When Harmonization is Not Enough: Shareholder Stewardship in the European Union

Abstract

On 10 June 2019 the transposition and implementation deadline for the shareholder engagement rules imposed upon institutional investors and asset managers by the revised Shareholder Rights Directive (SRD II) expired. This article offers an original account of the rationale, the dynamics and the evolution of this EU-driven policy, which aims to promote long-term institutional shareholder engagement within (or in the absence of) nationally embedded frameworks. We place the SRD II shareholder engagement rules within what we see as a multi-layered regulatory landscape consisting in some Member States of soft-law stewardship codes or similar principles and guidelines, and we find—perhaps surprisingly—that the SRD II stewardship-related provisions were transposed in a literal and minimalistic fashion without any customization to divergent national specifications and despite the fact that the SRD II is only a minimum harmonization directive. We search for explanations for this transposition pattern by pointing to three key issues: the policy and institutional misfit between the harmonized rules and national regimes, the lack of a strong market demand for shareholder stewardship, and the more apt soft, flexible and mostly bottom-up norms (contained in codes or similar principles and guidelines)—rather than (semi-)hard top-down rules—in inculcating good shareholder stewardship practices. Against this background of minimalist intervention (both at the EU and national levels), we find that pre-SRD II soft stewardship initiatives have had two key positive effects. First, they increased market actors’ familiarity and preparedness with the SRD II transposed rules, thereby increasing the likelihood of effective compliance with good shareholder stewardship standards whilst maintaining national idiosyncrasies. Second, soft-law stewardship codes or similar principles and guidelines, despite their own weaknesses, are vital mechanisms of innovative norm-generation and can expand or adjust the SRD II stewardship-related rules to provide tailored shareholder stewardship frameworks and serve as a signalling function for key market actors. From this it follows that the uniform, but minimalistic, transposition of the SRD II stewardship-related rules across the EU, although welcome in shaping the minimum standards, needs to be supported by tailored, soft-law stewardship codes or similar principles and guidelines. Such a symbiosis of the harmonized SRD II shareholder engagement rules and supporting soft-law stewardship developments will allow the tailoring of shareholder stewardship norms to local conditions and the provision of guidance and meaning to the SRD II rules, while a minimum harmonization of shareholder stewardship is already secured.

1 Introduction

‘We have learned the lessons from the past. With the revised Shareholder Rights Directive we pave the way to responsible investment and corporate decisions that have a longer time horizon, instead of focusing on short-term financial gain’, said Věra Jourová, Commissioner for Justice, Consumers and Gender Equality, in June 2019,¹ three days before the expiry of the transposition deadline of the revised Shareholder Rights Directive (SRD II).² In this article we deconstruct this statement in light of the complexities of transforming the EU aspirations relating to the ‘long-term’ and ‘responsible’ corporate governance role of institutional shareholders (asset owners and asset managers) to concrete and workable national shareholder engagement and broader shareholder stewardship practices. Similar to Katelouzou, we use the term ‘shareholder stewardship’ as broader than that of ‘shareholder engagement’.³ The former encompasses not only informal and formal shareholder engagement and the monitoring of investee companies (such as conducting a meaningful dialogue with investee companies and exercising voting rights), but also related disclosure requirements imposed upon institutional investors and asset managers, such as in relation to conflicts of interests.⁴

Previous contributions have already pointed out not only the rather fractional alignment between the ‘stewardship ideal’ and the business models of the investment fund industry,⁵ but also the enforcement weaknesses of current shareholder stewardship frameworks.⁶ What is less discussed, however, are the practical challenges faced by legislators, public or quasi-public and private standard-setters, EU and national alike, in stirring institutional investors towards shareholder stewardship policies and practices. This is due to the heterogeneous shareholder stewardship policies and engagement modes at the EU and national levels that create what can be described as a multi-layered regulatory shareholder stewardship landscape in Europe. This is what this article aims to elucidate and evaluate.

On the one hand, Article 3g of the SRD II juridifies certain aspects of shareholder stewardship imposing requirements on institutional investors and asset managers to develop and publish an engagement policy. The SRD II was issued to ensure minimum standards of shareholder engagement, as a ‘floor’ rather than a ‘ceiling’ upon which the Member States may set superior standards.⁷ Yet, on the other hand, we find that the SRD II stewardship-related provisions are ‘transposed’⁸ in a literal and minimalistic manner. While from an EU-compliance perspective this is not a major concern as a literal transposition appears to be in line with the wording and spirit of the directive, we question the lack of national deviations within the boundaries allowed by the European Commission. In other words, we ask whether the lack of any ‘customization’⁹ within the scope of the discretion granted by the SRD II can be justified in light of pre-SRD II rules setting the shareholder stewardship framework at the national level and the cross-country differences in market structures and cultural traditions. Two observations are made in this regard. First, in some Member States we find soft-law stewardship ‘codes’ (in the form of fully-fledged codes or preliminary initiatives and guidelines)¹⁰ that are more closely aligned with national specific (institutional or political) situations, traditions and existing laws. Such soft-law stewardship codes along with other stewardship-related principles and guidelines found in corporate governance codes or investor associations’ codes of conduct can, in our opinion, offer a distinctive normative framework that will complement, rather than substitute, the SRD II stewardship-related rules and nudge market actors towards meaningful and tailored shareholder stewardship practices. This is due to the capacity of such soft-law shareholder stewardship developments to provide dynamic, flexible, innovative and tailored norm-generation and increase familiarity and compliance with the SRD II rules, attributes that make them particularly attractive to market actors and have the potential to boost ‘market demand’¹¹ for shareholder stewardship.

Our support for soft law in the area of shareholder stewardship may, at first glance, appear to be unusual and unsympathetic to the supporters of the Fullerian conception of EU law-making described as ‘one that sees the function of law as the provision of stable normative expectations’.¹² Soft law, with its flexibility, variation and adaptability, has admittedly a low capacity for creating stable normative expectations. But, in our opinion, soft-law shareholder stewardship codes or similar principles and guidelines, despite their shortcomings, have already functioned as a normative—yet embryonic—‘laboratory’ offering educative and informational benefits to market actors as well as increasing familiarity with SRD II rules. The utility of such soft-law codes and principles/guidelines is even more significant in instances of the literal and minimalistic transposition of EU harmonized rules,¹³ as is the case with the SRD II stewardship-related rules. In such cases the normative gap created (in the absence of pre-existing national soft-law stewardship regimes) is considerable and market actors may not be gradually nudged towards meaningful shareholder stewardship; instead, they may risk perceiving the SRD II transposed rules as another compliance burden. With further harmonization in this area of law being unlikely,¹⁴ such a gap can only be bridged with the multiplication of soft-law stewardship frameworks by (quasi-)public regulators or private standard setters. Soft-law stewardship codes or similar principles and guidelines have already been successful mechanisms of innovative and customized norm-generation, expanding or adjusting the SRD II stewardship-related rules to specific legal, market or institutional (cultural) circumstances. Further, national regulators need to be mindful of the EU political drive for a quick fix of the shareholder engagement agenda within the investment chain and need to favour an organic growth of the ‘stewardship market’,¹⁵ instead of aiming to serve formalistically the EU vision of long-term shareholder engagement and stewardship through a literal and minimalistic transposition of the SRD II stewardship-related rules. Not only should soft-law rules relating to shareholder stewardship not be jettisoned after the transposition of SRD II, but also the multiplication of such initiatives in Member States with no pre-existing stewardship norms by (quasi-)public or private actors is both politically feasible and normatively desirable.

The remainder of the article proceeds as follows. Section 2 lays out what can be described as a multifaceted shareholder stewardship landscape in the EU. We first examine the EU aspirations that shaped the shareholder engagement policy agenda on the basis of the general criticism of the investor-alleged acquiescence to serious corporate governance shortcomings that contributed to the global financial crisis, and the ensuing SRD II rules juridifying shareholder stewardship. We then examine some of the key pre-SRD II soft-law initiatives, in the form of stewardship codes or principles/guidelines, that have been nudging actors towards the adoption of sound stewardship practices independently from EU aspirations. We proceed our analysis by shedding light on the legal, market and cultural specificities within which this emerging multifaceted shareholder stewardship regulatory framework is embedded.

