Connecting research with policy for stronger stewardship
Building a better regulatory framework
By Anna Tilba - July 2019
I have recently submitted my formal response to the Financial Reporting Council and Financial Conduct Authority’s consultation on the UK Stewardship Code (2019).
My response was based on over a decade of my academic research into institutional investors’ investment management practices in relation to stewardship, as well as my advisory roles at the UK Law Commission, Financial Conduct Authority and the Pensions Regulator. It also brought together relevant empirical evidence and policy ‘thinking points’ from three of my theoretical academic papers, published over the years.
Engagement with policymakers via responding to their consultations, conducting research or being on their advisory boards, has always been an important and rewarding part of my academic career. In this article, I will share my latest experience of connecting research with the world of practice.
Institutional investors such as insurance companies, mutual funds and pension funds ‘own’ shares of public corporations and provide financial security for millions of savers who invest through them. Regulators count on these institutions to help police the financial market against the risks of corporate misconduct and fraud.
Yet, even after the Financial Crisis of 2007/08 and the heightened policy expectations on them to be more responsible owners, many financial institutions remained passive and disinterested in exercising proper oversight of their investee companies.
Therefore, it is not surprising that the regulators opened another discussion on how best to encourage the institutional investment community to engage more actively in stewardship of the assets in which they invest. Incidentally, this call came at a time when I had just published my research in the Modern Law Review (2019) which explored some of these issues. The paper explored fiduciary duty of pension fund trustees and stewardship and highlighted the practical challenges on the way to effective stewardship in the context of UK pension funds.
In the aftermath of the Financial Crisis and the governance reviews that followed, the concept of a ‘Fiduciary Duty’ was hastily (and perhaps inappropriately) put forward as a legal and practical foundation that could lead the development of institutional investor practices, particularly those relating to extending the stewardship role in relation to investee firms.
However, a host of barriers seem to prevent all but a handful of funds from meeting policy expectations about stewardship. Alongside the more obvious barriers (such as dispersed share ownership) and the associated problems (co-ordination, management and control, free-rider problems and information asymmetries), I found that trustees’interpretations of their core duty to act in the best interest of pension fund members also seems to prevent many pension funds to act more as ‘stewards of shares’.
More specifically, I reveal a distinct tension between trustees’ stewardship responsibilities and the exclusive focus on financial performance.
This is when stewardship appears to pull trustees in a different direction from what they consider to be the purpose of a pension fund (i.e. focusing on generating financial returns and securing retirement income, not fixing corporate governance problems). The majority of trustees do not relate their duties and the purposes of pension funds to stewardship, which suggests that there are still misconceptions around the nature of trustee obligations.
In the context of the FRC and FCA’s review of the stewardship Code, these findings provide an important glimpse into everyday pressures of trustees and highlight that the commitment to general principles of Stewardship seems to be much easier to achieve at a theoretical level than in practice. Whilst a healthy financial sector depends on retaining customers and building trustworthy business, it also requires collaborative thinking between academics and practitioners. How else can we generate sustainable wealth creation other than by combining the strengths of the world of practice and academic research?
On 16 May 2019, Anna was awarded the Transparency Trophy during the Financial Transparency Symposium in London. The award acknowledges Anna's years of commitment to improving governance, transparency and accountability standards within UK's financial services sector through her Transparency Ambassador work and her policy impact.
The award was presented by UK Parliament Member, Former Pensions Minister, Baroness Ross Altmann and Anna was the first female academic to receive it.
UK Transparency Taskforce is the collaborative, campaigning community, dedicated to driving up the levels of transparency in financial services, right around the world. Its mission is ‘To drive positive, progressive and purposeful finance reform by harnessing the transformational power of transparency’.
Transparency Taskforce reaches thousands of financial services professionals, it has over 650 members contributing to government and industry consultations, producing thought leadership white papers, having meetings with government officials and regulators. It is supported by a global network of Ambassadors, many of whom have extensive subject matter expertise.