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ABSTRACT
Notwithstanding the prevalent facets of shareholder stewardship as a market concept, this paper advances the argument that there is another constitutive - though well hidden - element that is more apt to fully grasp its distinctive features and better inform market and public policy initiatives. This element regards stewardship's essence as a social norm. Indeed, what this article calls the `stewardship sociality' offers original insights into the dynamics developing between different stewards. In parallel, building upon the premises of a real entity theory of company law, this paper explores the social interactions within and between stewardship groups, by demonstrating that their autonomous action requires a minimally coercive response from law. It is thus `stewardship autonomy', as it is called in this paper, that suggests that any legal reform needs to be confined in soft law instruments that depict the sociality of stewardship within a constantly evolving global landscape.
Acknowledgements
The author would like to thank Professor Eva Micheler and Dr. David Gindis for their invitation to participate in this special issue, as well as JCLS editors Professor Luca Enriques and Professor Felix Steffek, and the anonymous JCLS reviewers for their comments. The author would also like to thank Giulio Cimini for excellent research assistance.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 The term ‘shareholder stewardship’ is used to denote stewardship as projected and exercised within the life of public companies by shareholders. For the ‘shareholder stewardship’ concept, see D. Katelouzou and D.W. Puchniak, Global Shareholder Stewardship (eds) (Cambridge University Press, 2022); H. Kaur, C. Xi, C. Van der Elst and A. Lafarre (eds), The Cambridge Handbook of Shareholder Engagement and Voting (Cambridge University Press, 2022). For other types of stewardship, such as the debtholder stewardship, see S. Gomtsian, ‘Debtholder Stewardship’ (2022) Modern Law Review (early online publication). Debtholder stewardship is gradually becoming complementary to shareholder stewardship, in light of its tools and its potential to holistically ameliorate investor studentship; this is possible by filling the gaps in markets and firms where shareholder stewardship is less prominent: ibid, 5. Both types of stewardship are crucial to the study of ‘autonomy’ and ‘sociality’ concepts in this area but focus is dedicated to the ‘shareholder stewardship’ dimension in light of its more well-known and distinctive presence in relation to the social dynamics and autonomy that are the key concepts of this study. Future research is needed to address collectively all types of stewardship under the notions of autonomy and sociality.
2 Between the various levels of investment intermediation, we specifically refer to the relationship between asset managers and asset owners and between asset owners and ultimate beneficiaries. On this topic, see R. Barker and I. H.-Y. Chiu, Corporate Governance and Investment Management (Edward Elgar, Cheltenham, 2017).
3 D. Katelouzou and K. Sergakis, ‘Shareholder Stewardship Enforcement’ in Katelouzou and Puchniak (n 1) 572.
4 M.C. Jensen and W.H. Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’ (1976) 3 Journal of Financial Economics 305. See also E. Fama, ‘Agency Problems and the Theory of the Firm’ (1980) 88 Journal of Political Economy 288; E. Fama and M.C. Jensen, ‘Agency Problems and Residual Claims’ (1983) 26 Journal of Law and Economics 327.
5 Institutional investors hold 43% of the listed companies’ share capital at the global scale: OECD, Corporate Governance Factbook 2021 (2021), https://www.oecd.org/corporate/OECD-Corporate-Governance-Factbook.pdf, 13. Nevertheless, such a reconcentration is far from universal and is only dominant in the UK and in the US: see D.W. Puchniak, ‘The False Hope of Stewardship in the Context of Controlling Shareholders: Making Sense out of the Global Transplant of a Legal Misfit’ (2021) American Journal of Comparative Law forthcoming. Elsewhere, the typical ownership structure has a dominant shareholder plus minority holdings re-concentrated in the hands of institutions. The phenomenon as regards institutions is the same, the difference is in the presence or absence of dominant shareholders.
6 R.J. Gilson and J.N. Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Reevaluation of Governance Rights’ (2013) 113 Columbia Law Review 863.
7 Jensen and Meckling (n 4) 310.
8 Among an abundant literature, see n 1. Another strand of academic literature has nonetheless highlighted political forces and, more recently ESG considerations, driving stewardship. For example, politics in Japan and ‘halo signalling’ in Singapore are seen as significant drivers of stewardship: G. Goto, A.K. Koh and D.W. Puchniak, ‘Diversity of Shareholder Stewardship in Asia: Faux Convergence’ (2020) 53(3) Vanderbilt Journal of Transnational Law 829, 872–73. See also, on ESG considerations, G. Goto, ‘The Japanese Stewardship Code: Its Resemblance and Non-resemblance to the UK Code’, in Katelouzou and Puchniak (n 1) 236; on ‘halo signalling’, D.W. Puchniak and S.S. Tang, ‘Singapore’s Embrace of Shareholder Stewardship: A Puzzling Success’, 305–06; in Katelouzou and Puchniak (n 1) 8–9 and A.K. Koh, D.W. Puchniak and G. Goto, ‘Shareholder Stewardship in Asia: Functional Diversity within Superficial Formal Convergence’, in Katelouzou and Puchniak (n 1) 626. See also D. Katelouzou, ‘Investor Stewardship: The State of the Art and Future Prospects’ in J.N. Gordon and W.G. Ringe, The Oxford Hanbook of Corporate Law and Corporate Governance (eds.), (Oxford University Press, 2nd ed., forthcoming), https://ssrn.com/abstract=4470704.
9 Nevertheless, it should be borne in mind that ESG is not entirely divorced from economic considerations as it is often seen as financially oriented or at least not contrary to shareholder wealth maximization in the long-term. For example, in relation to its environmental facet and climate change related initiatives from market actors, one of the justifications that are frequently put forward is that pursuing ESG will maximize shareholder value in the long-term. However, seen in its totality and bringing together all of its facets, ESG does result in a focus on things other than maximizing shareholder value and may sometimes be detrimental to maximizing shareholder value.
10 Based on Eisenberg’s seminal work, which refers to ‘social norms’ as ‘all rules and regularities concerning human conduct, other than legal rules and organisational rules’: M.A. Eisenberg, ‘Corporate Law and Social Norms’ (1999) 99(5) Columbia Law Review 1253, 1255. In our analysis, we do emphasise the important of organisational rules (‘formal rules adopted by private organisations’, ibid. 1255) but also refer to other elements and dynamics that influence actors’ modus operandi. Indeed, Eisenberg distinguishes social norms to behavioural patterns, nonobligational norms and obligational norms (ibid, 1256–1257). Institutional investors are seen as actors that have passed from the ‘passivity norm’ to the ‘activity norm’ in light of legal, economic and, most critically, demographic (size of institutional investement) and critical mass (propagation and wide acceptance of active institutional activity) factors: ibid, 1285–87.
This paper also present similarities with the ‘nonlegally enforceable rules and standards’ (NLERS) that trigger obligations to involved parties without legal enforcement. For example, profit maximisation as a corporate management strategy is a NLERS, an area in which courts have traditionally abstained from intervening: E.B. Rock and M.L. Watcher, ‘Islands of Conscious Power: Law, Norms and the Self-Governing Corporation’ (2001) 149 University of Pennsylvania Law Review 1619, 1644. Yet, our vision of stewardship as a social norm goes beyond rules and standards and includes several other facets, as it will be shown below, that denote a continuous evolution of behavioural patterns, according to stewardship an ever evolving nature. Moreover, contrary to NLERS, legal enforceability is possible within the minimally coercive rules we advocate for: on the various facets of enforcement of shareholder stewardship, see Katelouzou and Sergakis (n 3) 572.