Section 3 illustrates how Member States transposed the SRD II shareholder-stewardship rules. Surprisingly, perhaps, we demonstrate a so far literal and minimalistic transposition of the SRD II rules irrespective of the pre-existence of national stewardship codes. We explain this unexpected and seemingly counterintuitive finding in light of the following factors: the novelty and ensuing lack of familiarity with the shareholder stewardship obligations in Member States with no pre-SRD II norms (policy misfit), the lack of a local market demand for a tailored transposition, and the more apt soft, flexible and mostly bottom-up rules (rather than semi-hard top-down rules) in inculcating good shareholder stewardship practices.

In Sect. 4 we expand this latter assertion and we argue that in the specific context of the SRD II the pre-existence of soft stewardship codes or similar principles and guidelines has had three additional positive effects. First, soft-law stewardship codes increased market actors’ familiarity with and preparedness for the SRD II transposed rules, thereby increasing the likelihood of effective compliance with good shareholder stewardship standards whilst maintaining national idiosyncrasies. Second, soft-law codes serve a signalling function for other market actors, thereby increasing their legitimacy. Finally, soft-law stewardship codes are innovative norm-generating mechanisms and can expand or adjust the SRD II-related rules to provide tailored shareholder stewardship frameworks. From this it follows that the uniform, but minimalistic, transposition of the SRD II stewardship-related rules across the EU, although welcome in shaping the minimum standards, needs to be supported by tailored, soft-law stewardship codes or principles/guidelines. Such a symbiosis of the harmonized SRD II shareholder engagement rules and supporting soft-law stewardship developments will allow the customization of shareholder stewardship norms to local conditions and the provision of guidance and meaning to the SRD II rules, while a minimum harmonization of shareholder stewardship is already secured.

Section 5 concludes this article by reiterating the main claim for a multi-layered, symbiotic ‘regulatory space’¹⁶ for shareholder stewardship norms. The minimum standards introduced by the SRD II should be supported and advanced via soft-law shareholder stewardship norms. Such soft-law norms can be generated by different standard-setters (public and quasi-public regulators and private standard setters, national and supranational alike) and through different channels (stewardship codes or principles and guidelines or any other related initiative included in corporate governance codes, best practice standards or codes of conduct). In such a multi-layered regulatory space, shareholder stewardship norms—irrespective of their soft- or hard-law nature and the form of responsibility they generate—should come together in a symbiotic and mutually supporting fashion to shape sound and meaningful shareholder stewardship standards and practices.

2 The Regulatory Landscape of Shareholder Stewardship in Europe

2.1 The EU Aspirations: The Case of the SRD II

Shareholder rights have been a key focus of the EU corporate governance regulatory architecture from its inception.¹⁷ Following the global financial crisis in 2007–2008 the case for a ‘shareholder democracy’¹⁸ energetically revived. Shareholder engagement was positively brought forward as a sound corporate governance attribute and soon became one of the key buzzwords in the EU context, along with an emphasis on long termism, transparency and more recently sustainability. In 2014, the European Commission proposed amendments to the 2007 Shareholder Rights Directive (SRD I), aiming, among other things, at improving corporate governance through the promotion of effective and sustainable shareholder engagement and the improvement of transparency along the investment chain.¹⁹ After various negotiations and consultations,²⁰ the amended Directive (SRD II) was adopted in May 2017.

The SRD II recognizes that ‘effective and sustainable shareholder engagement is one of the cornerstones of the corporate governance model of listed companies, which depends on checks and balances between the different organs and different stakeholders’,²¹ and includes various measures with the aim of encouraging long-term shareholder engagement, such as facilitating the transmission of cross-border information and shareholder voting,²² improving the level and quality of the engagement of institutional investors and asset managers,²³ enhancing the transparency of and shareholder influence on executive remuneration and related party transactions,²⁴ and ensuring the reliability and quality of proxy advisers’ recommendations.²⁵ Even though the term ‘stewardship’ is used only once in the SRD II, the engagement and disclosure obligations imposed under Article 3g are along lines that are similar to those in pre-existing national stewardship codes.²⁶ Under Article 3g institutional investors (defined as insurance companies and pension funds)²⁷ and asset managers²⁸ are expected to develop an engagement policy, which would describe, among other things, how shareholder engagement is integrated in their investment strategy, how the financial and non-financial performance of investee companies are monitored, how dialogue is conducted, how voting rights are exercised, how other shareholders or stakeholders have been engaged and how actual and potential conflicts of interests are managed.²⁹ This engagement policy along with its implementation need to be annually disclosed.³⁰ The requirements relating to the establishment and disclosure of an engagement policy operate on a ‘comply-or-explain’ basis.³¹ The degree of flexibility offered by the ‘comply-or-explain’ principle is considerable and not uncommon in EU company law and corporate governance.³² Such ‘opt-outs’,³³ despite their ‘softening’ effect on EU law-making, decrease the risks of inefficient deadlocks and ‘one size fits all’ approaches that simply equalize standards ‘from above’. Yet, the SRD II is not far from imposing a ‘duty to demonstrate engagement’³⁴ on grounds of public interest relating to sustainable, long-term shareholder behaviour.³⁵ Although this is not an expressly defined duty, the disclosure obligations imposed upon institutional investors and asset managers under Article 3g compel that certain institutional shareholder engagement needs to be undertaken. This is arguably a move towards ‘hardening’³⁶ shareholder stewardship norms in contrast to national stewardship codes and principles which mainly treat shareholder stewardship as a voluntary practice.³⁷

But why did the EU regulators become increasingly focused on promoting shareholder engagement, especially on the part of institutional investors and asset managers? The politics of EU corporate governance regulation are well discussed. Laura Horn has forcefully pointed out that the primacy of shareholder rights found in the EU corporate governance regulation is not only a legal but also a political device.³⁸ The EU emphasis on strengthening the rights of shareholders has been part of a broader movement from harmonization to marketization, cross-listings and the raising of capital and from industrial to shareholder democracy.³⁹ But following the financial crisis of 2007-8 an important shift has begun to make inroads in the EU corporate governance regulation, a shift that has elsewhere been termed as a ‘modified, sustainable, version of shareholder primacy’. SRD II is clearly a part of this movement.⁴⁰

The impetus of this reform was driven by strong criticism of the way institutional investors have undertaken their corporate governance roles over the years preceding and following the global financial crisis of 2007–2008 and of the general priority that has been given to them by policymakers compared to other corporate actors and wider stakeholders. Among the key claims that have been put forward is that investment management has largely supported or acquiesced to a short-term focus and has pressured executives to focus on current earnings, especially in financial institutions, at the expense of financial stability and long-term sustainability.⁴¹ The post-financial crisis environment also revealed the loss of investment incurred by ultimate beneficiaries—future retirees and long-term individual savers—rendering investment management a highly sensitive issue in the eyes of governments.⁴² The EU political stance on the agenda of long-term shareholder engagement has been clear since its inception: in a ‘capital market regulation’ facet,⁴³ the SRD II imposes a top-down premise that nudging institutional investors and asset managers toward shareholder engagement and introducing greater disclosure requirements along the investment chain will generate sustainable shareholder value.⁴⁴ This stance is a clear manifestation that the ‘absentee landlord’⁴⁵modus operandi can no longer be accepted as the default policy approach. But more importantly, as Katelouzou points out, the SRD II is moving away from an exclusive focus on shareholder primacy and the popular agency theory jargon towards a modified, enlightened, version of shareholder primacy and a sustainability lexicon.⁴⁶

The role of the European Parliament has been instrumental in this regard. In July 2015 the European Parliament amended the original European Commission’s SRD II proposal adding the reduction of social and environmental risks as key components of the engagement policy, compelling institutional investors to take into account and cooperate with stakeholders when engaging with investee companies, and ‘socialising’ the transparency requirements across the investment chain.⁴⁷ These changes reflect the public interest in making institutional shareholders accountable to their clients, other market actors, investee companies and society at large.⁴⁸ More recently shareholder stewardship has been placed as one of the key building blocks for an EU sustainable finance strategy.⁴⁹ In the transition to a sustainable economy, institutional investors have an important stewardship role to play to manage company-specific risks, promote long-term performance and achieve sustainability in investment.⁵⁰

However, the chances of institutional shareholders serving successfully all the above-mentioned interests⁵¹ or that disclosure obligations will generate—on their own—long-term shareholder engagement⁵² being less than certain and outside the scope of this article, leaves the current SRD II rules in a ‘conceptual limbo’. By attempting to inculcate an ‘investor paradigm’ shift,⁵³ merging private and public aspects of the corporate governance role of institutional investors and their investment management, the SRD II becomes a normative source in open competition—in terms of persuasiveness and attractiveness—with pre-existing, national soft-law instruments, such as stewardship codes or principles, to which we now turn.

