The of the global financial crisis (OECD, 2009). The

    TheEffects and the Challenges of Stewardship CodeBoKyoon Kim (201811092)KDISchool of Public Policy and ManagementJan2018     AuthorNoteThis report was written for the “AcademicWriting for Graduate Study in Public Policy” class by Professor Lisa Lim in the2018 Pre-spring semester of KDI School.Correspondence concerning thisarticle should be addressed to Bo Kyoon Kim, KDI School of Public Policy andManagement, 263 Namsejong-ro, Sejong Special Self-Governing City, South Korea.Contact: [email protected]  The effects and the Challengesof Stewardship CodeStatementof the Problem            The inactive exercise of shareholder rights and low levelof risk-monitoring by institutional investors have been pointed out as one ofcauses that had brought the global financial crisis in 2008~2009 (OECD, 2009;O’dwyer, 2014). Kirkpatrick (2009) mentioned “The financial crisis can be toan important extent attributed to failures and weaknesses in corporategovernance arrangements.” OECD (2009) revealed that main defective factors ofcorporate governance were remuneration that were scarcely related to companyperformance, risk management that didn’t care about the whole company orcompensation structure, boards that noticed the danger  companies confronted too late in many casesand shareholders made an attention to short term incentives like traders andmanagers and therefore could not oversight boards effectively.

These fourfactors 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 ofthe global financial crisis (OECD, 2009). The last factor about shareholder isalso said as “a wide spread acquiescence by institutional investors” whichaggravated the influence of financial crisis (Walker, 2009; Robert, 2015).As an attempt to changethis 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 sevenprinciples and related guidances for institutional investors to act asresponsible asset manager or asset owner and aims to enhance the quality ofengagement between investors and companies to improve long-term risk-adjustedreturns to shareholders. For example, the principles contain enhancing thedialogue with companies and exercising shareholder right like voting more actively(FRC, 2010; Wong, 2010). FRC might have expected institutional investors to actas motivators or facilitators who make UK listed companies they invest tocomply with UK Corporate Governance Code more well by engaging positively withthem (FRC, 2010). Because UK Corporate Governance Code contains principlesrelated to remuneration, risk management, and board practices, the UKStewardship Code could  be a tool tocomplement corporate governance weaknesses that provoked the global financialcrisis.Since UK’s first stepin introducing Stewardship Code, many other countries like Italy, Denmark,Switzerland, the Netherlands, the European Union, the US, Canada, Japan, HongKong, Philippines, South Korea, Malaysia, Taiwan, Thailand, Brazil andSingapore followed to enact Stewardship Code (Reynolds, 2017).

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Though theprinciples of Stewardship Code were similar among countries, the motivations ofeach countries to develop Stewardship Code were somewhat different. For theJapan case, Financial Services Agency(FSA), the financial regulator, developed”Japan Stewardship Code” in 2014 to boost the economy by pushing companies toincrease returns as an implementation of Abenomics policies (BloombergIntelligence, 2017). For Korea, Stewardship Code has got attention as a toolfor strengthening the protection of investor’s interests and improvingcorporate governance of chaebol and listed companies. Korea CorporateGovernance Service(KCGS), a monitoring and research institution, introduced”Korea Stewardship Code” in 2016 (KCGS, 2016).

The number of countries thatenacted Stewardship Code is gradually increasing and the intention of the Codeto improve corporate governance and long-term return is widely agreed andaccepted. But there are severalneed for research around Stewardship Code in Korea. First, request for theevidence to show that the code is substantially beneficial for improvingcorporate governance and increasing investor’s return. In Koreansocio-economical context, The representative of industries and corporationslike the Federation of Korean Industries(FKI) or Korea Listed CompaniesAssociation(KLCA) claims that Stewardship Code can erode the right ofmanagement. Second, the controversies on whether the code generates negativesocial effects on the listed companies like too much governmental influence isstill latent.

Third, how to reduce the discordance between the abstractinstitutional investor the code depict and the real world asset managers whouse portfolio basket of  listed companiesand follow the stock market index is also in question. Furthermore, there is aneed for policy solutions to make conditions for institutional investorssuccessfully act as a responsible shareholder. Among former literatures,research about these questions are limited. These knowledge gaps will be filledin this paper.ResearchQuestionsIs there some evidenceto show that Stewardship Code is substantially beneficial for improving corporategovernance and increasing investor’s return?Does Stewardship Codegenerates negative social effects on the listed companies like too muchgovernmental influence?How can it bereconciled that there is some discordance between the abstract institutionalinvestor that Stewardship Code depict and the real world asset managers who useportfolio basket of  listed companies andfollow the stock market indexWhat is policysolutions to make conditions for institutional investors successfully act as aresponsible shareholder?Methodology             Aqualitative methodology will be used to respond to the research questions.Former literatures around corporate governance and Stewardship Code, reportsfrom government like UK FRC, Japan FSA and Korea Financial Services Commissionor international institutions like OECD, internet blogs run by Bloomberg,Mckinsey, KPMG and etc, news articles worldwide will be reviewed. For eachresearch questions, articles to be reviewed will be carefully selected andanalysed and contradictory opinions and their evidences will be compared withscrutiny.

Through the process for finding answers for the research questionsthe implication for promoting Korea Stewardship Code will be investigated. References             ListBloomberg Intelligence. 2017. “Japan’s corporategovernance overhaul.” Cheffins, B.

R. 2010. The Stewardship Code’sachilles’ heel.

The modern law review 73(6). 985-1025. Fidelity. 2014. “Abenomics: A roadmap to corporatereform.


cn/zh-cn/data/MarketCommentary/PDF/MC-english/Abenomics-Aroadmaptocorporatereform_Fidelity_Sep_2014.pdf Financial Reporting Council. 2010. “Consultation ona stewardship code for institutional investors.” London: Financial ReportingCouncil. Financial Reporting Council.

2012. “The UKStewardship Code.” London: Financial Reporting Council. Kirkpatrick, G. 2009.

“The Corporate GovernanceLessons from the Financial Crisis.” Paris: OECD. Korea Corporate Governance Service. 2016.12.19.”Korea Stewardship Code Announcement”(Press release). http://cgs. Lynn, T. G. 2013. Institutional Investor Monitoring.

Encyclopedia of Corporate Social Responsibility. 1422-1429. Verlag BerlinHeidelberg: Springer. Organisation for Economic Co-operation andDevelopment(OECD). 2009. “Corporate governance and the Financial Crisis- Keyfindings and main messages.” Paris: OECD. Organisation for Economic Co-operation andDevelopment(OECD).

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A Compromise for ActivistShareholders from the UK Stewardship Code. Vanderbilt journal of transnationallaw 48. 543-575. Walker, Sir David. 2009.

“A review of corporategovernance in UK banks and other financial industry entities: Finalrecommendations.” London: The walker review secretariat.