What the Language of Shareholder Stewardship Can Teach Us

Stewardship has, along with sustainability, social equality, biodiversity, and climate risk management, emerged in recent years as a favorite buzzword in corporate governance and investment management circles. But the language used by investors to express stewardship objectives and practices varies significantly. For some, stewardship is nearly synonymous with voting: it is a matter of shareholder engagement with company management and is aimed at maximizing long-term value. Others expand the long-lamented notion of shareholder ownership to include active ownership and responsible investing. For still others, stewardship is about “building stronger portfolios,” both active and passive.

To complicate matters further, stewardship is not necessarily limited to engagement within individual companies (micro-level stewardship), industries, portfolios, or even whole markets (portfolio- or market-level stewardship). It includes engagement with governments, regulators, supranational organizations, and other standard setters at the macro-level (macro-level stewardship). Stewardship does not even mean the same things to various policymakers around the world. It varies from shareholder engagement and voting with individual companies to thematic stewardship across portfolios, and from stewardship exercised by institutional investors to stewardship by family owners.

The lack of a common stewardship language and shared understanding of the word is one of the main obstacles to wider implementation of stewardship practices and their acceptance by the investment community. In a new article, the Rhetoric of Activist Shareholder Stewards, I systematically examine what the language of stewardship can teach us, focusing on disclosure statements to the first-generation UK Stewardship Code (2010/12).

To reveal the stewardship rhetoric, I focus on “shareholder stewardship” at the micro-level, where monitoring, voting, and engagement by institutional investors target individual companies. At the micro-level, the main aim of stewardship policies is to transform rationally “apathetic” institutional investors into long-term engaged shareholders that can help minimize excessive risk-taking and short-termism and create value for both individual companies and the ultimate providers of capital.

However, from an investment-management perspective, the development and promotion of micro-level shareholder stewardship is premised on the assumption that engagement and monitoring of individual companies align with the internal business models of institutional investors. Notably, most institutional investors have neither the ability nor the incentives to engage in micro-level shareholder stewardship. Though scholars and policymakers have largely ignored them so far, my article shows that there is a breed of investors with undiversified portfolios and firm-specific expertise who could view the kind of micro-level shareholder stewardship described in the UK Stewardship Code as compatible with their business models and a useful strategy for unlocking investment value. These activist funds – including hedge funds and other types of activists – could act as “stewardship arbitrageurs” or “stewardship intermediaries” at the micro-level, but on one significant condition: that their incentives be well aligned with the stewardship goals.

To test this claim and examine the degree to which the activist funds’ perceptions of stewardship responsibilities cohere to those of policy-oriented institutions, I provide the first comprehensive evidence from the UK – the birthplace of the stewardship movement – on the stewardship rhetoric of activist funds as revealed in their stewardship disclosures. I focus on the 50 signatories to the UK Code 2010/12 with an “activist orientation” and apply natural language processing (NLP) to explore their understanding of shareholder stewardship. The final corpus consists of 73,207 total words (tokens), and there are five main findings of this systematic analysis.

First, activist signatories to the UK Code 2010/12 understand stewardship to include aspects of both corporate governance and investment management. Shareholder stewardship at the micro-level is understood as engagement and voting. But activist stewards are also concerned that shareholder stewardship cannot be internalized – and more fundamentally cannot be effectively exercised – if the investors’ own business models, incentives, and abilities, as well as regulatory constraints (including fiduciary duties), are not accounted for. Second, the notion of responsibility, which is an inherent element of “enlightened” shareholder stewardship, is much more embedded in the statements of friendly rather than confrontational activist stewards and of activists who are signatories to the Principles of Responsible Investing. Third, non-UK activist stewards place a greater emphasis on proxy voting and on the impact of ESG factors on risk management. Fourth, large activist stewards tend to place more emphasis on the governance of stewardship inside their organizations, which may be attributable to their greater resources and larger in-house teams. Finally, the application of structural topic modeling reveals that the FRC’s public-tiering approach, which was introduced in 2016 to distinguish signatories who report well and demonstrate commitment from signatories who cannot explain the variety of stewardship topics within a statement, was rightly discontinued when the 2020 UK Stewardship Code was introduced.

Overall, I argue that a special breed of enlightened, long-term, and less confrontational activist funds can play the role of “stewardship arbitrageurs” or “stewardship intermediaries” for other investor-stewards with active or passive investment models. Such enlightened activist stewards are still the minority in the field, but they are no longer negligible.

Looking at the future of micro-level shareholder stewardship, I contend that the increasing capacities for coalition building (among activist and non-activist stewards and other investors, often facilitated by third-party coordinators), the evolution of activist objectives and strategies to include environmental and social factors, and the growth of ESG investing more generally are likely to streamline micro-level shareholder stewardship. And, as my article provides,there is encouraging evidence that activist stewards have the abilities and incentives to walk the stewardship talk.

This post comes to us from Dionysia Katelouzou, a reader at King’s College London, The Dickson Poon School of Law. It is based on her recent article, “The Rhetoric of Activist Shareholder Stewards,” available here.