11 Inspired by Fiske’s seminal theory on sociality, focusing on people’s fundamentally sociable nature and the organisation of their social life in accordance with their relations with others: A.P. Fiske, ‘The Four Elementary Forms of Sociality: Framework for a Unified Theory of Social Relations’ (1992) 99(4) Psychological Review 689. Fiske developed four relational models to explain human social life: ‘communal sharing’, ‘authority ranking’, ‘equality matching’ and ‘market pricing’. Aiming to engage with these relational models, we argue that ‘market pricing’ seems the most vicinal model to institutional investor and asset manager patterns, being characterised by ‘rational calculations of efficiency or expected utility’ (regardless of social relationships amongst such actors being associated with money or not): ibid., 691–92. As advanced by Fiske, inidividuals may value a model but apply another as well as disagree on which model to apply. Relationships between stewards thus manifest traits from the authority ‘ranking category’, with prestige, elements of rank, hierarchical structures and charismatic legitimation being frequently encountered amongst stewards, as it will be shown in the next section that examines isomorphic trends.
12 Such interactions take place both from a corporate governance (synergies or social dynamics when exercising stewardship under a shareholder capacity) and an investment management (interactions between investors themselves and between investors and beneficiaries) perspective. Our analysis transcends both levels by shedding light on the interactions between stewards holistically, aiming to demonstrate the existence of a social norm at both levels. On stewardship’s ‘inward’ facet, more generally, namely the interactions between institutional investors and their clients/beneficiaries that regard to investment management aspects, see D. Katelouzou and D. Puchniak, ‘Global Shareholder Stewardship: Complexities, Challenges and Possibilities’ in Katelouzou and Puchniak (n 1) 8–9.
13 As it has been advanced by E. Micheler, Company Law, A Real Entity Theory (Oxford University Press, 2021).
14 Stewardship groups can take any form, characterized by an agglomeration of individuals (internal teams within an institutional investor or asset manager, third parties to which stewardship activities may have been delegated, teams of stewardship consultants etc) as well as of groups of investors or managers forming coalitions. They can also take any legal form (e.g. corporate, trust, contractual or foundation), as mentioned in the next section.
15 This paper does not examine the raison d’être of other hard law measures applicable to asset owners and asset managers, as it exclusively focuses on shareholder stewardship aspects related to corporate governance.
16 Fictionalist theories consider firms pure legal fictions.
17 Aggregationist theories simply conceive firms as aggregates of their parts, depicting the assemblage of individuals, contracts and assets.
18 For a complete overview of different theories, see D. Gindis, ‘From Fictions and Aggregates to Real Entities in the Theory of the Firm’ (2009) 5 Journal of Institutional Economics 25. See also Freund’s three ‘salient characteristics of the body corporate: its unity, its distinctiveness and its identity in succession’ as a criterion for the recognition of a real entity: Ernst Freund, The Legal Nature of Corporations (University of Chicago Press, 1897), cited by Gindis, ibid.
19 R.R. Nelson and S.G. Winter, An Evolutionary Theory of Economic Change (Cambridge, MA: Harvard University Press, 1982); S.G. Winter, ‘On Coase, Competence and the Corporation’ (1988) 4(1) Journal of Law, Economics and Organization 163. Gindis (n 18) 40 refers to the firms’ ‘“ontological glue”, which is further broken down into: “institutional glue” created by legal entity status, constitutive rules, contracts, and norms; “organizational glue” manifested by structures, processes, functions and roles; “motivational glue” that ensures loyalty and adherence to common goals through a variety of means; “cognitive glue” accounting for identification, shared beliefs, and representations; and “capabilities glue” that relates to the complementarity between human assets such as knowledge and non-human assets, to productive routines, and so on’. See also D. Gindis, ‘Some Building Blocks for a Theory of the Firm as a Real Entity’ in Y. Biondi, A. Canziani and T. Kirat (eds), The Firm as an Entity: Implications for Economics, Accounting and the Law (London and New York: Routledge, 2007) 279.
20 K. Weber and T. Dacin, ‘The Cultural Construction of Organizational Life’ (2011) 22 Organization Science 286.
21 Micheler (n 13) 28. For an empirical study demonstrating that norm-constrained institutional investors (e.g. pension funds, universities as well as religious, charitable and non-profit groups) engage in a value-driven (rather than profit-driven) positive screening in CSR issues and that social norms’ influence on stock market is non-negligible, see S.F. Cahan, C. Chen and L. Chen, ‘Social Norms and CSR Performance’ (2017) 145(3) Journal of Business Ethics 493.
22 Micheler (n 13) 28.
23 G. Teubner, ‘The Many-Headed Hydra: Networks as Higher-Order Collective Actors’, in J. McCahery, S. Picciotto and C. Scott (eds), Corporate Control and Accountability (Oxford University Press, 1993); B. Kogut, ‘The Network as Knowledge: Generative Rules and the Emergence of Structure’ (2000) 21 Strategic Management Journal 405.
24 R. Adelstein, ‘Firms as Social Actors’ 6(3) (2010) Journal of Institutional Economics 329, 339.
25 Micheler (n 13) 21.
26 Adelstein (n 24) 340.
27 M. Aoki, Toward a Comparative Institutional Analysis (Cambridge MA: MIT Press, 2011) 11. See also K. Basu, The Republic of Beliefs: A New Approach to Law and Economics (Princeton University Press, 2018).
28 W. McDougall, Introduction to Social Psychology (Meuthen, 1908) 37, cited in G.M. Hodgson, ‘What Are Institutions?’ 40 Journal of Economic Issues 1, 6.
29 As it has been critically argued, ‘[t]here is no financial gain from stewardship. But there are tremendous political stakes: J. Schwartz, ‘Stewardship Theater’ (2022) 100 Washington University Law Review 393, 432. On a similar argument regarding asset owners’ and asset managers’ openness to reputational benefits arising from adhering to the ESG agenda out of concerns related to a potential governmental initiative, see P. Davies, ‘The UK Stewardship Code 2010–2020: From Saving the Company to Saving the Planet?’ in Katelouzou and Puchniak (n 1) 65.
30 J. Meyer and B. Rowan, ‘Institutionalized Organizations: Formal Structure as Myth and Ceremony’ (1997) 83 American Journal of Sociology 340; A.R. Heugens and M.W. Lander, ‘Structure! Agency! (And Other Quarrels): A Meta-Analysis of Institutional Theories of Organization’ (2009) 52(1) The Academy of Management Journal 61.
31 Heugens and Lander, ibid, 64.
32 Micheler (n 13) 24.
33 See, for example, the FRC’s UK Stewardship Code (compulsory for asset managers), the Australian FSC’s Standard 23: Principles of Internal Governance and Asset Stewardship (compulsory for FSC members) and the following instruments in India that are mandatory for their members: IRDAI’s Guidelines on Stewardship Code for Insurers, PFRDA’s Common Stewardship Code and SEBI’s Stewardship Code.
