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Corporate Governance and Investment Management

The Promises and Limitations of the New Financial Economy

Roger M. Barker and Iris H.-Y. Chiu

Shareholder engagement with publicly listed companies is often seen as a key means to monitor corporate malpractices. In this book, the authors examine the corporate governance roles of key institutional investors in UK corporate equity, including pension funds, insurance companies, collective investment funds, hedge and private equity funds and sovereign wealth funds. They argue that institutions’ corporate governance roles are an instrument ultimately shaped by private interests and market forces, as well as law and regulatory obligations, and that policy-makers should not readily make assumptions regarding their effectiveness, or their alignment with public interest or social good.
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Chapter 3: Corporate equity ownership and misplaced hope in institutional shareholder stewardship

The Promises and Limitations of the New Financial Economy

Roger M. Barker and Iris H.-Y. Chiu

Extract

This chapter presents a high level perspective on the instrumental assumption of corporate governance roles by institutions, and shows that both neglect of such roles or the use of them in a self-interested manner by financial actors produces a mixture of beneficial and deleterious effects for investee companies. The desirability of promoting greater shareholder engagement in a world of institutional share ownership is far from obvious, and should not necessarily be seen as the key to an optimal system of corporate governance, as the UK Stewardship Code and the European Shareholder Rights Directive seem to assume. The awkwardly framed provisions in the new European Shareholder Rights Directive that are punctuated with public interest concerns regarding the nature and effectiveness of institutional investment management show that policy-makers have turned their attention to the governance deficits and issues in this area. We propose more comprehensive thinking about the governance and regulation of investment management practices, building upon the existing patchwork of UK and EU prudential and conduct of business regulation, but also more thoroughly to deal with issues hitherto unaddressed, such as the investment chain structuration and the role of the various entities of which it is composed, appropriate conduct in securities lending and, more broadly, the mitigation of agency problems and perverse incentives in the investment chain. Regulation may be the only means, albeit not necessarily perfect, to address the long-term needs of savers reliant on the investment management industry, and its impact on the long-term wealth-creating potential of the corporate economy. A soft law approach of shareholder stewardship which situates the underlying public interest notions in a private ‘corporate governance’ paradigm is unlikely to be an adequate one. Key words: Stewardship Code, shareholder activism, say on pay, short-termism, value extraction, long-termism.

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