project Report)
Uncontrolled Keywords: Stewardship Code, FRC, asset management, fund managers
Subjects: H Social Sciences > HG Finance
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of Accounting & Finance
Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA)
Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA) > Centre for Governance, Risk & Accountability (CGRA)
Last Modified: 29 Jul 2019 15:52
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
Selected for GREAT 2019: GREAT 5
URI: http://gala.gre.ac.uk/id/eprint/24293

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