34 Gindis (n 18).
35 Ibid, 39. S. Deakin, D. Gindis, G.M. Hodgson, K. Huang and K. Pistor, ‘Legal Institutionalism: Capitalism and the Constitutive Role of Law’ (2017) 45 Journal of Comparative Economics 188.
36 See, for example, Adelstein (n 24) 334.
37 D. Katelouzou, ‘The Rhetoric of Activist Shareholder Stewards’ (2022) 18(3) New York University Journal of Law and Business 665, 733.
38 Micheler (n 13) 21.
39 W.R. Scott, Institutions and Organizations (Sage, 1995) 56; See more generally M. Wooten and A.J. Hoffman, ‘Organizational Fields: Past, Present and Future’ in R. Greenwood, C. Oliver, K. Sahlin and R. Suddaby (eds) The SAGE Handbook of Organizational Institutionalism (Sage, 2008) 130–31. For applications of the related notion of ‘strategic action fields’ to law and corporate governance, see F. Partnoy, ‘Law and the Theory of Fields’ 39 Seattle University Law Review 579; N. Fligstein, ‘The Theory of Fields and Its Applications to Corporate Governance’ 39 Seattle University Law Review 237.
40 P. DiMaggio and W. Powell, ‘The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields’ (1983) 48(2) American Sociological Review 147; see also D.L. Deephouse, ‘Does Isomorphism Legitimate?’ (1996) 39 Academy of Management Journal 1024.
41 Ibid, 149.
42 Ibid, 150.
43 Ibid, 154.
44 See, for example, the shifting focus of the latest version of the Stewardship Code, leading towards a reconceptualisation of stewardship as ‘systemic’: Davies (n 29).
45 Katelouzou and Puchniak (n 12) 29–31; see also D. Katelouzou and M. Siems, ‘The Global Diffusion of Stewardship Codes’ in Katelouzou and Puchniak (n 1).
46 S. Gomtsian, ‘Different Visions of Stewardship: Understanding Interactions Between Large Investment Managers and Activist Shareholders’ (2022) 22(1) Journal of Corporate Law Studies 151, 188. Nevertheless, Gomtsian expresses reservations regarding such alignment trends that may have an adverse impact on the breadth and depth of shareholder stewardship.
47 DiMaggio and Powell (n 40) 151.
48 ‘Russia-focused Funds with more than €4bn in Assets Freeze Redemptions’, Financial Times, 2 March 2022.
49 Schwartz (n 29), citing the empirical data provided by R. Bubb and E. Katan, ‘The Party Structure of Mutual Funds’ (2020) European Corporate Governance Institute Law Working Paper No. 560/2020, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3124039, 8.
50 More generally, on companies aiming to gain such legitimacy by mimicking ‘innovations’, see DiMaggio and Powell (n 40) 152.
51 Schwartz (n 29).
52 Heugens and Lander (n 30).
53 Schwartz (n 29).
54 M. Granovetter, ‘Economic Action and Social Structure: The Problem of Embeddedness’ (1985) 91 American Journal of Sociology 481.
55 Heugens and Lander (n 30) 63.
56 Micheler (n 13).
57 Heugens and Lander (n 30) 63.
58 See the relevant debate as explained by Heugens and Lander (n 30).
59 Micheler (n 13).
60 Which can be also seen under a ‘sociality’ spectrum: indeed, market pricing ‘is not merely a pattern that happens to emerge out of the independent and unrelated actions of individuals [but] also a directive force that guides coordinated action toward a goal’: Fiske (n 11) 707. More generally, investment practices also depict a means to take into consideration social values and partake into markets’ collective decision making processes: ibid.
61 Amongst an abundance of social norm theories, this article focuses on those that best depict stewardship’s sociality.
62 ibid.
63 C.R. Sunstein, ‘Social Norms and Social Roles’ (1996) 96(4) Columbia Law Review 903. See also, E. Ullmann-Margalit, The Emergence of Norms (Oxford University Press, 1997).
64 J. Crowe and L. Agnew, ‘Legal Obligation and Social Norms’ (2020) 41 Adelaide Law Review 217, 229 citing C. Bicchieri, Norms in the Wild: How to Diagnose, Measure, and Change Social Norms (Oxford University Press, 2017) 111. The coordination of action is organically developed via the continuous interaction of the individual actors over time: ibid, 231.
65 A. Falk, E. Fehr and U. Fischbacher, ‘Driving Forces of Informal Sanctions’ (2001) Zurich IEER Working Paper No. 59, https://www.econ.uzh.ch/static/wp_iew/iewwp059.pdf, citing J. Coleman, Foundations of Social Theory (The Belknap Press of Harvard University Press, 1990).
66 Ibid, 5.
67 J.N. Gordon, ‘Systematic Stewardship’ (2022) Journal of Corporation Law forthcoming, European Corporate Governance Institute Law Working Paper No. 566/2021, https://ssrn.com/abstract=3782814; see also A. Kokkinis, Corporate Law and Financial Instability (Abingdon: Routledge, 2018) 21–25, providing an overview of empirical evidence showing that in banks more powerful shareholders were associated with higher insolvency risk in the years leading up to the 2008 global financial crisis.
68 Katelouzou and Puchniak (n 12).
69 S. Legros and B. Cislaghi, ‘Mapping the Social-Norms Literature: An Overview of Reviews’ (2020) 15(1) Perspectives on Psychological Science 62, 66.
70 M. Svensson, ‘Norms in Law and Society: Towards a Definition of the Socio-Legal Concept of Norms’ in M. Baier (ed), Social and Legal Norms (2013, Ashgate) 39, 47.
71 Directive 2017/828/EU of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement [2017] OJ L132/1.
72 C. Bicchieri and E. Dimant, ‘Nudging with Care: The Risks and Benefits of Social Information’ (2019) 191 Public Choice 443.
73 Ibid.
74 ibid.
75 L. Eriksson, ‘Social Norm Theory and Development Economics’ (2015) Policy Research Working Paper No 7450, Washington, DC: World Bank, https://documents1.worldbank.org/curated/en/999971468189875243/pdf/WPS7450.pdf, 33–34.
76 R. Cooter, ‘Expressive Law and Economics’ (1998) 27(2) The Journal of Legal Studies 585.
77 Individuals also interact across networks for a series of incentives: career advancement, competition as well as membership in educational, employer or employee networks. For a network theory based analysis of such interactions and the corresponding academic literature, see L. Enriques and A. Romano, ‘Institutional Investor Voting Behavior: A Network Theory Perspective’, in S. Grundmann and P. Hacker (eds), Theories of Choice: the Social Science and the Law of Decision Making (Oxford University Press, 2021) 227, 247–51.
78 Gomtsian (n 46) 152.
79 Interactions that are facilitated by various features, such as institutionalised investor networks (e.g. Council of Institutional Investors, the UK’s Investor Forum or the British Local Authority Pension Fund Forum, to name a few), co-ownership or geographical links that enhance such interactions: on peer expectations and interactions amongst institutional investors in voting patterns. See Enriques and Romano (n 77) 246–47, 251. For investor networks with an ESG focus, see T. Bowley and J.G. Hill, ‘The Global ESG Stewardship Ecosystem’ (2022) European Corporate Governance Institute - Law Working Paper No. 660/2022, https://ssrn.com/abstract=4240129, 23.