2.2 The National Aspirations: The Case of National Stewardship Codes

The shareholder stewardship provisions of the SRD II did not arrive in a normative gap. Rather, they added to a high-profile, pre-existing record of national standards for shareholder stewardship.⁵⁴ Within Europe, four EU Member States, i.e. the UK,⁵⁵ the Netherlands,⁵⁶ Italy⁵⁷ and Denmark,⁵⁸ as well as Switzerland⁵⁹ and Norway⁶⁰ had introduced measures to increase the level and quality of institutional shareholders’ engagement with investee companies and to facilitate a shareholder stewardship orientation among institutional investors, before the introduction of the SRD II.

These national stewardship codes originate from different issuers. In the UK and Denmark, the codes emanate from quasi-regulators, the Financial Reporting Council and the Danish Committee on Corporate Governance, respectively.⁶¹ The Swiss code has been a joint effort by private and public actors,⁶² whilst in Italy, The Netherlands, and Norway the stewardship codes are investor-led. This difference in authorship has some impact on the content and scope of the stewardship codes.⁶³ The 2012 version of the UK Stewardship Code contains seven key principles ranging from the development and disclosure of an engagement policy to monitoring the investee companies and being prepared to escalate any stewardship activities, and from acting collectively with other investors where appropriate and exercising voting rights to disclosing voting policy and behaviour, avoiding conflicts of interests and reporting to beneficiaries.⁶⁴ The 2012 UK code was overhauled in 2019 following serious criticism directed at the practicalities of exercising stewardship, including the questionable abilities and capacities of institutional investors and the extensive focus of the 2012 version on stewardship policies rather than on outcomes.⁶⁵ The new 2020 UK code comprises twelve principles for asset owners⁶⁶ and asset managers and six separate principles for service providers, including investment.⁶⁷ The new stewardship principles are supported by reporting expectations which sometimes differ according to whether those applying the code are investing directly or indirectly.⁶⁸

Despite its overhaul, the 2012 version of the UK code has left its mark firmly upon stewardship codes around the world.⁶⁹ In Europe, the Danish Stewardship Code contains the same seven stewardship principles as its UK 2012 counterpart.⁷⁰ From the investor-led codes, the Dutch code incorporates the same seven stewardship principles as the UK and Danish codes with the addition of principles relating to: (1) communication with other stakeholders where appropriate,⁷¹ (2) the need to consult the investee company before exercising the shareholder rights to submit a request for convening an extraordinary general meeting or put an item on the agenda of a general meeting,⁷² and (3) abstaining from voting in case of short positions and recalling share lending before voting.⁷³ The Italian code consists of six principles which closely resemble the key aspects of its UK counterpart,⁷⁴ but it incorporates elements that are strictly related to the Italian regulatory framework, including the slate voting system for the election of the management and supervisory board members and behind-the-doors dialogues.⁷⁵

Both the Norwegian and Swiss codes are more a type of a ‘preliminary stewardship initiative’ than a proper stewardship code.⁷⁶ The Norwegian code is probably the most ‘alien’ of the investor-led codes as it solely focuses on the investment management aspects of stewardship incorporating selected references to the 2011 EFAMA’s (European Fund and Asset Management Association’s) ‘code for external governance’⁷⁷ and Norwegian investment law (mostly related to securities funds).⁷⁸ Finally, the Swiss code—despite its multiple issuers—is also limited in its content having its main focus on the exercise of voting rights by institutional investors. The Swiss code repeatedly refers to the interests of the clients (the ultimate beneficiaries) of institutional investors rather than responsible shareholding and has, therefore, been characterised as a ‘watered-down’ version of the 2012 version of the UK code.⁷⁹

Finally, in terms of their scope, the UK (2012), Danish, Dutch and Swiss codes apply to both asset owners and asset managers, while the Italian and Norwegian codes are aimed at asset managers. The limited scope of the Italian and Norwegian codes reflects the nature of the issuer which in both cases is an association of asset managers. On the other hand, the UK 2020 code has the widest scope comprising of principles not only for asset owners and asset manager but also for service providers.

Even though the national stewardship codes exhibit differences in authorship, scope and content, all but the Swiss code⁸⁰ use the term ‘stewardship’ to encompass the vision of the long-term institutional investor which is capable and willing to monitor the management of investee companies with the aim of promoting long-term value, whilst at the same time acting as a steward to safeguard the interests of its own beneficiaries and the economy as a whole. This ‘stewardship ideal’, also termed as an ‘investor paradigm’ for corporate law and corporate governance regulation,⁸¹ attempts to construe what appears to be an irreconcilable tension between value-enhancing shareholder engagement in corporate affairs aiming at improving corporate performance and portfolio returns for the end-investors, on the one hand, and accountability to a variety of constituents, ranging from end-investors to investee companies’ shareholders and wider stakeholders, on the other hand, such as employees, creditors or environment, with the overall aim being the furtherance of aggregate social welfare. While the weight placed on the need to enhance accountability across the investment chain varies widely across the national stewardship codes,⁸² this tension between value-enhancing monitoring and accountability has been manifested in different ways across different asset owners and asset managers and different countries.⁸³ But a common feature of all national stewardship codes is their soft, non-binding nature. Most of them are either completely voluntary (as in the case of the Norwegian and Swiss codes) or incorporate an expectation that the comply-or-explain approach will be followed on a voluntary basis (as in the case of the Danish, Dutch and Italian codes). Only the UK code has some coerciveness, as the apply-and-explain (comply or explain) approach of the UK 2020 (2012) code is mandatory for FCA-authorized asset managers.⁸⁴

Overall, national stewardship codes and similar initiatives have managed, notwithstanding their soft, non-binding nature and other limitations relating to their narrow, national scope,⁸⁵ to attract a substantial amount of market attention, especially among asset managers,⁸⁶ and to trigger awareness of the need for responsible ownership within the investment chain. Sometimes these codes have been influenced by supranational developments, as is the case with the Italian and Norwegian codes which have been largely drafted on the basis of the EFAMA code.⁸⁷ However, within this wider regulatory network of national and supranational stewardship soft-law norms, it needs to be acknowledged that the stewardship codes are part of broader national frameworks shaped within legal, market and cultural specificities.

