Stewardship and institutional investor engagement

Executive summary

Over the past few decades, global capital markets have undergone significant changes. Large institutional investors now hold substantial equity stakes in listed companies across jurisdictions and cross-border ownership has become a defining feature of many markets. Given their scale and influence, these investors contribute to capital market efficiency and integrity and can strengthen market discipline and the accountability of corporate boards through their capital allocation and stewardship activities.

As institutional investors have become central actors, important questions arise for policymakers and regulators on how to ensure that their role supports market efficiency and integrity, while maintaining high standards of transparency and accountability to clients. This policy paper seeks to provide guidance to policymakers and regulators on how to assess the legal, regulatory and institutional frameworks that enable institutional investors to discharge their stewardship responsibilities.

The policy considerations in this paper are addressed to policymakers and regulators, while recognising that industry bodies and institutional investors may also support related market improvements. While the policy considerations focus on institutional investors as the primary holders of stewardship responsibilities, they also include considerations for entities and professionals that support institutional investors in carrying out these functions (referred to in this paper as “market service providers”). The policy considerations identify common elements that underpin effective stewardship and disclosure across different types of institutional investors, including targeted considerations where relevant, and seek to identify good practices and suggest possible means for achieving them.

Key policy considerations

Ensuring the basis for an effective stewardship framework

Effective stewardship frameworks may depend on a coherent institutional and regulatory structure in which responsibilities for supervision, implementation and enforcement are clearly defined. This could include ensuring that public authorities and industry bodies have the authority, autonomy, integrity and capacity to carry out their roles objectively. Frameworks may also focus on promoting transparency, accountability and fair market practices to support trust in capital markets. Grounding stewardship frameworks in the rule of law, with clear and enforceable requirements that safeguard investors’ property rights, could further strengthen market integrity. At the same time, policymakers and regulators could prioritise market efficiency, transparency and fairness while avoiding undue interference in institutional investors’ stewardship activities, particularly where such activities are not aligned with client mandates.

In evaluating frameworks, consideration of international good practices could help address the concentration of capital among large institutional investors and the prevalence of cross-border ownership, supporting greater consistency and more effective engagement. Expectations may need to be proportionate to institutional investors’ capacity and market impact, with higher disclosure standards for larger investors and more proportionate requirements for smaller ones. Frameworks could also ensure that institutional investors and market service providers provide disclosures that clearly reflect their roles in the investment chain.

Fiduciary duties of institutional investors

Respect for institutional investors’ fiduciary duties and the preservation of their discretion to act in the best interests of clients ought to be at the core of effective stewardship. For institutional investors that delegate investment decisions, clear expectations at the mandate stage may be important, including in relation to voting and engagement priorities. Stewardship frameworks may support effective oversight by encouraging regular monitoring against mandate provisions and focusing on the reporting of stewardship activities and outcomes.

To support accountability across investors with differing levels of sophistication and bargaining power, minimum transparency requirements could help ensure that smaller institutional investors can assess and hold asset managers to account, even where larger investors negotiate more detailed arrangements.

Exercising rights and responsibilities

The extent to which institutional investors engage in stewardship varies widely. For some, stewardship is an integral part of their business models or investment strategy, while others do not prioritise such activities. In this context, mandating stewardship practices for all asset managers may be ineffective and risks encouraging a box‑ticking approach. At the same time, frameworks may add value by promoting transparency by requiring or recommending disclosure of how shareholder rights are exercised, supported by corporate governance frameworks that protect basic shareholder rights.

To reinforce transparency, accountability and proportionality, frameworks may encourage complete and balanced voting and engagement disclosures, avoid selective reporting and focus on quality without imposing undue burdens. Institutional investor engagement may also extend beyond issuers to policy and regulatory matters, particularly when addressing market-wide issues.

Stewardship policies by institutional investors

Stewardship frameworks may promote transparency by encouraging institutional investors to disclose their stewardship policies, allowing clients to assess alignment with their preferences and objectives, as well as with the mandates agreed upon with institutional investors. Where stewardship is integral to the business model or investment strategy, proportionate disclosures on governance and resourcing may help clients assess whether investors are adequately equipped to deliver on their commitments, while preserving flexibility in how investors allocate their human resources.

Stewardship frameworks may also address conflicts of interest by promoting transparency in how they are mitigated or managed. Stewardship frameworks may also encourage clarity on the use of market service providers and the extent of reliance on them, while reinforcing that institutional investors retain ultimate responsibility for stewardship.

Market service providers

While institutional investors retain primary responsibility for stewardship, the quality and objectivity of supporting services can materially influence voting and engagement outcomes. Effective stewardship frameworks may therefore address the mitigation or management of conflicts of interest, the disclosure by market service providers of their resources and the transparency of methodologies, while protecting proprietary information and avoiding overly prescriptive requirements and excessively rigid rules. Stewardship frameworks may also support effective communication between market service providers and issuers.