80 A. Carrothers, ‘Friends or Foes? Activist Hedge Funds and Other Institutional Investors’ (2017) 3(17) Economics and Business Review 38; D. Cvijanović, A. Dasgupta and K.E. Zachariadis, ‘Ties at Bind: How Business Connections Affect Mutual Fund Activism’ (2016) 71(6) Journal of Finance 2933; V.K. Pool, N. Stoffman and S.E. Yonker, ‘The People in Your Neighborhood: Social Interactions and Mutual Fund Portfolios’ (2015) 70 Journal of Finance 2679. For empirical evidence, see G. Matvos and M. Ostrovsky, ‘Heterogeneity and Peer Effects in Mutual Fund Proxy Voting’ (2010) 98 Journal of Financial Economics 90, 97–100; A.D. Crane, A. Koch and S. Michenaud, ‘Institutional Investor Cliques and Governance’ (2019) 133 Journal of Financial Economics 175, 181–82.
81 Eriksson (n 75) 9.
82 A. Geisinger, ‘A Group Identity Theory of Social Norms and its Implications’ (2004) 78(3) Tulane Law Review 605, 632.
83 Ibid, 624.
84 A.N. Licht, ‘Social Norms and the Law: Why Peoples Obey the Law’ (2008) 4(3) The Review of Law and Economics 715, 717.
85 Licht turns to psychologists who have analysed structural links among social norms focusing on values; such values are ‘[a]t the individual level […] internalised social representations or moral beliefs that people appeal to as the ultimate rationale for their actions. At the group level, values are scripts or cultural ideals held in common by members of a group; the group’s ‘social mind’: ibid, 728, citing D. Oyserman, ‘Values, Psychological Perspectives’ in N. Smelser and P. Baltes (eds), 22 Internationall Encyclopedia of the Social and Behavioral Sciences (Pergamon, 2002) 16150, 16151. On the notion of internalisation of an obligation, which triggers the creation of a social norm when such internalisation occurs among many actors in a community, see Cooter (n 76).
86 The distinction between instrumentality and non-instrumentality is based on Weber’s categorisation between instrumentally rational and value-rational actions. We argue that stewardship’s sociality is best apt to drive market actors from instrumentally rational action to a mix of instrumental and value rational action (herein instrumental and non-instrumental action respectively): Max Weber, Economy and Society (Bedminster Press 1921) 24–25. Stewardship as a social norm is able to offer a reconceptualised version of profits, by inculcating a different (aka long term) mentality in relation to reaching financial and non-financial objectives. As it has been advanced, social norms ‘make for qualitative differences among human goods, and these qualitative differences are matched by ingenious mental operations involving qualitative differences among different ‘kinds’ of money’: Sunstein (n 63).
87 Katelouzou and Sergakis (n 3) 572. On other non-market factors, see the academic literature focusing on politics and ‘halo signalling’ as significant drivers of stewardship at n 8 above.
88 See, for example, the UK Stewardship Code’s focus on the creation of long-term value for clients and beneficiaries; see also the FRC’s ambition to create a ‘market for stewardship’ by beneficiaries and end-investors aiming to extract more information from institutional investors on stewardship activities and formulate demands for the provision of such services: for an overview of the FRC’s and other initiatives’ focus on the market for stewardship, see D. Katelouzou and E. Micheler, ‘The Market for Stewardship and the Role of the Government’ in Katelouzou and Puchniak (n 1) 67, 68–73.
89 See third part below.
90 On the various formal and informal enforcement mechanisms of shareholder stewardship as well as on a new enforcement taxonomy in this area, see Katelouzou and Sergakis (n 3).
91 A notable example is signatory parties’ motivations to join the Principles for Responsible Investment (PRI), which have been seen as driven by both societal and commercial motives. Signatories are also more likely to join the PRI network if social and environmental issues are considered more prominent in the countries where such signatories are based. R. Gibson, S. Glossner, P. Krueger, P. Matos and T. Steffen, ‘Do Responsible Investors Invest Responsibly?’ (2021) Review of Finance forthcoming, Swiss Finance Institute Research Paper No. 20-13, European Corporate Governance Institute – Finance Working Paper No. 712/2020, https://ssrn.com/abstract=3525530.
92 ‘Discount rates’ refer to individuals’ variable (high or low) tendency to discount the future by deciding to forego immediate benefits of defecting by favouring the benefit of future cooperation that will materialise at a later stage: E. Posner, Law and Social Norms (Cambridge, MA: Harvard University Press, 2000).
93 Katelouzou and Puchniak (n 12) 29.
94 D. Katelouzou and K. Sergakis, ‘When Harmonisation is not Enough: Shareholder Stewardship in the European Union’ (2021) 22 European Business Organization Law Review 203, 228.
95 Schwartz (n 29) 53.
96 Ibid.
97 M. Finnemore and K. Sikkink, ‘International Norm Dynamics and Political Change’ (1998) 52(4) International Organization 887, 898.
98 See, for example, the predominance of the ‘market for stewardship’ approach amongst policy makers and academics (n 88 above).
99 In this regard, ‘there is a long-term trend toward humanizing the ‘other’, or ‘moral progress’, that helps to explain both the end of slavery and the end of colonization and could predict the demise of international war in the future’: Finnemore and Sikkink (n 97) 907.
100 R. C. Ellickson, ‘The Evolution of Social Norms: A Perspective from the Legal Academy’ (1999) Yale Law School, Program for Studies in Law, Economics and Public Policy, Working Paper No 230, at http://papers.ssrn.com/paper.taf?abstract_id=191392.
101 ‘Change agents’ are the drivers behind the emergence of new social norms: ibid, 15.
102 Ibid, 17–20.
103 Ibid, 29.
104 I. H.-Y. Chiu, ‘Governing the Purpose of Investment Management: How the “Stewardship” Norm is being (Re)Developed in the UK and EU’ (2021) European Corporate Governance Institute - Law Working Paper No. 602/2021, https://ssrn.com/abstract=3908561; A. Dignam, ‘The Future of Shareholder Democracy in the Shadow of the Financial Crisis’ (2013) 36 Seattle University Law Review 639.
105 The percentage of retail investors wanting to contribute to corporate governance matters and to support ESG issues keeps rising. For some interesting empirical data, see EQ, ‘Shareholder Voice: Responding to Uncertain Times’ (2022) https://equiniti.com/uk/shareholder-voice-2022/; see also similar empirical evidence in sustainability preferences amongst different investor generations in A. Gelfand, ‘The ESG Generation Gap: Millennials and Boomers Split on Their Investing Goals’ (10 November 2022) Stanford Graduate School of Business, https://www.gsb.stanford.edu/insights/esg-generation-gap-millennials-boomers-split-their-investing-goals.
106 Moreover, notwithstanding the lack of transparency in relation to stewardship policy motivations, it has been alleged that the Big Three ‘take tentative steps before adopting rules’: D.S. Lund, ‘Asset Managers as Regulators’ (2022) 171 University of Pennsylvania Law Review, https://ssrn.com/abstract=3975847, 36. This may assist the market in predicting forthcoming actions based on soft engagement activities: ibid.
