The Global Diffusion of Stewardship Codes Post-COVID-19

The rapid global spread of COVID-19 in the first half of 2020 has had serious repercussions for governments, corporations, and institutional investors. Government responses have largely been fragmented, with each nation prioritizing its own interests and following the science of its own advisers. The result has been a wide range of strategies to contain the virus and protect domestic economies and citizens and subsequently to unwind lockdowns and stimulate post-COVID economies.

The coronavirus pandemic has also exposed the fragility of global supply chains and forced corporations to quickly adapt to a rapidly evolving new normal.  Institutional investors, meanwhile, have seen large fluctuations in the value of their investments and faced liquidity pressures due to outflows from funds.

All these developments have highlighted the importance of institutional investors’ stewardship responsibilities, and the stewardship codes that underlie those responsibilities, in helping corporations navigate and emerge from this health and economic crisis.

In a new paper, I and my co-author, Mathias Siems, examine the extent to which, in the absence of a global regulator, the adoption of stewardship codes has prompted “diffusion” of stewardship norms throughout the world. Those codes have ostensibly been modelled on the 2012 version of the UK Stewardship Code (UK Code 2012).  Diffusion is a term that is widely used in social sciences and denotes a one-way transfer from one country to another.

In our research, we used computational tools to systematically examine 41 stewardship codes published between 1991 and 2019, the methodology of which we describe in detail in our paper. Although we found evidence of norm diffusion from the UK, particularly to former British colonies in Asia, we also detected diffusion as the result of the impact of transnational initiatives such as the European Fund and Asset Management Association (EFAMA) and International Corporate Governance Network (ICGN) codes on a number of codes (notably Italy, Malaysia and Kenya), as well as regional clusters, such as Korea-Japan.

Our analysis shows that there is both uniformity and diversity among the codes, with most of the seven key stewardship principles of the UK Code 2012 having diffused widely. However, the principles of escalating engagement activities and collective action were less well travelled.  Interestingly, the diffusion has resulted in the adoption of stewardship principles that vary regardless of whether a country is a civil or common law jurisdiction. The U.S. stewardship principles and one of the Australian codes are, for example, very different from the UK model, and we found evidence of diffusion to several civil law jurisdictions, including Denmark and Japan.

But with the latest revision of the UK Stewardship Code (UK Code 2020) representing a significant departure from the 2012 code, I expect that the question of diffusion of stewardship norms will take a significant turn. In 32 pages, the UK Code 2020 shifts the idea of stewardship in new directions not yet reflected in the other codes. For example, the UK Code 2020, with its 12 principles aimed at asset managers and asset owners and six principles aimed at service providers, broadens stewardship across assets other than listed equity and emphasizes reporting specific stewardship activities and outcomes rather than just stewardship policies. Whereas the 2012 Code takes a mandatory “comply or explain” approach for asset managers authorized by the FRC (the UK’s Financial Reporting Council), and states  that ‘[s]tewardship aims to promote the long term success of companies in such a way that the ultimate providers of capital also prosper,” the 2020 Code defines stewardship as “the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society” and adopts a mandatory “apply and explain’ approach for FCA-authorized asset managers. Relevant organizations will be required to submit their first Stewardship Reports against the 2020 Code by March 31, 2021.

The new code will require institutional investors to look beyond how a given corporation maximizes long-term value and examine how this value leads to sustainable benefits to the economy, environment, and wider society. The UK Code 2020 for the first-time places societal issues at the heart of stewardship and recognizes investors as guardians of the public interest and market integrity and urges them to address environmental, social, and governance (ESG) as well as market-wide and systemic risks. In the context of unprecedented state support for corporations during the pandemic, relevant institutional investors in the UK will thus be required to explain how their stewardship leads to broad sustainable benefits. One issue, for instance, will be the extent to which institutional investors vote for the payment of dividends by corporations that have received state aid to weather the lockdown.

It remains to be seen how the existing stewardship codes assist or influence institutional investors in their stewardship activities during and after the pandemic. I expect, however, that stewardship norms and practices will continue to travel globally. The next iteration of norm diffusion is likely to arise not from a global financial crisis (as the first version of the UK code did), but from the global pandemic. COVID-19 may well prompt a second round of exportation of the revised 2020 UK model into the transnational arena, with a greater focus on the role of stewardship in fostering sustainable business practices.

This post comes to us from Dionysia Katelouzou, a senior lecturer at King’s College London, The Dickson Poon School of Law. It is based on the paper by her and Mathias Siems, “The Global Diffusion of Stewardship Codes,” available here. The research for the paper is part of the broader and comparative EGCI-supported Global Shareholder Stewardship Project led by Dionysia Katelouzou and supported by Dan W. Puchniak.