2.3 The Broader National Stewardship Frameworks: Legal, Market and Cultural Specificities

National shareholder stewardship frameworks are dependent on various national legal traits, including company law rules and investment management requirements (such as fiduciary duties) facilitating or impeding stewardship.⁸⁸ National stewardship codes have been developed within well-established corporate governance frameworks and sometimes they specifically refer to national corporate governance codes as ‘complementary counterparts’ noting that shareholder stewardship can give force to the ‘comply or explain’ system upon which corporate reporting is based.⁸⁹ In addition, shareholder stewardship interfaces with the position of institutional shareholders as minority shareholders. Company law rules are, therefore, a decisive factor that can facilitate or impede shareholder stewardship practices. Rules relating to shareholder voting rights and the conduct of annual general meetings, for instance, have been discussed extensively in the previous literature and many authors have pointed to the impact of such rules on shareholder engagement and shareholder activism.⁹⁰ In the EU, shareholder protection has been at the top of the policy agenda since the 2003 Action Plan⁹¹ and following the enactment of the SRD I many procedural aspects of exercising shareholder rights have been harmonized.⁹² But the SRD I has been criticised as falling short of harnessing the full potential of shareholder engagement,⁹³ and there is still ample room for the preservation of national legal traits that may impede or promote shareholder engagement and stewardship orientation.⁹⁴ For instance, in Germany section 54 of the Aktiengesetz (the German Corporation Act) allows shareholders to remain passive. Yet, it is debatable whether this ‘right to remain passive’ prohibits shareholder engagement.⁹⁵ On other occasions, country-specific legal nuances may promote shareholder stewardship as is the case with the shareholder right to appoint minority directors and statutory auditors in Italy. Indeed, Strampelli has argued that minority directors are often appointed by collective engagement activities supported by Assogestioni, the issuer of the Italian stewardship code. These minority rights therefore play a key role in fostering the involvement of institutional shareholders in the corporate governance affairs of publicly listed companies in Italy.⁹⁶

While both the nature and success of shareholder engagement depend decisively on shareholder rights, stewardship also has an important investment management aspect.⁹⁷ The realisation of the envisaged stewardship role by institutional investors largely depends on the nature and character of investment management. Regulation plays a contributory part in shaping the incentives of institutional investors and asset managers to engage in stewardship activities. Çelik and Isaksoon have suggested, in a research paper for the Organisation for Economic Co-operation and Development (OECD), that the ‘business model’ of different institutional investors has an impact on the character and degree of shareholder engagement,⁹⁸ and Chiu and Barker have examined the impact of regulatory obligations imposed on UK pension funds and retail collective investment schemes that impede engaged ownership.⁹⁹ The Norwegian Stewardship Code, for instance, concentrates its focus on securities fund management companies and makes direct references to Norwegian legal specifications, such as the Norwegian Act on Securities Funds and the Securities Funds Regulation.¹⁰⁰ While more research is still required on the investment management aspects of stewardship both at the national and supranational level,¹⁰¹ EU legislation has already addressed some general regulatory aspects of investment management.¹⁰² But despite these efforts, serious concerns still remain in relation to the asset managers’ regulatory duties and their overall compliance stance. For instance, EFAMA has already evoked the lack of knowledge in respect of ‘many country-specific nuances’ and the difficulty that asset managers have in complying with national provisions.¹⁰³ Finally, as the concept of shareholder stewardship is deeply intertwined with sustainability concerns, the way in which the sustainable behaviour of both companies and investors is regulated can potentially have an impact on stewardship activities.¹⁰⁴ Here the differences across Member States are substantial,¹⁰⁵ but the EU is making significant steps to harmonize the non-financial reporting requirements for both companies and investors and to expand directors’ and investors’ duties to account for ESG factors.¹⁰⁶

Market infrastructure also becomes critical for shareholder stewardship. Leaving aside the structures and incentives of the fund management industry,¹⁰⁷ the ownership structure of investee companies can affect the likelihood and success of shareholder stewardship practices and it would therefore be utopic to anticipate the accomplishment of the generic SRD II objectives at the national level in a uniform way. Member States vary significantly in the ownership concentration and types of shareholders at the company level.¹⁰⁸ Previous literature has elaborated how different ownership structures impact engagement practices and shareholder activism more generally.¹⁰⁹ For instance, in countries with dispersed ownership, such as the UK, shareholder engagement and more aggressive forms of shareholder activism (expressed by both traditional and alternative institutional investors) is a much more frequent phenomenon.¹¹⁰ On the other hand, in countries with concentrated ownership, such as Germany and Italy, such activism, while initially not developed due to the presence of opposing controlling shareholders, now becomes more and more notable.¹¹¹ Lastly, in the latter category, we also find countries, such as Sweden and Finland, whose predominantly controlling shareholders also impede shareholder engagement.¹¹² But the general rise of institutional investors in European equity markets, even where controlled companies are still predominant, creates enabling conditions for the development of shareholder stewardship.¹¹³ Another key market parameter for shareholder stewardship, as Katelouzou points out, is the substantial differences in pension systems across Europe and the varying emphasis on state-funded pension schemes. The shift from defined benefit to defined contribution arrangements in countries like the UK had a dramatic impact on the direct allocations by pension funds to equities. This in turn has a negative effect on the demand for shareholder stewardship from pension funds.¹¹⁴

Finally, the overall institutional context,¹¹⁵ including cultural specificities, can play a decisive role in the development of good shareholder stewardship practices. Licht’s analysis of cultural distance and ‘foreignness’¹¹⁶ deserves specific attention here. Indeed, corporate governance characteristics are related to value emphases and cognitive elements attached to national frameworks.¹¹⁷ This also explains the resistance of some frameworks to adapt to changes, perpetuating their own cultural values over time.¹¹⁸ In the case of shareholder stewardship, a cultural aversion to shareholder engagement in corporate affairs is noticeable among Member States that share a network-oriented or stakeholder-oriented corporate governance tradition, often associated with the cultural dimensions of egalitarianism, the ideal of a voluntary commitment to promoting the welfare of others.¹¹⁹ The role of national élites in resisting any exogenous modification of traditional norms or rules that may undermine their own position is also important here.¹²⁰ Indeed, in some countries such as France, institutional investors and asset managers are seen as a potential threat to the corporate establishment when actively engaging with their investee companies.¹²¹ Additionally, the ‘proper’ tools of shareholder engagement are perceived differently across the EU, depicting cultural preferences in terms of communication routes.¹²²

To conclude this section, for shareholder stewardship, like any other legal norms, to operate as designed there must exist a widely shared social norm of stewardship abidingness. At the same time, shareholder stewardship norms and rules are shaped and exercised differently in different national contexts depending upon legal nuances, market structures, cultural traditions and other contingent factors. Without such supporting social norms and local institutions, shareholder stewardship cannot operate effectively especially when it is imported in a top-down fashion as is the case with the transposed SRD II stewardship-related rules.

3 National Transposition Trends: A Puzzle in Search of an Explanation

3.1 A Literal and Minimalistic Transposition

As mentioned above, the SRD II is a minimum harmonization directive which aims to create a common framework whilst leaving room for divergent national specification.¹²³ Although lower standards of shareholder engagement and associated disclosures are not allowed, Member States can introduce higher standards of shareholder stewardship and customize the EU rules according to local circumstances.¹²⁴ In most cases, however, Member States have largely copied Article 3g of SRD II without adapting the EU policy to domestic circumstances.¹²⁵ Representative examples of such a literal and minimalistic transposition can be found in Germany,¹²⁶ Greece,¹²⁷ Luxembourg,¹²⁸ Portugal,¹²⁹ Sweden,¹³⁰ and Spain.¹³¹ Belgium has also been a literal transposer of the SRD II provisions opting for what it calls a ‘faithful’ transposition of a minimum harmonization directive.¹³² While a literal transposition can imply a high degree of compliance with EU policies, in the context of shareholder stewardship one may question the degree of fit or ‘misfit’¹³³ between the SRD II rules and existing national soft or hard laws, market structures and cultural traditions. It is therefore surprising that the same literal implementation was followed even by Member States with pre-SRD hard-law provisions that imposed more onerous transparency requirements on institutional investors. For instance, France ripped off the previous requirement for asset managers to justify to institutional shareholders the reasons for which they had decided not to exercise their voting rights. The current version of this article has now removed this additional requirement incorporating a literal and minimalistic transposition of Article 3g (SRD II) and specifying that the details of disclosure items will be provided by a decree by the Conseil d’État.¹³⁴ It will thus be interesting to see if this tighter pre-SRD II domestic requirement will be permanently removed despite the discretion of Member States to go beyond the necessary minimum standards.

