I.1 Introduction

Institutional ownership of listed companies has grown significantly almost everywhere in the last three decades. Equity ownership has steadily moved from retail to institutional investors in that period.Footnote ¹ With (minority) shares now concentrated in the hands of a relatively small number of institutions, the free-rider problem that prevented atomised individual shareholders of listed corporations from monitoring managers’ (or controlling shareholders’) actions and performance has become less daunting. In fact, institutional investors play an ever-increasing role in the governance of listed companies worldwide.

Not only are they capable of exerting influence on investee companies by using their voice through voting and engagement, but expectations that they do so have been growing considerably. In a context where sustainability-related issues are in the spotlight as they have never been before and legislators (especially in the EU) are nudging institutions into including ESG factors in their investment and stewardship strategies, institutions are called to engage with investee companies not only to monitor their financial performance but also to push them to pursue environmental and social goals.

However, the actual willingness of institutional investorsFootnote ² to engage with portfolio companies and to focus on ESG-related issues remains uncertain. Indeed, regardless of whether stewardship activities are conducted at the individual company level or at the portfolio level, holding stakes that are large enough to enable them to exert pressure over investee companies and capture potential economic benefits from stewardship activities is a precondition for institutions’ engagement. But several economic and legal factors can affect the propensity of institutional investors towards engagement with portfolio companies, as well as the methods by which engagement is undertaken and the topics covered.

Against this backdrop, this chapter proceeds as follows. Section I.2 provides an overview of the institutionalisation of listed companies’ ownership. Section I.3 illustrates asset managers’ ownership and nationality in different jurisdictions. Section I.4 describes the shift to ESG-related engagement and discusses the relevance of end-clients’ preferences as a main driver of this move as well as the potential regulatory backlash arising from increasing ESG engagement. Section I.5 provides the reader with a roadmap of the book contents.

I.2 The Institutionalisation of Listed Companies’ Ownership

Institutional investors dominate the ownership of publicly listed firms worldwide. At the aggregate level, they are the largest category of shareholders.Footnote ³ They hold 41 per cent of global market capitalisation, accounting for more than USD 30 trillion invested in public equity markets.Footnote ⁴ This is three times the amount invested by public-sector owners and six times the value of investments by strategic individuals.Footnote ⁵ Institutional investors’ presence in listed companies, while by far stronger in the US and the UK, where ownership is traditionally highly dispersed, is relevant also in countries, such as European ones, where the percentage of companies with a controlling shareholder (be it a private entity, a family, or the state) is common.Footnote ⁶ For example, as reported by the OECD, institutional investors hold 26.9 per cent of total market capitalization in Italy, 27.5 per cent in France and 28.3 per cent in Germany.Footnote ⁷

Focusing on the asset management industry, the market is more concentrated in the US than elsewhere: since 1980, the top 10 institutional investors have quadrupled their holdings in US stocksFootnote ⁸ and, at the end of 2021, the five largest mutual fund and exchange traded fund sponsors – out of a total of 825 – accounted for 54 per cent of the industry’s total assets.Footnote ⁹ While not as dramatic as in the US, concentration within the asset management industry is significant in the EU as well. At the end of 2021, the share of assets under management (AUM) held by the top 20 EU asset managers was 43.71 per cent.Footnote ¹⁰ Relatedly, in 2021, the share of the total AUM held by the world’s top 20 asset managers (all from the US, the EU, and the UK) was 45.2 per cent.Footnote ¹¹

The concentration process that has taken place in the asset management industry over the past few decades has mainly been fuelled by the exponential rise of passive funds and ETFs. In the US, they accounted for 18 per cent of US stock market capitalisation at the end of 2022, surpassing the 14 per cent held by active funds.Footnote ¹² Indeed, despite its continuous growth, the passive index fund industry remains highly concentrated. The market is dominated by Blackrock, Vanguard, and State Street Global Advisors (SSGA) – the ‘Big Three’ – which, overall, manage over 90 per cent of all AUM in passive funds.Footnote ¹³

The combination of ownership reconcentration and asset management industry concentration dynamics has a direct impact on the ownership of listed companies and carries significant corporate governance implications. Indeed, although sectoral passive funds and personalised index funds that adopt active-like investment strategies and thus comprise more concentrated portfolios are increasingly widespread,Footnote ¹⁴ giant asset managers dominating the passive funds industry are heavily invested across all companies included in major stock indexes.Footnote ¹⁵ According to Lazard, at the end of 2021, Vanguard, BlackRock, and State Street together held on average 18.7 per cent of S&P 500 companies. Their ownership of smaller companies was even more concentrated as they held 22.8 per cent of the shares in the S&P MidCap 400 index and 28.2 per cent in the S&P SmallCap 600 index.Footnote ¹⁶

The fact that the largest asset managers are large shareholders in an enormous number of listed companies is widely documented. To our knowledge, though, available studies mainly focus on the US and data on European markets are limited.

