interest to this study. Having reviewed the relevant SC literature, I now turn to the next area of interest to this study, namely that of institutional investors.
but not limited to innovation, strategy or corporate development (Boyd & Solarino 2016;
Goranova et al. 2017; Hoskisson et al. 2002; Shi, Connelly & Cirik 2018). Large, controlling, majority shareholders have drawn the lion’s share of scholarly attention (Aguilera et al. 2015;
Anand 2018; Connelly et al. 2010; Cundill, Smart & Wilson 2018; Cuomo, Mallin & Zattoni 2016; Cronqvist & Fahlenbrach 2009; Edmans 2014; Gifford 2010; Goodman et al. 2014;
Porta et al. 1999), due to their potential to affect change.
Institutional investors are a type of shareholder, and include several investor types: pension funds, insurance companies, mutual funds, hedge funds, index funds, Sovereign Wealth Funds (SWFs), banks, insurance companies and a variety of asset managers and financial intermediaries (Connelly et al. 2010; OECD 2011). The Oxford English Dictionary defines stewardship as ‘the responsible use of resources, especially money’ (https://www.oed.com).
Stewardship is about preserving and enhancing long-term value as part of a responsible investment approach and is viewed as a way of promoting financial market stability and economic growth (ICGN 2017). Institutional investors are a heterogeneous group (Artiga González & Calluzzo 2019) encompassing different types and behaviours: active and passive, engaged and disengaged. Institutional investors, who are assumed to have long-term
horizons, such as large, so called passive, index funds, pension funds and SWFs, are potential drivers of investor activism and engage in corporate governance (Aguilera, Canapé & Esade 2016; Brest, Gilson & Wolfson 2018; Gillan & Starks 2007; Goyer & Jung 2011; McNulty &
Nordberg 2016, Tilba & McNulty 2012), and are regarded as ideal active stewards. Different investor typologies exist (Gilson 2006; Hertig 2018; McNulty & Nordberg 2016; Rock 2018;
Tilba & McNulty 2012). For instance, pension funds are often referred to as active investors (ICGN 2017; Tilba & McNulty 2012); index funds as large passive investors(Bebchuk &
Hirst 2018; Fichtner, Heemskerk & Garcia-Bernardo 2017); hedge funds as short-term oriented, activist investors seeking changes in governance and financial performance (Becht et al. 2009; Becht et al. 2017); and SWFs (state owned investment vehicles) as universal owners (Aguilera, Canapé & Esade 2016; Gjessing & Syse 2007; Lydenberg 2007;
Vasuveda, Nachum & Say 2018). In addition, shareholders can also be classified as salient:
investors who have power, legitimacy and urgency in corporate eyes (Bundy, Schropshire &
Buckholtz 2013), typically majority or controlling owners, and assumed to be the object of directorial attention. Although an in-depth analysis of investor taxonomies is beyond the scope of this thesis, what is important is that investors, although long assumed to be a
homogeneous group (Artiga González & Calluzzo 2019), have heterogeneous aims, affecting their investment horizons and actions, a relevant point when considering how their
stewardship influences director engagement (Davis 2008, 2009; Jackson 2008; Tilba &
McNulty 2012; Tonello 2006).
Stewardship increasingly includes consideration of the wider ESG (environmental, social and corporate governance) factors as a core element of investor fiduciary duties (Espahbodi et al.
2019; Van Duuren, Platinga & Scholtens 2016). ESG factors represent many of the externalities around us, the challenges of our time, and encapsulate potential risks and opportunities for both investors and companies. Throughout history, nature has been disruptive, yet climate change is accelerating the urgency of tackling environmental
problems. Social unrest has also always existed, whether in ancient Greece due to wealth and land inequality (Fuks 1984), in the city of Norwich in Tudor England following disastrous harvests (Hoskins 1964), in Somalia, Rwanda and the former Yugoslavia following poverty and unemployment in ‘the lost decade of the 1980s’ (Chossudowsky 1997, p. 1786), or in
Hong Kong in the summer of 2019 (Korner 2019). Governance issues (and scandals) are also not new, with regulation aimed at improving governance effectiveness and strengthening control. What is different now is the immediacy, the scale and the global effects of the consequences of such events, giving added urgency and importance to the response to and anticipation of them, hence the increasing inclusion of ESG factors in investment decisions.