A literal transposition of the SRD II shareholder stewardship requirements has taken place even in Member States with pre-existing soft-law stewardship codes, such as in The Netherlands¹³⁵ and Italy.¹³⁶ In Denmark Article 3g was also transposed in a literal and minimalistic way despite the slightly wider scope of the Danish transposition rules which also apply to some sui generis Danish funds.¹³⁷

Finally, in the UK the transposition of Article 3g has been bifurcated on the basis of the nature of the regulatees. For asset managers and insurers, the Financial Conduct Authority (FCA), the responsible authority for the implementation of the relevant SRD II provisions, chose to copy paste Article 3g, with the only distinctiveness being the expanded geographical scope of the UK transposed rules to investments in shares traded outside the EU.¹³⁸ The FCA considers this non-prescriptive approach as providing flexibility to asset owners and asset managers¹³⁹ to meet the stewardship requirements depending on their business models and investment mentalities.¹⁴⁰ For trustees and occupational pension schemes, the UK Pensions Regulator is the authority that transposed Article 3g of the SRD II by introducing new disclosure stewardship obligations in June 2019.¹⁴¹ These complement the regulations introduced in 2018 to require pension trustees to set out in their Statements of Investment Principles (SIP) their policies on financially material considerations, including ESG, and the shareholder stewardship (including monitoring and voting) of scheme investments.¹⁴²

Overall, we find that a literal and minimalistic transposition of Article 3g of the SRD II took place both in Member States with and without pre-existing stewardship codes. While such a literal transposition of EU directives is a frequent phenomenon,¹⁴³ previous research has shown that where literal transposition takes place at the expense of a careful adaptation to the specific circumstances in each Member State, shortcomings in enforcement and application are common.¹⁴⁴ In the specific context of shareholder stewardship, this literal and minimalistic transposition is likely to reduce the attractiveness of shareholder stewardship in the eyes of market actors. This is because asset owners (or institutional investors in the SRD II jargon) and asset managers will mostly focus on ensuring boilerplate compliance with the minimalistic and generic transposed rules in order to avoid liability. But before trying to find a solution to this suboptimal regulatory outcome, let us consider some explanations for this apparent ‘transposition puzzle’.

3.2 In Search of Transposition Rationales

The literal, minimalistic and a-contextual transposition of Article 3g runs counter to what would be predicted based on the foregoing elaboration of the legal, market and cultural specificities of national shareholder stewardship markets.¹⁴⁵ It is also surprising to see literal transposition trends in countries with pre-SRD II soft stewardship codes or preliminary stewardship initiatives, which create excellent conditions for a tailored adaptation of EU policy to domestic circumstances. Leaving aside the general problems associated with the delayed and highly routinized transposition of EU directives,¹⁴⁶ we identify several reasons for this trend.

First, Article 3g juridifies new normative features of shareholder stewardship obligations with which most of the Member States are not familiar. The requirement of developing and implementing an engagement policy is not something with which national regulatory authorities and regulatees are instinctively familiar. This argument is reinforced if one examines the transposition of other SRD II provisions. Unlike the stewardship-related engagement and disclosure provisions, the transposition of the more familiar SRD II rules relating to ‘say on pay’ or related party transactions has been tailored at the national level in a way that depicts the idiosyncrasies and features of different company law traditions.¹⁴⁷ Research on EC implementation has identified the degree of institutional and policy fit or misfit between EU harmonized rules and existing, national institutional and regulatory features as one of the central factors that determine the implementation success.¹⁴⁸ Here, there is a related argument about path dependence and the lock-in effects or ‘stickiness’ of pre-existing norms which create formidable pressures for continuity.¹⁴⁹ If one applies this argument of pre-existing national institutions, norms and rules that persist change in the context of SRD II, then it becomes clear that Member States should customize rather than copy harmonized rules that relate to issues closely attached to their respective legal traditions or that have been traditionally subject to hard (and maybe soft) law at the national level to allow for the continuity of the differentiating national rules.¹⁵⁰ To put it in another way, the more outlandish the harmonized rule is, as is the case with the stewardship-related provisions of the SRD II, the less likely the tailored transposition will be.

Another reason explaining the literal and minimalistic transposition of Article 3g is the lack of a strong market demand for shareholder stewardship in Europe.¹⁵¹ Despite the increasing institutionalisation of public equity across Europe, ownership differences persist. A characteristic example is Germany where the market demand for stewardship from local institutional investors is not as strong as in the UK. It is well documented that German public equity, long seen as being dominated by German blockholders, has been increasingly institutionalized over the past 20 years mainly due to the advent of foreign investors.¹⁵² While this institutionalization may increase the demand for stewardship in the future (especially from foreign investors) and trigger the development of soft stewardship initiatives, at present local players, such as German pension funds, are not as developed as in other countries and therefore a demand for shareholder stewardship from German investors is lacking.¹⁵³ This may explain why there is no appetite for a tailored transposition of the SRD II in Germany. Also, institutional investors vary widely in their ability to evaluate the performance of their asset manager in terms of stewardship activities. In the UK, for instance, despite the efforts by the FCA to strengthen investors’ stewardship capability, institutional investors are still not taking their stewardship obligations seriously enough.¹⁵⁴ Investor stewardship abilities and capacities are even less in other Member States with no pre-SRD II stewardship norms (such as Germany). Another issue affecting the demand side of stewardship is the compatibility of the duties (often fiduciary in nature) that institutional investors, particularly pension trustees, owe to their beneficiaries. There has been much debate in recent years over the extent to which such duties require investors to maximize investment returns.¹⁵⁵ In some countries, such as the UK, it is now clear that ESG considerations and stewardship are permissible.¹⁵⁶ But in other countries, this debate is still unresolved.¹⁵⁷ To all these, one needs to add that benefits from stewardship activities are not easily quantified.¹⁵⁸ This weakens even further the demand for shareholder stewardship. On the lack of such a demand at the national level, there are no lower-level (market) actors, such as institutional investors or their associations, to lobby for customized rules or even resist the literal adoption of the SRD II stewardship-related provisions.¹⁵⁹

Finally, the literal and minimalistic transposition trend can be explained in light of the acknowledgement that more flexible tools, such as stewardship codes or other related principles, may be better suited to inculcate shareholder stewardship practices to which the next section is devoted.

4 The Enduring Importance of National Stewardship Codes or Principles/Guidelines

4.1 The Benefits of Stewardship Codes: Flexibility, Compliance, Legitimacy and Signalling

The attributes of soft law, including its non-binding character, flexibility and gradual nudging capacity towards meaningful compliance, are well discussed.¹⁶⁰ Stewardship codes or principles/guidelines have all these features, but in addition they apply to investors (signatories) that voluntarily regard stewardship as compatible with their investment management practices. This is an additional attractiveness point for stewardship codes (as compared with corporate governance codes, for instance) as they can stimulate compliance not only from domestic market actors but also from foreign ones; indeed, foreign actors may want to become signatory parties of such initiatives for reputational purposes and to signal their proximity to a specific local market and clients for the expansion of their activities and clientele. By contrast, the SRD II applies to all the institutional investors and asset managers as defined in Article 1(2)(e) SRD II and this has been transposed in national regimes, and not only to signatory parties. Also, the requirement to develop, disclose and implement an engagement policy under the transposed SRD II rules even though it operates on a comply-or-explain basis, it still has strong coerciveness: the regulatees have to comply or explain with regard to the transposed national rule.¹⁶¹ Both features point out the stronger SRD II presumption with regard to the relevance of shareholder engagement for investment management.¹⁶² By contrast, soft stewardship codes and principles/guidelines by offering flexibility and malleability in the shaping of their content and expectations from signatory parties can promote tailored stewardship practices and inculcate stewardship to national frameworks that have not progressed significantly in that area or have not witnessed an institutionalized effort to shape stewardship norms.

