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The global financial crisis gave rise to competing narratives about shareholders and their engagement in corporate governance. According to one narrative, which was common in the United States, shareholders were complicit in the crisis, by placing pressure on corporate managers to engage in excessive risk-taking to increase profitability.

However, an alternative narrative prevailed in many other jurisdictions, such as the United Kingdom and Australia, where the real problem was perceived to be lack of shareholder participation in corporate governance. According to this positive narrative, greater engagement by shareholders is a beneficial corporate governance technique.

Our recent Working Paper, Stewardship and Collective Action: The Australian Experience, examines an important recent international phenomenon, the rise of shareholder stewardship codes (“stewardship codes”). These codes, which have now spread around the world, embody the positive narrative concerning shareholder engagement. They reflect the growing importance of institutional investors in capital markets, and a belief that increased engagement by these investors can improve corporate decision-making and provide protection against inappropriate corporate risk-taking.

Our Working Paper focuses on collective action as a form of stewardship. Many recent stewardship codes include specific provisions relating to collective shareholder action. This makes good sense from the perspective of the positive narrative of shareholder engagement. The ability to undertake collective action can enable institutional investors to leverage their power, pool resources and share costs, thereby making stewardship economically feasible and less speculative.

We pay close attention to Australia, which provides an interesting case study concerning the use of collective action as a stewardship tool. Australia has a capital market structure that is conducive to investor stewardship – it has, for example, high levels of institutional ownership and relatively low levels of controlling stakes held by non-institutional blockholders. In addition, Australian statutory law provides beneficial mandatory shareholder rights. These conditions potentially provide incentives for institutional investors in Australian listed companies to undertake their stewardship activities collectively.

Unlike jurisdictions, such as the United Kingdom, where stewardship codes are initiated and overseen by government regulators, Australia’s codes have been developed in a piecemeal fashion by organisations representing the interests of shareholders. The Australian stewardship codes tend to address collective action only briefly and in very general terms. Furthermore, market data indicates that investors in Australian listed companies generally tend to avoid aggressive forms of collective action, such as board spills and high-profile public campaigns. Australia has also experienced relatively low levels of hedge fund activism, and, to date, it has not witnessed to any significant degree the U.S.-style interaction between hedge funds and institutional investors, described by Professors Gilson and Gordon as “agency capitalism”.

Although overt forms of activism are rare, there is, nonetheless, a significant amount of private engagement between institutional investors and their investee companies in Australia. It is unclear, however, to what extent discrete institutional investors act together in undertaking this kind of engagement. Disclosures issued pursuant to the Australian stewardship codes suggest that institutions only undertake collective behind-the-scenes engagement on an exceptional basis, primarily as a mechanism to escalate major governance concerns.

Our paper concludes, therefore, that Australian institutional investors do not appear to use direct forms of aggressive collective action as a default stewardship tool. We present evidence which suggests that, instead, Australian institutional investors routinely channel their collective influence in corporate governance indirectly through intermediary organisations. These intermediary organisations include proxy advisers, industry lobbying bodies, and service providers that undertake behind-the-scenes engagement with corporate managers on behalf of their institutional investor clients. We argue that, for reasons of efficiency, mitigation of free-riding concerns and information accumulation, it makes good sense for institutions to undertake stewardship activities in this way, rather than by using ad hoc investor coalitions that engage directly with companies.

Our study demonstrates that collective action is by no means a one-dimensional form of stewardship. This has significant implications for policy makers, regulators and researchers. It suggests that these groups should be alert to the nuances of collective activism across different jurisdictions. For example, it is important for issuers of stewardship codes to consider carefully what specific forms of investor collective action they wish to encourage (or discourage) in their particular jurisdictional setting. It is also important for policy makers to assess what constraints are appropriate for intermediary organisations that engage in collective action on behalf of institutional investors.

Our Working Paper is available for download here. An edited version of the paper will be published as a chapter in Global Shareholder Stewardship: Complexities, Challenges and Possibilities (Dionysia Katelouzou and Dan W Puchniak eds, Cambridge University Press, forthcoming).

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