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Iris H-Y. Chiu

This chapter focuses on the nature of ‘private’ and ‘public’ enforcement against shareholders in order to critically tease out the differences in terms of their rationales and broad characteristics. The chapter will raise the question whether the boundaries between the two are clear, and the implications for considering the suitable loci for enforcement. It is not a comprehensive study of the sources of law for enforcement but key examples will be raised.

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Iris H-Y Chiu

The chapter provides a comprehensive analysis of pan-European investment law. By providing an overview of European Union sources of law and regulatory objectives, he offers a thorough introduction to a large and growing market that rivals the United States in global economic importance. It explores the unique features of the two key pillars of European fund governance: UCITS (broadly corresponding to public funds like mutual funds in the United States) and Alternative Investment Funds (broadly corresponding to private US funds, such as hedge or private equity funds). It then offers an analysis of the future trajectory of European investment fund law.

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Iris H.-Y. Chiu

The interpretation of ‘shadow banking’ and the mapping of the shadow banking universe is the subject of much academic commentary and policy discussions. This is because ‘shadow banking’ is often used as a catch-all term to refer to financial activities and transactions that may not be subject to traditional realms of regulation, but the amorphous nature of the term is unsatisfactory for informing debates on regulatory perimeter and policy. Often, a ‘functional’ approach is suggested in order to understand the nature of financial activities and transactions that are lumped into the shadow banking category. The functional approach focuses on the economic function of the financial activity in question, regardless of the type of institution carrying it out. By looking at the economic function performed by the financial activity in question, one may better be able to ascertain the underlying demand and supply for such function and the risks that such functions give rise to, particularly whether systemic risk is implicated. The approach may also highlight the functional similarities and differences with already-regulated financial activity in order to form views as to the regulatory perimeter for shadow banking activities. The functional approach to shadow banking is therefore a prima facie useful approach to surveying the universe of shadow banking and informing the policy-making process in relation to shadow banking activities and transactions at national and international levels. This chapter however raises queries as to the limitations of the functional approach, and whether such limitations would ultimately hamper the development of regulatory policy. In particular, we question whether the functional approach is too embedded in market-liberal assumptions, and stymies imagination in regulatory design by converging upon ‘like-for-like’ analyses and applications. Further, we query whether the functional approach, though conceptually promising, is subject to the legal arbitrage that it seeks to overcome. Nevertheless, this chapter does not deny the achievements made by adopting the functional approach and suggests how it should be put to optimal use.

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Investment funds in an era of financialisation

The Promises and Limitations of the New Financial Economy

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

We discuss the rise of institutional fund management as part of the global trend towards financialisation. This context allows us to draw out the key characteristics of modern institutional fund management which are important in shaping their corporate governance roles. The context of financialisation allows us to appraise whether institutions behave like fiduciary or universal capitalists as some commentators have proposed, or self-interested agency capitalists, as suggested by others. Key words: financialisation, fiduciary capitalism, universal owners, agency capitalism, money manager capitalism, asset allocation.

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

We draw together broad level discussions in the structures and incentives in investment fund management, as reflecting a model of financialised business. We argue that most investment funds running a business model of pooled investments have structurally separated funds from managers for efficiency and regulatory reasons. This has further resulted in the growth and lengthening of the investment chain which has implications for the nature of investment management practice, including the assumption (or lack of assumption) of corporate governance roles for investment funds and their managers. The industry of professionalised asset manager is in particular susceptible to investor myopia and short-termism and is riddled with agency problems. Further, regulatory compliance pressures reinforce market preferences for these behaviours. However, these effects are also by-products of legitimate objectives in investor protection such as regular accountability and ensuring liquidity for investors. We query whether the embrace of ESG factors may change investment behaviour. We note that certain niche funds carry out different investment management practices, adopting ESG factors as a different ethos in their management. They come closer to an investment management paradigm that integrates savers’ long-term interests and the long-term wealth-creation role of the corporate economy. However, we do not think there are sufficient market-driven or regulatory forces that would compel such change to become mainstream. Hence, the model of investment management that the fund industry has developed raises considerable questions for the long-term objectives of meeting savers’ needs and supporting a long-term wealth-creating corporate sector. Key words: investment chain, asset managers, proxy advisers, socially responsible investing, investor protection, short-termism.

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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

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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Pension funds as corporate governance actors

The Promises and Limitations of the New Financial Economy

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

This Chapter provides an overview of public and private sector pension schemes, and the key factors that shape their investment management approaches and their corporate governance behaviour. A key aspect is funds’ reliance on asset managers to discharge their corporate governance roles. Asset managers are likely to professionalise and standardise notions of ‘stewardship’ for cost-effective engagement and to achieve at least an appearance of effective engagement with investee companies. We posit that such corporate governance roles are to be predominantly shaped by the interface between keeping investment management cost low while demonstrating, at least superficially, the achievement of shareholder stewardship to wider society. The likely dominant forms of stewardship will probably revolve around voting subject to proxy advisers’ recommendations and collective engagement organised around defensive concerns or norms in corporate governance but not amounting to polarised and confrontational relations with investee companies. However, we are of the view that opportunistic forms of stewardship are also welcomed by pension funds, as observed in their involvement in securities litigation, especially in the US, and some support for hedge fund activism. We remain sceptical as to whether pension funds and their asset managers can fulfil the aspiration of playing a corporate governance role that is necessary for the long term well-being of the corporate economy. Moreover, we also need to recognise that calling for pension funds and their asset managers to engage in their investee companies’ corporate governance need not be an unequivocal good. Instrumental exercises of corporate governance power could cause more harm than good. Key words: defined benefit pension schemes, defined contribution pension schemes, annuities, liability-driven strategies, voting, collective engagement.

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Mutual funds as corporate governance actors

The Promises and Limitations of the New Financial Economy

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

Retail collective investment schemes that own corporate equities tend to be structured as UCITs and in this chapter we discuss how their corporate governance roles may be shaped by their structuration and by regulation. We are of the view that the investor protection objectives underlying regulation have inevitably shaped funds’ short-termist priorities. Such investor protection measures include redemption rights for investors, regular reporting and transparency, and governance in relation to cost and fees. But these measures have not made the corporate governance role of funds relevant to their business model of investment management. Funds face contrary driving forces in terms of shaping their corporate governance roles. The current concern with transparency and moderation in cost and fees could make shareholder engagement relatively expensive and even more unattractive. However, compulsion by regulation and market pressures make it difficult not to demonstrate some degree of engagement. Hence, we think regulatory compulsion to engage in such roles would go little further in encouraging funds to internalise such roles as an essential part of their business model. Funds are likely to regard such regulatory compulsion as part of compliance obligations, and outsource such compliance needs to be provided by, for example, proxy advisory agencies for voting decisions and entering into collective engagement. Regulatory imposition that forces funds to reckon with their corporate governance roles is unlikely to be the optimal way of encouraging the development of deep and committed corporate governance roles in a socially beneficial way, as discussed in Chapter 3. Ultimately, retail investors are themselves risk averse and relatively fickle. They generally support the investor protection regimes that have been instituted for their protection even if these may put short termist pressures on funds and entail short termist investment management behaviour. Investor clamour for exchange-traded funds is a testament to an ultimately deep disconnect between the beneficiary community and the investee corporations at the other end of the investment chain. Key Words: mutual funds, UCITs, active management, passive management, proxy voting agencies, exchange-traded funds, inducements.