Second, national soft-law stewardship initiatives have increased the familiarity of market actors with stewardship practices and in some cases their awareness and compliance readiness with regard to the SRD II stewardship-related rules. Indeed, anecdotal evidence on the disclosure practices of signatory parties to national stewardship codes reveal that they have been more familiarized with the SRD II transposed rules, while remaining open to additional levels of transparency that derive from their adherence to national codes or principles.¹⁶³ A recent survey of European institutional investors’ awareness and readiness for the SRD II by Hermes found that 79% of the Dutch investors surveyed were aware of the SRD II as opposed to 42% in Spain.¹⁶⁴ The survey also reported that Spain has the lowest understanding and compliance readiness of any country studied pointing to the lack of a stewardship code in place.¹⁶⁵ Yet, the relationship between the pre-existence of national stewardship codes, on the one hand, and the awareness of and compliance readiness with regard to the SRD II stewardship-related rules, on the other, is not a linear one and notable exceptions exist. For instance, Italian institutional investors are reported as having low awareness and compliance readiness with regard to the SRD II despite the presence of stewardship principles directed to asset managers since 2016.¹⁶⁶ This may be regarded as confounding the positive attributes of soft stewardship codes, but market and cultural traits can explain, to some degree, the Italian case. While there has been a growing interest in voting in recent years, Italian investors tend to disregard long-term shareholder engagement and shareholder stewardship as an investment tool.¹⁶⁷ It is also noteworthy that the limited scope of the Italian code, which applies only to asset managers (and not to institutional investors), may also explain why Italian investors appear to be less familiar with and less compliance-ready to apply the SRD II stewardship-related tools.¹⁶⁸ Nevertheless, there is some evidence that the national demand for soft-law initiatives is currently shifting in Italy: in 2020, three institutional investors (Inarcassa, Cassa Forense and Enpam) formed the Association of Responsible Investors (Assodire) with the aim, inter alia, of defining a best practice policy for their members and issuing a judgement so as to align shareholder stewardship activities with such policy. Assodire is also open to more institutional investors who may want to join this voluntary initiative. During the same period, various Italian institutional investors announced the formation of a similar network so as to better exercise their shareholder stewardship activities and to aspire to their own high standards via the increase of awareness, research studies, training courses and assistance to institutional investors in their activities.¹⁶⁹

While the potential of stewardship codes and similar principles/guidelines to promote familiarity and compliance with shareholder stewardship norms and rules surely depends on their scope and traction in national contexts, other stewardship norm setters (public or quasi-public authorities, industry associations etc.) have a crucial role to play in enabling multiple points of reference for the improvement of best practices and the achievement of high shareholder stewardship standards.¹⁷⁰ At the transnational level, the EFAMA Stewardship Code¹⁷¹ and the International Corporate Governance Network (ICGN) Global Stewardship Principles¹⁷² provide, respectively, EU and international outlooks in relation to market expectations on best shareholder stewardship practices. But while the EFAMA code aims to serve as ‘a European reference document’ for asset managers seeking to comply with the SRD II stewardship-related provisions, national stewardship norms are better suited to support institutional investors and asset managers aiming to comply more meaningfully with the transposed SRD II provisions as they are more sensitive to localized legal, market and cultural traits.

Third, there is a legitimacy argument in favour of the preservation and development of soft stewardship codes and similar initiatives. By facilitating compliance with the SRD II-related stewardship rules, national soft stewardship codes can help institutional investors to seek legitimacy from both (quasi-)public regulators and other markets actors. In other words, the transposed rules, similar to soft-law stewardship codes, promote interaction between market actors within the investment chain as well as between these actors and society (ranging from the ultimate beneficiaries to various stakeholders affected by the corporate economy).¹⁷³ By obliging such actors to disclose their engagement policies and investment practices, the transposed SRD II rules inadvertently create a ‘neo-institutional’ dimension that drives investors towards the need to acquire legitimacy within society,¹⁷⁴ looking beyond rational economic behaviour that only relates to their profits. But the literal and minimalistic transposition of the SRD II stewardship-related rules is likely to have a knock-on effect on these legitimacy attributes. This is because the informational quality of the shareholder engagement statements imposed by the SRD II is expected to be poor following the literal and minimalistic transposition of the SRD II stewardship-related rules. Market actors, therefore, will endeavour to discover more meaningful (and sometimes additional) information arising from disclosures triggered by soft-law stewardship tools that often add informational elements that go beyond the SRD II, as is the case with the 2020 version of the UK Stewardship Code which puts an increasing emphasis on ESG factors and stewardship outcomes.¹⁷⁵ This is why market actors support the introduction of post-SRD II stewardship codes, in countries such as Germany, so as to fill implementation gaps and to entice investors to produce more detailed policy statements and to avoid cursory reporting.¹⁷⁶ Having the unique capacity to go beyond a formalistic compliance with the literally transposed SRD II rules, soft stewardship codes and similar initiatives can provide distinctive benefits for signatory parties to become more open and discursive towards other actors through their stewardship statements. Additionally, this auxiliary informational exposure is safeguarded in its flexibility and malleability in the absence of formal public sanctions, contrary to what is provided as an option by Article 14b of the SRD II.¹⁷⁷

Finally, adherence to soft-law stewardship codes may strengthen the signalling effect that stewardship statements produced in compliance with Article 3g of the SRD II have on ultimate beneficiaries, other investors and boards of investee companies,¹⁷⁸ and stimulate the demand side of the stewardship market.¹⁷⁹ For instance, ultimate beneficiaries have become increasingly interested in responsible, long-term investment and the impact of the adopted stewardship strategy, such as engagement, upon the investment portfolio. The information contained in shareholder stewardship statements, especially when a single statement is used to comply with both soft and hard-law stewardship norms,¹⁸⁰ often goes beyond the items provided by Article 3g of the SRD II and can therefore amplify the signalling effect of stewardship to the market. This should gradually increase the incentives of institutional investors to become signatory parties of a stewardship code or set of principles/guidelines and reap reputational benefits. Other investors can also use the disclosed information generated by stewardship codes to distinguish engagement strategies that contribute to the improvement of corporate governance from others that have a more short-term focus. This is especially important in the context of activist campaigns when the support of fellow investors is sought by activist funds that aim to collectively change corporate governance matters in investee companies.¹⁸¹ Boards of directors can also find the information contained in stewardship statements useful when they engage with investors as adherence to stewardship codes can entice them towards a greater availability to initiate dialogue so as to clarify a series of issues.¹⁸²

A final point to be raised is that different soft stewardship instruments from different issuers and different content may present their own advantages for different purposes. For instance, some codes can allow a more targeted focus on the achievement of specific outcomes within the national context. Take, for instance, the examples of the Swiss or Norwegian codes, which focus solely on shareholder voting and investment management, respectively, or the Italian code which only applies to Italian asset managers. Such codes, better described as preliminary stewardship initiatives,¹⁸³ despite their limited nature can still instil a common denominator of shareholder stewardship in frameworks that are still in their infancy or are still indecisive about the regulatory approach that needs to be adopted. If such initiatives are seen as a ‘normative laboratory’ that is able to inaugurate a basic—yet initially static—framework, they may well prepare the ground for the multiplication of more ‘extended’ stewardship codes at the national level¹⁸⁴ or even a gradual transition to the latter.¹⁸⁵ While there is only some very limited evidence on the impact of pre-SRD II stewardship norms on investment practices,¹⁸⁶ preserving and evolving stewardship codes or principles as well as multiplying such soft-law norms across the EU will support the functionality of the wider ‘symbiosis’ with the harmonized rules.

4.2 An Emerging Symbiosis of SRD II Rules and Soft Law Norms

We have already seen that shareholder stewardship norms occupy a highly complex and interconnected regulatory space—or better ‘spaces’¹⁸⁷—dominated by various public, quasi-public and market actors. In Member States with pre-existing stewardship codes, public or quasi-public authorities, investor associations or other private groups have already been influential in shaping stewardship norms and practices. With the transposition of SRD II, the engagement and disclosure elements of shareholder stewardship have been juridified and have moved away from a purely self-regulatory environment.¹⁸⁸ As a result, in Member States with pre-SRD II stewardship norms we are already witnessing a progressive symbiosis of the transposed SRD II rules with domestic soft law instruments. In this section we support the expansion of such a symbiotic relationship across the EU advancing the claim that soft-law codes or principles are innovative norm-generating mechanisms.

