The Effect of Stewardship Code in UK and Japan
and the Challenges to Stewardship Code
Statement of problem
The inactive exercise of shareholder rights and low level of risk-monitoring by institutional investors have been pointed out as one of causes that had brought the global financial crisis in 2008~2009 (OECD, 2009; O’dwyer, 2014). Kirkpatrick (2009) mentioned “The financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements.” OECD (2009) revealed that main defective factors of corporate governance were remuneration that were scarcely related to company performance, risk management that didn’t care about the whole company or compensation structure, boards that noticed the danger companies confronted too late in many cases and shareholders made an attention to short term incentives like traders and managers and therefore could not oversight boards effectively. These four factors of corporate governance – “corporate governance weaknesses in remuneration, risk management, board practices and the exercises of shareholder rights”- combined with macroeconomic condition make a contribution to the occurrence of the global financial crisis (OECD, 2009). The last factor about shareholder is also said as “a wide spread acquiescence by institutional investors” which aggravated the influence of financial crisis (Walker, 2009; Robert, 2015).
As an attempt to change this passivity of UK-based institutional investors toward the active tendency, the Financial Reporting Council launched the UK Stewardship Code in 2010 (Cheffins, 2010). The code is “voluntary guidelines” which comprises seven principles and related guidances for institutional investors to act as responsible asset manager or asset owner and aims to enhance the quality of engagement between investors and companies to improve long-term risk-adjusted returns to shareholders. For example, the principles contain enhancing the dialogue with companies and exercising shareholder right like voting more actively (FRC, 2010; Wong, 2010). FRC might have expected institutional investors to act as motivators or facilitators who make UK listed companies they invest to comply with UK Corporate Governance Code more well by engaging positively with them (FRC, 2010). Because UK Corporate Governance Code contains principles related to remuneration, risk management, and board practices, the UK Stewardship Code could be a tool to complement corporate governance weaknesses that provoked the global financial crisis.
Since UK’s first step in introducing Stewardship Code, many other countries like Italy, Denmark, Switzerland, the Netherlands, the European Union, the US, Canada, Japan, Hong Kong, Philippines, South Korea, Malaysia, Taiwan, Thailand, Brazil and Singapore followed to enact Stewardship Code (Reynolds, 2017). Though the principles of Stewardship Code were similar among countries, the motivations of each countries to develop Stewardship Code were somewhat different. For the Japan case, Financial Services Agency(FSA), the financial regulator, developed “Japan Stewardship Code” in 2014 to boost the economy by pushing companies to increase returns as an implementation of Abenomics policies (Bloomberg Intelligence, 2017). For Korea, Stewardship Code has got attention as a tool for strengthening the protection of investor’s interests and improving corporate governance of chaebol and listed companies. Korea Corporate Governance Service(KCGS), a monitoring and research institution, introduced “Korea Stewardship Code” in 2016 (KCGS, 2016). The number of countries that enacted Stewardship Code is gradually increasing and the intention of the Code to improve corporate governance and long-term return is widely agreed and accepted.
But there are several need for research around Stewardship Code in Korea. First, request for the evidence to show that the code is substantially beneficial for improving corporate governance and increasing investor’s return. In Korean socio-economical context, The representative of industries and corporations like the Federation of Korean Industries(FKI) or Korea Listed Companies Association(KLCA) claims that Stewardship Code can erode the right of management. Second, the controversies on whether the code generates negative social effects on the listed companies like too much governmental influence is still latent. Third, how to reduce the discordance between the abstract institutional investor the code depict and the real world asset managers who use portfolio basket of listed companies and follow the stock market index is also in question. Furthermore, there is a need for policy solutions to make conditions for institutional investors successfully act as a responsible shareholder. Among former literatures, research about these questions are limited. These knowledge gaps will be filled in this paper.
Is there some evidence to show that Stewardship Code is substantially beneficial for improving corporate governance and increasing investor’s return?
Does Stewardship Code generates negative social effects on the listed companies like too much governmental influence?
How can it be reconciled that there is some discordance between the abstract institutional investor that Stewardship Code depict and the real world asset managers who use portfolio basket of listed companies and follow the stock market index
What is policy solutions to make conditions for institutional investors successfully act as a responsible shareholder?
A qualitative methodology will be used to respond to the research questions. Former literatures around corporate governance and Stewardship Code, reports from government like UK FRC, Japan FSA and Korea Financial Services Commission or international institutions like OECD, internet blogs run by Bloomberg, Mckinsey, KPMG and etc, news articles worldwide will be reviewed. For each research questions, articles to be reviewed will be carefully selected and analysed and contradictory opinions and their evidences will be compared with scrutiny. Through the process for finding answers for the research questions the implication for promoting Korea Stewardship Code will be investigated.
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