To fill this gap, we collected data on the shareholdings of the 25 largest institutional investors in each of the continental European companies included in the Euro Stoxx 50Footnote ¹⁷ and the 15 largest UK companies in the FTSE 100 as of the end of April 2022.Footnote ¹⁸ We find that leading institutional investors rank among the largest shareholders in most companies comprised in the Stoxx 50 index. On average, the top institutional shareholder at these companies owns 6.54 per cent of the equity, the top three institutional shareholders own 14.09 per cent, and the top five institutional shareholders 18.50 per cent. We also look at the cumulative shareholding of the Big Three and the Big Four (BlackRock, Vanguard, State Street, and Fidelity). As far as the top 15 FTSE 100 are concerned, the corresponding figures are 13.42 per cent and 14.65 per cent.  The percentage held by the Big Three and the Big Four in the Stoxx 50 companies amounts to 8.31 and 9.40 per cent, respectively.

To shed further light on the corporate governance role asset managers can play, we also look at the basic characteristics of the shareholder base of Stoxx 50 and top 15 FTSE 100 companies. Namely, we look at the type of entity the top shareholder qualifies as and the stake it holds.

Table I.1 classifies top shareholders at these 65 companies as asset managers, government (central or local government, a state-owned enterprise, or a sovereign wealth fund), foundations and mutual entities (four cases), insiders, managers and families, and strategic individuals and other operating companies and provides the number of companies with such shareholder at the top. Interestingly, only in three companies does the largest shareholder account for the majority of the share capital. The stake of the largest shareholder exceeds 30 per cent or 20 per cent in four and six companies, respectively.

With regard to the size of the Big Three’s shareholdings, it is worth mentioning that there is a significant difference in the size of the stakes of the Big Three depending on whether the company has a shareholder with a stake exceeding 30 per cent of the share capital or of the voting rights. Namely, the Big Three hold together, on average, 10.22 per cent of capital in non-controlled companies and 3.45 per cent in controlled companies. As the Big Three dominate the passive investment market and their AUM are largely represented by passive funds and ETFs, the fact that the Big Three’s holdings in controlled companies are lower is also explained by the fact that the benchmark indices take into account the free float. For instance, the STOXX 50 index is weighted by companies’ free-float market capitalisation.Footnote ¹⁹ As a consequence, controlled companies have a lower weight in the index than widely held ones with equal total capitalisation.

I.3 Asset Managers’ Ownership and Nationality

In addition to the ownership structure of investee companies and the ownership stake held in them, the nationality and ownership structure of asset managers themselves may lead to divergence in the incentives structure and in the focus of shareholder engagement.Footnote ²⁰

We focus on ownership as it can affect asset managers’ incentives structures and, in particular, can help explain potential conflicts of interests affecting asset managers’ willingness to engage. As highlighted by the European Commission, ‘conflicts of interest in the financial sector seem to be one of the reasons for a lack of shareholder engagement’ and ‘conflicts of interest often arise where an institutional investor or asset manager, or its parent company, has a business interest in the investee company’.Footnote ²¹

It is widely recognised that also independent asset managers not belonging to conglomerate financial groups can be affected by conflicts of interests that can influence their stewardship and engagement decisions. Indeed, independent asset managers having financially significant business ties with investee companies and their managers may abstain from engaging with portfolio firms and from taking an adversarial stance for fear of losing corporate business.Footnote ²² For example, in the US, asset managers may be interested in obtaining, or maintaining, the substantial revenues they derive from managing defined contribution plans (‘401(k) plans’) of many of their portfolio firms.Footnote ²³

Nevertheless, it can be assumed that potential conflicts of interests are more relevant for asset managers belonging to multi-services banking and/or insurance groups. Where an asset manager is owned by one such group, in addition to potential conflicts of interests arising from asset managers’ business ties with investee companies, a second layer of conflicts exists. In fact, it may happen that banks and insurance companies pressure their asset management arms to avoid antagonising the clients of another of the group’s arms (for example, the investment banking arm) by voting against the board or conducting adversarial engagement initiatives.Footnote ²⁴ Of course, the intensity of intra-group conflicts of interests depends on the weight of the asset management arm within the group. The higher the asset management arm’s contribution to the group’s profits, the lower the influence of other group’s branches over the asset management arm should be.