ESG factors represent ‘a tragedy (…) and a golden opportunity for positive system change’
(Kiernan 2007, p. 478), and include environmental factors (e.g. waste generation, carbon emission reduction, water or renewable energy consumption, or other aspects of the climate transition); social factors (e.g. gender diversity, social inequality and tensions, product safety, employee engagement or human rights); and governance ones (director independence,
executive compensation or disclosure). A variety of ESG and sustainability ratings and rating agencies also exist, which have an impact on investment decisions (Brest, Gilson & Wolfson 2018), examples of which include Morningstar, B Analytics, TSE4Good and the Dow Jones Sustainability Index (DJSI). The United Nations (UN)-supported Principles for Responsible Investment (PRI 2019) promote the incorporation of ESG factors in investment decisions, reporting over 2,000 signatories as of 2019, with just short of $500 trillion under
management (PRI 2019). While earlier studies questioned the relevance of ESG to investors (Campbell & Slack 2011; Deegan & Rankin 1997), more recently information on ESG factors has been shown to relate to significant economic effects, for instance cost of capital (Dhliwal et al. 2011), analyst forecast errors (Dhliwal et al. 2012), lower capital restrictions (Cheng, Ioannou & Serafeim 2014), movements in stock price following ESG mandatory disclosure (Grewal, Riedl & Serafeim 2017), and good ratings on materially relevant ESG issues in an industry as a predictor of a company’s future financial performance (Khan, Serafeim & Yoon 2016). ESG factors are strategically relevant (Brown, Liburd & Zamora
2015), and investors are willing to invest in companies incorporating ESG in their strategy (Cheng, Green & Chi Wa Ko 2015). However, other studies indicate that no consensus has so far emerged with regard to the integration of ESG leading to superior or inferior financial performance (Crifo & Mottis 2016; Margolis, Elfenbein & Walsh 2007; Margolis & Walsh 2003), while Espahbodi et al. (2019) find that investor perceived relevance of ESG interacts with its integration in investment decisions and affects investment allocation.
The end game of stewardship is ‘about value, not values’ (emphasis added), as Cyrus Taraporevala, CEO of State Street Global Advisors mentioned in an interview in the Financial Times (Edgecliff-Johnson 2019). Beyond the buzz surrounding Sustainable Investment (SI), Socially Responsible Investment (SRI), Ethical Investment (EI), or
Sustainable Development Funds (SDF), mostly dating back to the 1960s and 1970s, although SRI started in the 1920s (Guay, Doh & Sinclair 2004), yet all gaining momentum in this century, stewardship is legitimately about value maximisation, and ESG integration in investment decisions follows financial rather than ethical, moral or ‘doing good’ motives.
Amel-Zadeh and Serafeim (2018) found that investors incorporate ESG factors in decisions assuming them to be relevant to investment performance, in response to client demands, or as part of a product strategy.
Investor ESG consideration varies from merely superficial interest to ESG forming a cornerstone of investment decisions (Kiernan 2007; Vasuveda, Nachum & Say 2018). This can have important effects on the way directors engage with purpose, as capital providers’
views and accounting of ESG may influence director engagement, as shown in the recent example of risk-hungry, mining giant Glencore, with directors coming under pressure from
investors to change the company culture and incorporate ESG factors at the heart of the business (The Economist 2019). Most importantly, against a backdrop of a lack of globally accepted standards, ESG factors continue to be regarded as non-financial dimensions of stock and corporate performance (Klasa 2018; van Duuren, Platinga & Scholtens 2016), a view supported by the integrated reporting recently mandated by the EU and in force since June 2019 (EU 2014; 2017a), and by the US Congress rejection of the adoption of ESG standards (Temple-West 2019). However, climate change, social tensions and unrest, and governance issues pose real threats to companies (and to investments) but also represent opportunities for innovation, and new products or lines of business, so these factors are therefore relevant to finance and business (The Economist 2019a, 2019b). Consequently, the boundaries between financial and social activism by investors are increasingly blurred (Goranova & Ryan 2014;
Guay, Doh & Sinclair 2004; McNulty & Nordberg 2016), as noted also by Guay, Doh and Sinclair (2004), who defined shareholder activism as ‘a mix of SRI, corporate governance and stakeholder capitalism’ (p. 128). Institutional investors, traditionally known and studied for their financial activism, become active in social and environmental matters because these can affect return maximisation. Most recent examples are Allianz Global committing to increase social impact investment (Gordon 2018) and BlackRock urging CEOs to contribute to society (Mooney 2018). In parallel, social organisations, (for instance the Church of England or the Swiss Responsible Business Initiative), regarded for their social intents, are increasingly active in financial and non-financial matters that, although social on the surface, entail a significant potential change in the fundamentals of how a business performs and is run. Thus, theorising investor activism in two separate compartments no longer reflects reality, leading to calls to bring their study closer together (Briscoe & Gupta 2016; Goranova
& Ryan 2014).