Starting with the UK, the FCA and the FRC (a quasi-public agency responsible for the UK Stewardship Code)¹⁸⁹ have engaged in joint-up policy thinking on stewardship following the enactment of SRD II.¹⁹⁰ The current shareholder stewardship regulatory framework in the UK features the transposed (by the FCA and Pension Regulator) rules as the minimum regulatory baseline for shareholder stewardship actions, with the 2020 version of the UK Stewardship Code promoting higher stewardship standards that go beyond the minimum SRD II rules.¹⁹¹ The FCA explicitly recognises the role of other stewardship norm-setters and allows regulatory space for industry participants, such as investors’ associations, or other stakeholders to develop additional guidance to aid interpretation and promote the comparability of stewardship disclosures.¹⁹² The need for such a coordinated industry approach has been emphasized in the case of voting disclosures.¹⁹³

Another sign of innovation in the development of soft-law norms is the expansion of the stewardship-related regulatory agenda in the UK. While the original rationale behind the introduction of shareholder stewardship in the UK was mostly related to the financial crisis, ‘absentee landlords’ and blatant corporate governance failures, the revised 2020 stewardship code shows elements of a gradual detachment from such law-and-economics arguments and a gradual embracing of overarching public priorities related to the shaping of a sustainable-focused stewardship framework.¹⁹⁴ The evolution of the UK stewardship principles from the preliminary Institutional Shareholders’ Committee (ISC) 1991 statement to the 2020 FRC code demonstrates that the continuous interaction of market actors with constantly evolving soft-law norms will not simply increase familiarity and compliance with the harmonized SRD II rules but will, most importantly, allow for the overall improvement of stewardship standards and practices.¹⁹⁵ But we need to acknowledge that the UK benefits from a market infrastructure that has traditionally favoured openness to foreign capital and market actors, thereby providing a highly prolific framework for the emergence and furtherance of market-driven initiatives in the area of shareholder stewardship. The same levels of stewardship demand and market infrastructure, as we have seen above, are largely absent in other Member States that seem to be resisting the idea of introducing soft stewardship codes or principles/guidelines within their national framework.¹⁹⁶

Signs of a fruitful symbiosis and normative innovation can also be found in Italy. In the public consultation launched by the CONSOB (the Italian public authority for regulating securities markets and in charge of implementing and enforcing the transposed SRD II rules) for the implementation of the SRD II, the role of Assogestioni, the representative association of Italian asset managers and the issuer of the Italian Stewardship Code, has been accredited as the normative precursor to the transposed SRD II rules and as a key factor facilitating compliance without subjecting the regulatees to a significant increase in compliance burdens and costs.¹⁹⁷ Most importantly, the Società per lo sviluppo del Mercato dei Fondi Pensione (Mefop Spa),¹⁹⁸ a company founded by the Italian Ministry of Economy and Finance (which still remains its majority shareholder) and capital participation by various asset owners (e.g. pension funds, insurance companies etc.) with the aim being to develop welfare means via research, interpretation and the communication of welfare norms, aims to occupy some regulatory space in a symbiotic relationship with the SRD II rules. In March 2020, Mefop sent a questionnaire to its members to gauge the levels of awareness concerning the SRD II stewardship-related rules.¹⁹⁹ In October 2020,²⁰⁰ Mefop shared with its members the opportunity to create a set of stewardship guidelines. In contrast with most stewardship codes or principles across the globe,²⁰¹ the envisaged guidelines will not require any commitment in terms of adherence and are aimed to function as a common reference point which will increase dialogue between institutional investors and investee companies, increase the awareness of SRD II stewardship-related rules, educate Italian institutional investors and fill the gap left by the Assogestioni’s stewardship code. The proposed multiplication of soft-law stewardship norms in Italy by Mefop is reflective of the malleable character of soft-law stewardship initiatives that aim to help market actors to better absorb top-down regulation, such as the SRD II rules, and guide them towards meaningful compliance and higher levels of stewardship practices. Such initiatives are even more important when top-down regulation is not customized to national circumstances, as is the case with the SRD II transposed rules. We should thus see such innovation as an example that needs to be followed across the EU.

Another interesting case of a symbiotic relationship between national stewardship norms and the transposed SRD II stewardship-related rules is the Dutch Stewardship Code which was revised in 2018 following the transposition of the SRD II. The Dutch code is the only stewardship code so far that makes direct references to the SRD II. The preamble to the Dutch code is indicative of its multi-level normative nature. The code: (1) ‘builds and supersedes’ the 2011 stewardship code; (2) ‘incorporates’ the semi-hard stewardship obligations for asset owners and asset managers stemming from Article 3g of the SRD II; (3) ‘incorporates the best practices of the Dutch Corporate Governance Code that apply to asset owners and asset managers’; and (4) ‘contains a number of additional principles as a result of evolving stewardship expectations’.²⁰² Importantly, principle 1 of the Dutch code (which incorporates Article 3g of the SRD II) chooses the term ‘stewardship policy’, rather than ‘engagement policy’ that is used in the SRD II.²⁰³ This is because ‘engagement’ is considered to be only a facet of the broader concept of stewardship.²⁰⁴ The Dutch code also extends beyond the SRD II and includes principles relating to communication with relevant stakeholders (Principle 5) or borrowing and lending shares (Principle 11).

While in the UK, Italy and the Netherlands we have seen signs of a fruitful symbiosis between soft national stewardship norms and the transposed SRD II stewardship-related rules, Denmark has taken the perhaps surprising decision to abolish pre-existing soft-law norms on the transposition of SRD II rules. On 28 January 2020, the Danish Committee on Corporate Governance announced, in agreement with the Minister of Business Affairs, that it will discontinue the applicability of the Danish Stewardship Code. The Committee recognized the beneficial role that the Danish code has played so far in preparing market actors to follow the transposed SRD II rules and ensuring openness on how institutional investors manage assets. But the Committee considered that there is now an overlap between the semi-hard obligations set forward by the SRD II and the soft Danish code and, therefore, it decided to abolish the code.²⁰⁵ It is interesting to note that the Danish code was introduced whilst the SRD II was imminent and the Danish Committee foresaw that the implementation of the SRD II could overlap with the soft stewardship framework.²⁰⁶ Indeed, the scope of the Danish Code and the transposed rules is almost identical—with the exception of some sui generis Danish investors.²⁰⁷ In terms of content, all principles of the Danish code, apart from Principle 3 on escalating activity, are now found in the transposition framework. Birkmose and Madsen have argued that escalation is an ‘implicit part of shareholder engagement’ and should therefore be reflected in future policies on active ownership required by the Danish transposed rules despite that lack of a specific reference.²⁰⁸ To that one can add that the escalation principle has been the least well-perceived principle of the inaugural UK Stewardship Code,²⁰⁹ and is not incorporated in Article 3g of the SRD II.

But what does the Danish example tell us about the future of soft shareholder stewardship norms? We find the marginalisation of soft-law norms, as is the case in Denmark, to be a regulatory faux pas for the following reasons. By depriving the market of a soft stewardship code, institutional investors and asset managers will have less—if no—guidance about what should be included in the engagement policies provided by the SRD II. Indeed, the norm-setters of soft stewardship codes have a unique capacity—due to their proximity to and experience of the market—to develop and maintain an ongoing dialogue with the regulatees, and thereby to nudge and guide actors towards meaningful compliance. Moreover, in the absence of a soft stewardship code or related principles/guidelines, market actors will depend on a future revision of the SRD II rules to see any evolution or amendments applicable to their shareholder stewardship obligations. Such a revision may take longer than the much more frequent revision of soft-law norms that can depict new challenges or changes in the investment management models affecting stewardship practices. Lastly, the obligation to comply with the literal and minimalistic SRD II rules, in the absence of accompanying tailored soft stewardship norms, will accentuate meaningless compliance trends since market actors will not have a flexible point of reference to disclose their strategies but will be conscious of the perils of coming across as non-compliant in a strict framework and hence reluctant to be more transparent. Birkmose and Madsen are optimistic, however, and argue that this abolition is not synonymous with the ‘culmination of Danish stewardship’.²¹⁰ Rather, they suggest that evolution can come from the incorporation of soft stewardship-related obligations in the Danish Corporate Governance Code, such as a duty by the board of directors to engage with institutional shareholders.²¹¹ Irrespective of whether stewardship-related norms will operate through the means of a standalone stewardship code, a corporate governance code or any other standards, guidelines, rules, codes of best practices or codes of conduct, the key message is clear: soft law in the area of shareholder stewardship can nudge market actors towards higher standards of stewardship and can act as a continuous driving force to promote compliance with the literal and minimalistic national rules that have transposed the SRD II.