Moreover, asset managers belonging to banking and/or insurance groups could be less keen on conducting engagement initiatives because they can rely on a large base of group-captive clients and are less interested in winning over new clients. Hence, reputational (or marketing-related) incentives to engage with investee companies may be lower for such asset managers.

Nevertheless, available anecdotal evidence shows that European asset managers controlled by banking or insurance companies do conduct a significant number of engagements covering a wide range of ESG issues. For example, according to evidence provided by the London-based think-tank InfluenceMap,Footnote ²⁵ European bank- and insurance-controlled asset managers, including BNP Paribas Asset Management, Legal & General Investment Management, UBS Asset Management, Aviva Investors, and AXA Investment Management, showed greater transparency around the targets of company engagements and the topics discussed, and engaged more intensively on climate-related issues than US independent peers. Relatedly, AXA, BNP Paribas, Legal & General, Aviva, and Allianz all supported 80 per cent or more of climate-relevant resolutions, while big US players, namely BlackRock, Vanguard, and Fidelity Investments, declined support for 75 per cent of them.

To shed light on asset managers’ ownership and its potential impact on investors’ approach to engagement we collected ownership data on the top 20 US asset managers and the top 20 European (EU and UK) asset managersFootnote ²⁶ and tracked their weight in Stoxx 50 companies and the top 15 FTSE 100 companies. Based on ownership data for the companies in our sample, we excluded the four US asset managers (Pimco, Prudential Financial, Edward Jones Investments, and TIAA) and the four EU and UK asset managers (Aegon, Insight, Generali, APG) which the CapIQ database does not capture, either because they do not invest in equity (Pimco) or because none of their stakes is among the top 25 holdings by institutional shareholders in any of the companies in the dataset. Therefore, our final sample includes 16 US asset managers and 16 European asset managers.

We grouped asset managers in the following categories: bank-owned; insurance-owned; publicly owned (including asset management companies listed on a stock exchange); independent and team-owned; others (including asset managers with peculiar ownership structures which do not fall in any of the above categories).Footnote ²⁷ The independent and team-owned category includes asset management companies that are not listed and whose stakes are owned privately either by entities other than banks, insurance companies or other entities identified separately in the list (eg pension funds or sovereign wealth funds), or by their own workers and/or management team.

We find that bank-owned asset managers make up the largest category among the EU’s largest asset managers: nine out of the 16 of them are bank-owned, whereas in the US banks own six out of the 16 asset managers in the sample. By contrast, large publicly owned and independent asset managers are much more common in the US: nine out of the top 16 US asset managers included in the sample are listed or independent firms not belonging to banking or insurance groups. By contrast, there are only three listed companies among the top 16 European asset managers.Footnote ²⁸

As far as US publicly owned or independent asset management companies are concerned, it is perhaps unsurprising but no less noteworthy that, with the exception of Vanguard,Footnote ²⁹ they all have other top asset managers among their shareholders.Footnote ³⁰ For example, Vanguard is the largest shareholder of BlackRock and SSGA, and Fidelity ranks among Vanguard’s largest shareholders. Similarly, Vanguard, BlackRock, and SSGA are the three largest shareholders of T. Rowe Price and Northern Trust Global Investments Limited and rank among the largest shareholders of Invesco. Moreover, leading asset managers are large shareholders in some banks and insurance companies that have an asset management arm ranked among the top 20 investors.Footnote ³¹

Whether cross-shareholdings among leading asset managers can affect their approach to engagement, especially regarding social and environmental matters, is controverted. On the one hand, as a recent op-ed in the Wall Street Journal contends, cross-shareholdings make leading asset managers non-independent actors.Footnote ³² According to this view, common ownership explains why major asset managers do share common ESG preferences and regularly engage on these topics. An alternative point of view is that common ownership in the asset management industry is too low to influence the preferences and behaviour of leading investors. It is in fact the case that the most influential shareholders of some asset managers do not hold significant stakes in their rivals. For example, the most influential shareholder at Fidelity Investments, FMR LLC (which is controlled by Fidelity’s founder family), does not hold any stakes in other asset managers. Moreover, the fact that the Big Three and other major asset managers push on the ESG rhetoric and spend increasing sums in ESG-related engagements may support the view that they compete for investment flows by attracting clients who are more sensitive to ESG issues.Footnote ³³