107 See, for example, Larry Fink’s annual letter to CEOs: https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter.
108 See for example the anecdotal evidence provided showing that the Big Three are primarily concerned to be seen as having a positive impact on the world, being subject to a constant scrutinising of their market impact: Lund (n 106) 41.
109 Ibid. ‘Anti-social’ behaviour is intented as going against socially responsible patterns. This observation has been made in relation to the CEOs’ role within asset managers that is subject to such dynamics and cannot thus be the sole element for decision-making processes. See contra the opinion expressed by Congressional Republicans that the personal views and values of such CEOs are orientating stewardship decisions: Schwartz (n 29) 52. See also the view that the variegated governance philosophies expressed by different asset managers can explain voting patters; leadership ideology and firm culture in the various stewardship groups can thus be relevant in shaping voting by asset managers: Bubb and Katan (n 49). As Fisch argues, ‘socially or politically responsible investing behavior may be consistent with the personal preferences of fund managers, who view their actions as in the best interests of society’: J.E. Fisch, ‘Mutual Fund Stewardship and the Empty Voting Problem’ (2021), European Corporate Governance Institute Working Paper Series in Law, Working Paper No. 612/2021, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3939112, 7. See contra Enriques and Romano (n 77) 229, who argue that ‘the traditional atomistic focus on the incentives of individual investors is inadequate to understand institutional investors’ role in corporate governance’.
110 Market actors, such as asset managers (e.g. Blackrock and DWS) and service providers (e.g. Minerva Analytics), have declared their commitment or developed software to facilitate the expression of voting or stewardship preferences in pooled funds, paving the way for the re-enfranchisement of shareholders at the asset owner level. In parallel, ultimate beneficiaries are increasingly given opportunities to express their views on a series of matters, by emitting advisory votes to asset managers ahead of AGMs via companies that offer voting API services to pension schemes (e.g. Tumelo). Principles for Responsible Investment (PRI) has also focused on guiding pension funds in the integration of ultimate beneficiaries’ sustainability preferences with specific solutions and survey templates: PRI, ‘Understanding and Aligning with Beneficiaries’ Sustainability Preferences’ (2021) at https://www.unpri.org/strategy-policy-and-strategic-asset-allocation/understanding-and-aligning-with-beneficiaries-sustainability-preferences/7497.article. Dutch pension funds have occasionally offered a real vote to ultimate beneficiaries on certain sustainability issues and executed the members’ vote: for the empirical data as well as other examples of integration of individuals’ preferences by funds, see R. Bauer and P. Smeets, ‘Eliciting Pension Beneficiaries’ Sustainability Preferences: Why and How?’ (2021) Wharton Pension Research Council Working Paper 7–2021 at https://repository.upenn.edu/prc_papers/710/.
111 For example, the European Insurance and Occupational Pensions Authority (EIOPA), while acknowledging the challenging features of individuals’ participation in this agenda, has expressed its support for Institutions for occupational retirement provision (IORPs) to gauge individual members’ ESG preferences; such approximation to individual members is seen for IORPs as ‘essential for justifying the integration of ESG factors’ when complying with the Prudent Person Rule: EIOPA, ‘EIOPA’s response to the European Commission’s consultation on the renewed sustainable finance strategy’, 20/399, 15 July 2020 at https://www.eiopa.europa.eu/content/eiopa-responds-european-commission-consultation-renewed-sustainable-finance-strategy_en. EIOPA has also included in its 2022 objectives the obligation for insurers and pension funds to ‘reflect policy holder and pension scheme members preferences for sustainable investments’: EIOPA, ‘Revised Single Programming Document 2022–2024’, 22/042, 27 January 2022, 26 at https://www.eiopa.europa.eu/document-library/annual-work-programme/revised-single-programming-document-2022-2024_en.
112 ‘The desire to contribute to a collective good is palpably a function of social norms’: Sunstein (n 63) 945. So even if stewardship-related preferences might be dismissed as merely a fashionable trend, the social norm element cannot be ignored. Given the fact that ‘choices are a function of prevailing social meanings and roles, which can bring into effect a wide range of relevant norms’ (ibid. 25), mutatis mutandis, investors’ preferences already constitute embryonic evidence of a social norm for non-financial preferences. The fact that institutional investors and asset managers may be called upon to demonstrate how they take them into consideration in their modus operandi is a thus logical consequence.
113 B.R. Cheffins, The Public Company Transformed (Oxford: Oxford University Press, 2019) 274, explaining that in the late 1990s in the US, CEOs were very highly paid and treated by the media as royalty and larger-than-life individuals: ‘CEOs were increasingly being thought of as iconic symbols of corporate America’s success, as such individuals logically would have been thought of as appropriate recipients of generous compensation’.
114 B.V. Reddy, ‘The Emperor’s New Code? Time to Re-Evaluate the Nature of Stewardship Engagement Under the UK’s Stewardship Code’ (2021) 84 Modern Law Review 842, 852. The difficulty in deciphering stewardship’s concrete dimension and goals also stems from the heterogeneity of its target audience, which does not allow for an immediate grasp of its social norm identity. A better and detailed understanding of the target audience is thus necessary to start unveiling stewardship’s sociality: see, more generally, on target audiences, Eriksson (n 75) 33.
115 Especially in younger generations, such as Millennials and Generation Z, that demonstrate a more independent and active stance in corporate governance matters. These generation manifest different values, preferences (mostly sustainability ones in light of the global challenges affecting their generation) or circumstances compared to their predecessors, and seek to partake into corporate life via the use of advanced technological means, independently of financial intermediation: see S.A. Gramitto Ricci and C.M. Sautter, ‘Corporate Governance Gaming: The Collective Power of Retail Investors’ (2022) 22(1) Nevada Law Journal 51.
116 Katelouzou and Puchniak (n 12).
117 In relation to such activities in the area of ESG, see Bowley and Hill (n 79) 17.
118 More generally, on shareholder stewardship as a transnational norm, see D. Katelouzou and P. Zumbansen, ‘The New Geographies of Corporate Governance’ (2020) 42 University of Pennsylvania Journal of International Law 1, 80.
119 Finnemore and Sikkink (n 97).
120 Katelouzou and Zumbansen (n 118) 86–87. See also the UK Stewardship Code’s highly influential definition of 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.’: Financial Reporting Council (FRC), The UK Stewardship Code (2020), https://www.frc.org.uk/getattachment/5aae591d-d9d3-4cf4-814a-d14e156a1d87/Stewardship-Code_Dec-19-Final-Corrected.pdf, 4.
121 See, for example, International Corporate Governance Network (ICGN), ‘ICGN Global Stewardship Principles’ (2020) https://www.icgn.org/sites/default/files/2021-06/ICGN%20Global%20Stewardship%20Principles%202020_1.pdf; see also the European Fund and Asset Management Association (EFAMA)’s Stewardship Code: https://www.efama.org/sites/default/files/files/EFAMA%20Stewardship%20Code_FINAL.pdf.
122 See last part.
123 For a comprehensive overview of the divergent theories in this area, see S. Legros and B. Cislaghi, ‘Mapping the Social-Norms Literature: An Overview of Reviews’ (2020) 15(1) Perspectives on Psychological Science 62.