This can provide food for thought and facilitate a debate on the merits of soft shareholder stewardship norms in Member States that have not created or testified to the development of soft law initiatives in the area of shareholder stewardship. Sweden is a representative example here. The Swedish Investment Fund Association revised its 2002 shareholder engagement guidelines for ‘fund management companies’ (asset managers) in May 2019, following the literal and minimalistic transposition of the SRD II rules.²¹² The guidelines specifically state that they ‘have been adapted to shareholder engagement legislation which […] implements’ the SRD II.²¹³ The guidelines significantly expand the statutory requirements in relation to the content of the shareholder engagement policy adding the following principles: (1) ‘the fund management company’s principles regarding its own participation in the work of nomination committees’; (2) ‘how questions concerning inside information are handled in relation to the shareholder engagement’; (3) ‘the situations in which the fund management company acts in the companies in which the fund owns shares, and the fund management company’s escalation procedures’; (4) whether voting advisers are used; (5) ‘the fund management company’s principles for stock lending and how they are applied in order to perform the engagement where appropriate, particularly at general meetings of the companies that have issued shares that are included in the fund’, and (6) ‘other principles applied by the fund management company that are of material significance for the shareholder engagement’.

The Swedish development of innovative shareholder stewardship guidelines confirms that national law can provide more tailored solutions to local contexts. In addition, the incorporation of such customized solutions in a soft code of conduct developed by a domestic investor association underscores the importance of market demand and local institutional investor support so as to ensure good stewardship practices and support meaningful compliance with the SRD II transposed rules. Any future symbiotic relationship between soft stewardship codes or principles/guidelines and the transposed SRD II rules depends essentially upon the role of local investors’ associations. Such investor associations and other multi-stakeholder and supranational forums²¹⁴ can instil good shareholder stewardship practices through continuous dialogue amongst investors and standard setters and the shaping of collaborative activity pathways. Institutional investors that will actively invest resources, provide high-quality disclosure and meaningfully engage with asset managers will thus be of crucial importance in furthering the success of the national normative agenda.²¹⁵

Overall, our analysis shows that the operability of the literal and minimalistic SRD II shareholder stewardship rules crucially depends on other soft stewardship norms (stewardship codes or principles/guidelines or any other related initiative included in corporate governance codes, best practice standards or codes of conduct) tailored to the specific national contexts. However, it needs to be acknowledged that the symbiosis of multiple stewardship frameworks (especially when these do not entirely overlap) may create some confusion for institutional investors and asset managers that adhere to all of them. For instance, in the UK there is now a partial overlap between the disclosure requirements under the FCA’s Conduct of Business Sourcebook (COBS) that transposed Article 3g (SRD II) and reporting under the UK 2020 Stewardship Code. For instance, matters to be included in the engagement policy of COBS 2.2B.6 overlap with Principles 3, 9, 10 and 12 of the UK Stewardship Code which deal with conflicts of interests, engagement, collaboration with other investors and the exercise of shareholder rights, respectively.²¹⁶ However, there is no real clarity as to the interaction between the two. Indeed, the FCA provides no Handbook guidance or any other templates on how insurers and asset managers can implement the transposed requirements.²¹⁷ The FCA, however, leaves open the option for asset managers to report in a single document to both the COBS disclosure and the UK Stewardship Code, and requests asset managers to consider whether the disclosures they provide under the code are sufficient to meet the reporting imposed under the transposed rules.²¹⁸ But this is not a clear option in other Member States with pre-existing stewardship codes, such as Italy or the Netherlands. Another key challenge for the symbiosis between the SRD II rules and soft shareholder stewardship norms lies in the collective shaping of a normative framework of ‘culturally compatible’²¹⁹ stewardship at industry and national levels that acknowledges national traits while leaving space for both harmonized minimum standards and tailored practices to be introduced to the stewardship market. Of course, a series of adaptation limits are present here. For Member States with no pre-SRD soft stewardship norms, such as Germany, cognitive problems arise in relation to their reticence to accept shareholder stewardship as something malleable and constantly evolving. For other Member States with pre-SRD norms, such as Italy, other cognitive limitations may exist, such as the preoccupation of institutional investors with a more conventional perception of governance challenges that does not fully acknowledge currently emerging trends (e.g. ESG factors). But with the SRD II having been transposed in a literal and minimalistic way, this stewardship nexus can only be materialized with the continuous support and promotion of soft, tailored stewardship initiatives that can offer customization and meaning to the SRD II rules, while a minimum harmonization of shareholder stewardship has already been secured.

5 Concluding Thoughts for an Optimal Symbiosis of Stewardship Norms

In this article, we provided an original account of the rationale, the dynamics and the evolution of the EU policy towards long-term shareholder engagement within (or in the absence of) nationally embedded frameworks within which the broader concept of shareholder stewardship is currently emerging. Our key aim was to decipher the aspirations of the EU policy and the likelihood of its success. It was not our intention to deliver an all-encompassing analysis of the interaction between the SRD II transposed rules and the national legal frameworks. The complete image will only come into existence once market actors start implementing the semi-hard SRD II transposed rules or using them concomitantly with any pre-(or post-)SRD II soft-law stewardship norms.

Two key points stand out from our analysis. First, we denote the rather formalistic approach that has been adopted in the transposition of Article 3g of the SRD II. Member States have largely copied the requirement for the development, disclosure and implementation of an engagement policy on the part of institutional investors and asset managers without allowing for a tailored and more meaningful customization according to national idiosyncrasies. Secondly, we highlight the positive attributes of soft shareholder stewardship norms, in terms of flexibility, enhanced familiarity and preparedness concerning the SRD II transposed rules, legitimacy and signalling as well as innovation, and on that basis we advocate the maintenance and multiplication of such soft-law norms. The proposed symbiotic shareholder stewardship framework, tailored to specific national circumstances, can offer market actors an operational normative space that is discursive, flexible and customized to evolving shareholder stewardship norms and practices.

To paraphrase Věra Jourová’s statement: did we learn the lessons from the past? Unfortunately, the answer is: not very much. It is clear that the EU agenda focuses on responsible shareholder engagement, sustainable investment and long-term corporate growth. These are laudable policy objectives. But the means of achieving them—via the minimalist SRD II engagement and disclosure duties and the ensuing literal transposed rules—are not enough. The SRD II transposition cannot lead on its own to tailored shareholder stewardship practices and efficient outcomes without supporting soft-law stewardship initiatives (stewardship codes or principles/guidelines or any other related initiative included in corporate governance codes, best practice standards or codes of conduct). Simply put, moving on from focusing on short-term financial gain is not a simple task that can be solved with a single legal parameter. Nor can the literal and minimalistic national rules that transpose the SRD II stewardship-related provisions promote shareholder stewardship in Europe without any customization. Soft shareholder stewardship norms are therefore needed to go hand in hand with the transposed SRD II rules and support the emerging, but still to be concretely shaped, shareholder stewardship landscape.

Before we conclude it is important to emphasise that notwithstanding our critique on the literal transposition trends, we do not see this as necessarily suboptimal. Rather we argue that the lack of customization by the Member States has surprisingly left existing or future soft shareholder stewardship norms with a relatively large operational space (in terms of scope, content etc.), which is however not entirely autonomous. This is because soft-law shareholder stewardship can now operate to support and perhaps extend the minimum stewardship standards imposed by the transposed SRD II rules. On that basis, we argue that soft-law stewardship norms need to be multiplied across national markets so as to shape, together with the harmonized SRD II regime, a more flexible and tailored regulatory framework. The current examples of Italy and Sweden testify to the need to provide for experimental, less binding soft law tools to inculcate stewardship culture amongst investors and pave the way for more developments in this area. While much more must be done at the EU, national and industry level if we wish more fully to address the pressing challenges arising from the corporate governance role of institutional investors and asset managers, keeping the normative landscape diverse and open will surely help to promote shareholder stewardship in Europe.