ESG integration strategies include negative screening (excluding certain types of companies or industries, such as tobacco, alcohol or weapons), positive screening (focussing on certain corporations or industries such as organic food or artificial diamonds), best-in-class (for instance selecting the best companies in terms of ESG performance), investor activism, such as voting at the annual general meeting (AGM), filing resolutions, and investor engagement, with investors establishing dialogue with companies and directors on ESG issues (Goodman et al. 2014; Semenova & Hassel 2019; van Duuren, Platinga & Scholtens 2016).
Considering investor engagement inadequate and too focussed on short-term returns, in 2017 the EU decided that investors should disclose information about the implementation of their engagement policy and voting rights (EU 2017a). The EU’s second Shareholder Rights Directive (EU 2017b), in force since June 2019, seeks to strengthen the role of shareholders by enabling them to act as active rather than passive owners of stocks, promoting a new form of stewardship. It also introduced key changes to the rules governing the activities of proxy advisors, whose services are extensively used by investors for research (including on
companies) and voting recommendations (Institutional Shareholder Services and Glass Lewis featuring among the largest). The directive makes them answerable to regulators for greater transparency in how they go about serving their clients (Riding 2019).
The tide of investor engagement appears to be shifting. There is a movement from a historical lack of engagement with companies (Davis 2008, 2009; Jackson 2008; Tilba & McNulty 2012; Tonello 2006) to a landscape where investors increasingly engage with corporate governance activities and ESG topics (Goyer & Jung 2011; Semenova & Hassel 2019). A significant change in behaviour seems to be occurring, as investors engage with boards far
more actively if they believe that this will increase the value of the company (Cundill, Smart
& Wilson 2018; McNulty & Nordberg 2016; Rock 2018; Semenova & Hassel 2019; Swiss Sustainable Finance 2018).
Engagement represents a powerful type of investor activism, as it can have a direct impact on corporate policies and practices (Ahn & Wiersema 2019; Amel-Zadeh & Serafeim 2018;
Becht et al. 2009, 2017; Goodman & Arenas 2015; Goranova & Ryan 2014). This is where
‘the real action occurs’ (Logson & Buren 2009, p. 353). Studies have focussed on investors filing ESG resolutions in poorly performing companies and subsequently engaging to avoid a formal vote at the AGM (Bauer, Moers & Viehs 2015; Clark & Perrault Crafword 2012;
David, Bloom & Hillman 2007; Logsdon & Buren 2009; Rehbein, Logsdon & van Buren 2013), and on other investor engagements, with evidence of thematic engagement beyond governance topics, such as social and environmental matters (Barko, Cremers & Renneboog 2018; Bauer, Clark & Viehs 2015; Dimson, Karakas & Li 2015; Hoepner et al. 2018).
Overall, topics range from environmental issues and weapons, to corruption, executive
compensation and gender diversity, with the potential to lower ESG incidents and bring about positive changes in corporate ESG policy.
In summary, the essence of the much-debated topic of institutional investor stewardship rests on a recognition that investors have grown into a major force for companies to reckon with.
They are heterogeneous in type and aims and have different time horizons and ways of carrying out their stewardship duties, which nonetheless remain focussed on maximising returns. Through a form of activism, investors increasingly engage with companies on ESG matters to effect corporate change. Despite ESG factors being relevant both financially and in
business terms, there is a tendency to continue to regard them as non-financial, even in integrated reporting. This, coupled with the lack of globally accepted standards, hinders the full appreciation and integration of ESG in investment decisions. Furthermore, large, controlling investors have received the lion’s share of scholarly attention, due to their potential to affect change, while some investors rely on the services of proxy advisors for company knowledge and voting decisions.