124 As it will be shown in the last section, stewardship’s sociality provides sound arguments for the maintenance of soft law stewardship provisions and for an enabling and less interventionist approach from the law. The importance of social norms driving behavioural patterns and actions, independently of any legal framing that may facilitate such processes, has been highlighted in the area of shareholder primacy; seen first and foremost as a social norm in the business community, shareholder primacy has been conceived as the main driving force behind managers’ decisions. If this argument holds true, when the business community follows a certain widespread attitude, it could be seen as abiding by a social norm. This would be true, a fortiori, if social norms are understood as a behavioural standard that is commonly shared and with an authoritative or compulsory connotation for its members of the community that applies it: D. Rönnegard and N.C. Smith, ‘Shareholder Primacy vs. Stakeholder Theory: The Law as Constraint and Potential Enabler of Stakeholder Concerns’ in J.S. Harrison, J.B. Barney, R.E. Freeman and R.A. Phillips (eds), The Cambridge Handbook of Stakeholder Theory (Cambridge University Press, 2019) 117.
125 Finnemore and Sikkink (n 97) 888.
126 Ibid, 910.
127 These synergies become particularly evident in the area of macro-stewardship, namely the engagement with ‘governments, regulators and supranational organizations with the aim of seeking correction of market failures and mitigation of systemic risks to put markets on a more sustainable footing’, see Aviva Investors, ‘ESG Definitions Glossary’, https://www.avivainvestors.com/en-gb/capabilities/esg-definitions-glossary/, cited by Katelouzou (n 37) 669.
128 K. O’Neill, J. Balsiger, S.D. VanDeveer, ‘Actors, Norms, and Impact: Recent International Cooperation Theory and the Influence of the Agent-Structure Debate’ (2004) 14(7) Annual Review of Political Science 149, 151.
129 Referring to the relationships between states (agents) and the international system (structure).
130 Ibid, 170.
131 Katelouzou and Micheler (n 88) 76.
132 On the evolution of institutional investor engagement from the traditional governance focus to the more recent ESG issues, see Fisch (n 109).
133 Lazard, ‘2021 Review of Shareholder Activism’ (2021), https://www.lazard.com/media/452017/lazards-2021-review-of-shareholder-activism_vff.pdf; E. Pollman, ‘The Making and Meaning of ESG’ (2022) European Corporate Governance Institute - Law Working Paper No. 659/2022, https://ssrn.com/abstract=4219857; W.G. Ringe, ‘Investor-led Sustainability in Corporate Governance’ (2021) European Corporate Governance Institute Law Working Paper No. 615/2021, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3958960.
134 Ibid; see also Schwartz (n 29). More generally on the Big Three’s engagement with the ESG agenda, J. Azar, M. Duro, I. Kadach and G. Ormazabal. ‘The Big Three and Corporate Carbon Emissions Around the World’ (2021) 142 Journal of Financial Economics 674; A. Dyck, K.V. Lins, L. Roth and H.F. Wagner, ‘Do Institutional Investors Drive Corporate Social Responsibility? International Evidence’ (2019) 131 Journal of Financial Economics 693.
135 A. Christie, ‘The Agency Costs of Sustainable Capitalism’ (2021) 55 University of California Davis Law Review 875, 907.
136 M.M. Schanzenbach and R.H. Sitkoff, ‘Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee’ (2020) 72 Stanford Law Review 381 (2020).
137 Pacces argues that ‘institutional investors may not be entirely honest in pursuing ESG investment and, even if they are, their ESG labels may not correspond with what beneficiaries actually want’: A.M. Pacces, ‘Sustainable Corporate Governance: The Role of the Law’ (2020) European Corporate Governance Institute - Law Working Paper No. 550/2020, Amsterdam Law School Research Paper No. 2020–66, Amsterdam Center for Law & Economics Working Paper No. 2020-05, at https://ssrn.com/abstract=3697962, 7.
138 For a comprehensive analysis, see D. Katelouzou and A. Klettner, ‘Sustainable Finance and Stewardship: Unlocking Stewardship’s Sustainability Potential’ in Katelouzou and Puchniak (n 1) 549.
139 ESG also expands into new territories within the corporate governance realm of stewardship; from shareholder engagement, it starts covering – as it is the case in the revised UK Stewardship Code’s Principle 7 – investment policy at large: see Reddy (n 114) 849.
140 For example, food and energy security but also the role of the defence industry may put aside for a certain period of time other key ESG elements, such as the environmental one: Gomtsian (n 1) 41.
141 More generally, on institutional investor interactions in the area of ESG at the global scale that start challenging the investor ‘rational reticence’ argument and demonstrate a ‘deliberate, strategic and coordinated behaviour’, see Bowley and Hill (n 79) 32. On the ‘rational reticence’ argument, see R.J. Gilson and J.N. Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 863.
142 Calls for interventionist hard law and radical reforms to achieve ESG goals may find this approach implausible, given the pressing nature of global challenges. We nonetheless argue that interventionist measures may well create far-reaching and counter-productive effects that will impede innovation in the area of ESG initiatives; such innovation will materialise out of social dynamics in a much more prolific way.
143 See for example, Y. Liu, H. Lu and K. Veenstra, ‘Is Sin Always a Sin? The Interaction Effect of Social Norms and Financial Incentives on Market Participants’ Behavior’ (2014) 39(4) Accounting, Organisations and Society 289. Nevertheless, as it has been argued in relation to EU sustainability risk-related disclosures on various market participants, ‘it is clear that the EU does not view holistic-risk engagement as a lost cause, with an assumption that beneficiaries will encourage asset owners to exercise such stewardship based upon disclosures that clearly link such engagement (or the lack thereof) to the relevant portfolio’s financial returns.’: Reddy (n 114) 871. The evidence related to the effects of ESG activism on financial returns for investors and issuers remains mixed: for an overview of various empirical studies, see Katelouzou and Micheler (n 88) 73–75.
144 In fact, as it has been observed, shareholders and asset managers may opt for the pursuit of short-term goals instead of the long-term ones advocated by the UK Stewardship Code, due to the portfolio (instead of company) maximization focus and to the unpredictability of companies’ long-term value. As such, and despite legal and factual capacity, market actors lack incentives to exercise stewardship in the expected way: Davies (n 29) 44. See also the analysis on the lack of economic incentives for institutional investors to invest in stewardship by L.A. Bebchuk, A. Cohen and S. Hirst, ‘The Agency Problems of Institutional Investors’ (2017) 31 Journal of Economic Perspectives 89.
145 Pacces opines that ‘[t]he question remains how much profit shareholders are prepared to give up to pursue sustainability’: Pacces (n 137) 3. Critical theorists opine that ‘many investors … are unwilling to sacrifice profits for environmental gains’ and that ‘[w]hatever environmental sensitivities investors may have, they function within a financial system whose aim is to mobilise capital […] in order for it to deliver a profit’: B. Sjåfjell and B.J. Richardson, ‘Capitalism, the Sustainability Crisis, and the Limitations of Current Business Governance’ in B. Sjåfjell and B.J. Richardson (eds), Company Law and Sustainability: Legal Barriers and Opportunities (Cambridge University Press, 2015) 1, 3, 10.
146 ‘Shareholders are the main drivers of the green transition, because they worry about the long-term prospects of the companies they invest in, as this is how their shares are valued’: J. Lau Hansen, ‘Unsustainable Sustainability’, 8 March 2022, Oxford Business Law Blog at https://www.law.ox.ac.uk/business-law-blog/blog/2022/03/unstainable-sustainability.
147 ESG, after all, can be adopted so as to mitigate systemic risks and with a predominant financial focus that aims to protect financial returns’ continuity: V.H. Ho, ‘Risk-Related Activism: The Business Case for Monitoring Nonfinancial Risk’ (2016) 41(3) Journal of Corporation Law 647; see also Katelouzou and Klettner (n 138).
148 This is perhaps the reason for which it has been argued that the acuteness of the lack of economic incentives to invest in stewardship may be less relevant in the ESG field: see Katelouzou and Puchniak (n 1) (2022) 24.
149 S. Kedia, L.T. Starks and X. Wang, ‘Institutional Investors and Hedge Fund Activism’ (2021) 10(1) The Review of Corporate Finance Studies 1; Christie (n 135) 921.
150 Gilson and Gordon (n 141).
151 See, contra, the empirical data showing that, at least in relation to what is mentioned in stewardship statements in compliance with the UK Stewardship Code, the ‘stewardship arbitrageur’ role appears to be true; this may imply that such stewardship role can be exercised within and not outside the regulatory spectrum, as Gilson and Gordon (ibid) advocate: Katelouzou (n 37) 754. We argue that the sociality of stewardship is prevalent in the development of such roles and coalitions between actors and that stewardship norms are merely present to evidence such dynamics; even if such norms are able to further encourage the development of synergies, their role remains facilitative and cannot amount to a triggering factor. If stewardship statements align with such regulatory norms, this disclosure pattern may certainly demonstrate the willingness to display alignment and gain legitimacy and social approbation but is not sufficient to holistically represent the well-hidden sociality forces between investors that are independent of any ‘normification’.
152 Katelouzou and Puchniak (n 12) 37. See also E. Dimson, O. Karakaş and X. Li, ‘Coordinated Engagements’ (2021) European Corporate Governance Institute – Finance Working Paper No. 721/2021, https://ssrn.com/abstract=3209072.
153 See Puchniak (n 5).
154 A. Brav, A. Dasgupta and R. Mathews, ‘Wolf Pack Activism’ (2021) 68(8) Management Science 5557. See also the empirical evidence regarding the compatibility of activist hedge funds with institutional investors, suggesting that this mutually beneficial relationship is linked to the creation of value and the improvement of performance and of corporate governance: A. Carrothers, ‘Friends or Foes? Activist hedge Funds and Other Institutional Investors’ (2017) 3(17) Economic & Business Review 38, 39. On the potential of stewardship’s compatibility with hedge fund activism and on the ensuing risk of an adverse impact on the breadth and depth of shareholder stewardship, see Gomtsian (n 46).
155 See, for example, the following initiatives that have gained prominence: the Climate Change 100+, Net-Zero Asset Owner Alliance (supported by the UN), the Net Zero Asset Managers initiative, Race to Zero, the Investor Agenda and the Paris Aligned Investment Initiative.
156 E. Lim and D.W. Puchniak, ‘Can a Global Legal Misfit be Fixed? Shareholder Stewardship in a Controlling Shareholder and ESG World’ in Katelouzou and Puchniak (n 1) 599.
157 See PRI, ‘Anti-ESG Bills in the US will Only Create Confusion for Investors’ (2023), https://www.unpri.org/pri-blog/anti-esg-bills-in-the-us-will-only-create-confusion-for-investors/11077.article.
158 As of June 2023, 165 anti-ESG pieces of legislation were introduced in 39 states, with 22 bills and 6 resolutions being approved by state governments and 12 pending. See all the data from Pleiades Strategy, ‘2023 Anti-ESG Statehouse Report: Right-Wing Attacks on the Freedom to Invest Responsibly Falter in the States’ (2023), https://www.pleiadesstrategy.com/state-house-report-bill-tracker-republican-anti-esg-attacks-on-freedom-to-invest-responsibly-earns-business-labor-and-environmental-opposition.
159 For a critique of anti-ESG bills and on the risk of ‘liability trap’ for institutional investors, see D.J. Berger, D.H. Webber and B. Young, ‘The Liability Trap: Why the ALEC Anti-ESG Bills Create a Legal Quagmire for Fiduciaries Connected with Public Pensions’ (2023), https://ssrn.com/abstract=4360119.
160 The first stewardship code was introduced by the UK Financial Reporting Council (FRC) in 2010 and it was revised in 2012 and again in 2019. For the most recent version see FRC, The UK Stewardship Code 2020, https://www.frc.org.uk/getattachment/5aae591d-d9d3-4cf4-814a-d14e156a1d87/Stewardship-Code_Final2.pdf.
161 In the Netherlands, a stewardship code was introduced in 2018 by Eumedion, an institutional investors’ forum, to replace the 2011 Eumedion 10 Best Principles for Engaged Share-Ownership. See, further, the Dutch Stewardship Code (20 June 2018), https://www.eumedion.nl/en/public/knowledgenetwork/best-practices/2018-07-dutch-stewardship-code-final-version.pdf.
162 In Italy, Assogestioni, an association of asset managers, adopted stewardship principles in 2013 and revised them in 2015 and 2016. For the latest version of the principles, see Assogestioni, Italian Stewardship Principles for the exercise of administrative and voting rights in listed companies (2016), https://www.assogestioni.it/sites/default/files/docs/principi_ita_stewardship072019.pdf.
163 See the Danish Committee on Corporate Governance, Stewardship Code (November 2016), https://corporategovernance.dk/sites/default/files/180116_stewardship_code.pdf.
164 In Switzerland, in 2013 Economiesuisse (a Swiss NGO representing the interests of the Swiss business community), associations of institutional investors, proxy advisers and regulatory authorities joined forces and published the ‘Guidelines for institutional investors governing the exercising of participation rights in public limited companies’, https://swissinvestorscode.ch/wp-content/uploads/2013/06/Richtlinien_16012013_e.pdf.
165 The Norwegian stewardship principles introduced by the Norwegian Fund and Asset Management Association in 2003 and revised in 2012 are available (in Norwegian) at https://vff.no/assets/Bransjenormer/Bransjeanbefalinger/Bransjeanbefaling-ut%C3%B8velse-av-eierskap.pdf.
166 The UK Stewardship Code originates from the Institutional Shareholders’ Committee, The Responsibilities of Institutional Shareholders in the UK (1991), which was subsequently revised in 2002 and 2009.
167 According to J.R. Searle, The Construction of Social Reality (New York: Free Press., 1995) 35–36, cited by R. Adelstein, ‘Firms as Social Actors’ (2010) 6(3) Journal of Institutional Economics 329, 346.
168 L. Sacconi, ‘Corporate Social Responsibility and Corporate Governance’ (2012) 38 EconomEtica, 20.
169 Katelouzou and Siems (n 45).
170 Legal norms and not born ‘out of nowhere’. As described by Basu, ‘even for many positive laws, the origins often lie in the gradually hardening norms of the society. Thus the law can at times simply be the codification of norms’: K. Basu, ‘Social Norms and The Law’ in Peter Newman (ed), The New Palgrave Dictionary of Economics and the Law (London: McMillan, 1998). Social norms inevitably precede the normative action since the imposition of a certain conduct relies upon a shared understanding that an embryonic social norm already exists: Sunstein (n 63).
171 SRD II, Recital 19: ‘A medium to long-term approach is a key enable of responsible stewardship of assets.’. See also European Commission, MEMO, Action Plan on European company law and corporate governance: Frequently Asked Questions, 12 December 2012, https://ec.europa.eu/commission/presscorner/detail/en/MEMO_12_972) where the European Commission uses the term stewardship as synonymous to shareholder engagement.
172 SRD II, Art. 3g(1)(a).
173 SRD II, Art. 3g(1)(b). Additionally, institutional investors and asset managers are expected under Articles 3h and 3i to disclose annually their investment strategies (including how their investment strategy contributes to the medium to long-term performance of their assets) and their arrangements with each other.
174 SRD II, Art. 3g(1).
175 SRD II, Art. 3h and 3i.
176 Bicchieri and Dimant (n 72).
177 Cooter (n 76). On law as a focal point, see Basu (n 27). The existence of multiple equilibria and the fact that, apart from law, ‘history and chance determine where the system settles, [and that] [i]n the case of social norms, however, law can influence where the system settles by coordinating expectations’ could confirm that, if stewardship is not yet commonly accepted as a social norm it is because social norms are multiple as equilibria are. Therefore, it could be argued that a gradual intervention by legislators is symptomatic of expectations and – by consequence – of the existence a form of social norm: ibid.
178 On the hardening of stewardship norms, see further I. Chiu and D. Katelouzou, ‘From Shareholder Stewardship to Shareholder Duties: Is the Time Ripe?’ in H. Birkmose (ed), Shareholders’ Duties, (Kluwer Law International, 2017) 131.
179 Ibid.
180 Finnemore and Sikkink (n 97).
181 Ibid, 893.
182 For the pressure stemming from being observed in relation to adhering to social norms, see Eriksson (n 75) 11.
183 Katelouzou and Sergakis (n 94) 225.
184 F. Möslein and K.E. Sørensen, ‘Nudging for Corporate Long-Termism and Sustainability? Regulatory Instruments from a Comparative and Functional Perspective’ (2018) 24(2) Columbia Journal of European Law 391.
185 Katelouzou and Sergakis (n 94), also citing, in this framework, R.W. Scott, Institutions and Organizations, (2nd edn. Sage Publications, Thousand Oaks, 2001).
186 See, for example, the considerable expansion of the stewardship ecosystem in the new SC: Davies (n 29).
187 Katelouzou and Sergakis (n 94).
188 F.A. Hayek, Law, Legislation and Liberty: Rules and Order (Routledge, 1973) ch 1.
189 For an exhaustive analysis of these five meanings, see Katelouzou and Puchniak (n 12) 6–9.
190 Ibid, 9.
191 Gomtsian (n 46) 187.
192 Basu (n 170) 479; see also F.A. Hayek, The Constitution of Liberty (Ronald Hamowy edn, University of Chicago Press, 2011).
193 Basu (n 170) 477 distinguishes ‘rationality-limiting norms’, when they ‘limit the domain over which the rationality calculus is applied’, ‘preference-changing norms’, when they are internalised in such a way that they ultimately shape a person’s preferences, and ‘equilibrium-selection norms’. For the purposes of the current study, we argue that stewardship transcends all three categories: it can be conceived as a rationality-limiting norm. to the extent that it drives investors forego utilitarianism in their modus operandi, a preference-changing norm, since it organically drives investors towards the development and pursuit of different preferences, and an equilibrium-selection norm, because it assists stewards in finding a common point of reference in the overall investment landscape while maintaining a certain level of self-interest. Self-interest does not preclude social norms. ‘There is no sharp dichotomy between rationality and social norms or between self-interest and social norms; what is rational and what is in an agent’s self-interest are functions of social norms’: Sunstein (n 63) 956.
194 Ellickson (n 100).
195 Svensson (n 70) 47.
196 On the coexistence of social and legal norms more generally, see ibid, 48. An example of such friction may be considered Germany’s reticence to adopt a soft law stewardship instrument, going against the international trend of proliferation of such instruments: G. Ringe, ‘Stewardship and Shareholder Engagement in Germany’ in Katelouzou and Puchniak (n 1) 202.
197 For the element of complementarity between legal and social norms in corporate governance, see L.A. Stout, Cultivating Conscience (Princeton NJ: Princeton University Press, 2011).
198 J.R. Macey, Corporate Governance (Princeton NJ: Princeton University Press, 2008).
199 ‘The greater the degree of institutionalization, the greater the generational uniformity of cultural understandings, the greater the maintenance without direct social control, and the greater the resistance to change through personal influence’: L.G. Zucker, ‘The Role of Institutionalization in Cultural Persistence’ (1977) 42(5) American Sociological Review 726, 742.
200 Chiu (n 104). More generally, see the Purposeful Company Porject of the British Academy; this and similar initiatives could be seen as additional examples of a source for the emergence of a social norm: https://www.thebritishacademy.ac.uk/publications/future-of-the-corporation-principles-for-purposeful-business.
201 Ibid, 29.
202 Davies (n 29) 66.
203 Reddy (n 114) 866. See also Puchniak’s argument on the FRC’s willingness to maintain the UK’s position as the disseminator of global norms of good corporate governance by revising the UK Stewardship Code in 2020, notwithstanding the criticism that had been expressed in the Kingman review: Puchniak (n 5). The Kingman Reviww had expressed concerns about the Code’s lack of effectiveness and the risks of boilerplate reporting in the absence of a change of direction: John Kingman, ‘Independent Review of the Financial Reporting Council’ (2018), https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/767387/frc-independent-review-final-report.pdf.
This has also resulted in the new wave of ESG stewardship – which may be driven more by social norms than economics. On Kingman Review’s criticism, see also Davies (n 29) 45.
204 On the enforcement of shareholder stewardship, see Katelouzou and Sergakis (n 3).
205 Falk, Fehr and Fischbacher (n 65) 3. This observation remains valid after a social norm has been subject to a legal ‘normification’ process since it constantly evolves and some novel aspects may not be fully encapsulated by soft or hard law provisions, making informal sanctions a more efficient and prompt enforcement method in light of a behavioural pattern that is non-conformant to the social norm.
206 As it has been observed in the social norm literature, ‘policy makers can change a particular signalling equilibrium by either increasing the cost of sending the signals (in which case fewer people will signal), or by decreasing the cost of failing to signal (that is, making it less likely that people who fail to signal will suffer ostracism or other sanctions because they are thought to be “bad” types)’: Eriksson (n 75) 32.
207 On the tiering process as an enforcement mechanism, see Katelouzou and Sergakis (n 3) 591–2.
208 Geisinger (n 82) 607.
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Notes on contributors
Konstantinos Sergakis
Professor Konstantinos Sergakis is Professor of Capital Markets Law and Corporate Governance at the University of Glasgow. Professor Sergakis’ research interests are related to Corporate Law, Capital Markets Law and Corporate Governance. He serves as a Member (Alternate) of the Joint Board of Appeal of the European Supervisory Authorities. He also acts as Chair of the Best Practice Principles Oversight Committee (BPP OC).