Our analysis also shows that the number of insurance-owned firms on the top asset managers’ list has decreased in recent years, particularly in the United States, where only one insurance-owned asset manager is among the 16 included in the sample (whereas there are four out of 16 of them within the EU). According to consultancy Oliver Wyman, this decline can be attributed to the fact that, up until recently, persistently low interest rates pushed insurers to outsource more of their fund management needs to independent groups and, at the same time, insurance-owned asset managers have come under pressure from independent rivals, particularly from leading passive fund managers.Footnote ³⁴

To better assess whether asset manager ownership affects engagement, it is helpful to look into the distribution of AUM by asset manager ownership category. Data on the world’s top 20 asset managers collected by the Thinking Ahead Institute show that 12 independent asset managers make up 70 per cent of total AUM, while eight bank- and insurance-owned asset managers account, respectively, for 22 per cent and 8 per cent of those assets.Footnote ³⁵

To shed further light on this, drawing from data collected from the CapitalIQ database, we provide evidence on the weight of each type of asset manager in the ownership of Stoxx 50 and top 15 FTSE 100 companies. We find that publicly owned and independent asset managers hold, on average, significantly larger stakes in companies included in our sample than bank and insurance asset managers. On average, publicly owned asset managers own 8.40 per cent, and independent asset managers own 6.99 per cent. Bank- and insurance-owned asset managers account, on average, for 4.11 per cent and 0.77 per cent of ownership of companies comprised in the sample, respectively. The average weight of publicly owned asset managers is significantly higher in the top 15 FTSE 100 companies, where they account for 10.84 per cent, while holding, on average, 7.67 per cent in Stoxx 50 companies. Bank-owned (insurance owned) asset managers hold, on average, 5.45 per cent (2.13 per cent) in the top 15 FTSE 100 companies and 3.70 per cent (0.35 per cent) in the Stoxx 50 companies.

Ownership structure of asset managers is only one of several factors that together may influence investors’ role in corporate governance.Footnote ³⁶ As some studies show,Footnote ³⁷ nationality is also key, as it can affect institutional investors’ approach to engagement in at least four ways.

First, consider that social norms, legal rules and, perhaps more generally, clients’ and beneficiaries’ preferences and expectations and political pressures may impact the behaviour of institutional investors vis-à-vis investee companies.Footnote ³⁸ In fact, the empirical literature reveals that nationality has an impact on stewardship concerning ESG issues, in relation to which investor preferences on the two sides of the Atlantic significantly diverge. Namely, based on voting records and stewardship policies, EU-based institutional investors have been found to pay greater attention to ESG issues than US competitors.Footnote ³⁹

Second, an institution can be expected to engage more with home portfolio companies than with foreign ones. The incentives to engage with the latter are intuitively weaker. First of all, cultural estrangement may justify caution, if not passivity, abroad, because a different corporate culture may yield a very different, and potentially counterproductive, reaction to the same active behaviour.Footnote ⁴⁰ Next, to the extent that investors tend to favour domestic asset managers and so long as institutions use engagement also as a marketing tool,Footnote ⁴¹ retail clients and beneficiaries will be more sensitive to domestic engagement than to engagement abroad, as they obviously care more about inequality, environmental protection, and social issues at home rather than abroad.

Third, there are greater political risks to engagement abroad, no matter whether the engagement is shareholder-oriented or ESG-focused: traditional as well as environmentally focused engagement may well have a negative impact on social aspects (for employees, local communities, suppliers). Other things equal, political backlash to protect local constituencies will be likelier against a foreign institution than a domestic one, because the latter may well be politically connected and the former is a more appealing target for a political campaign. That foreign investors can face more political pressure seems to be confirmed by the recent decision of the Texas Comptroller to include nine European asset managers in a list of 10 names (also including BlackRock) deemed to boycott fossil fuel companies, a designation that could lead Texas pension funds to stop trading with those asset managers.Footnote ⁴²

The political risk attaching to activism abroad can be expected to increase as a function of geopolitical tensions and the resurgence of nationalism: even assuming that geopolitical tensions will not just stop cross-border indirect investment altogether, governments with a tense relationship with the home country of an institutional investor will react harshly to any attempt from that investor to influence how local companies should be run. Having said that, it is also worth considering that, as suggested by the data on US asset managers’ support for shareholder resolutions on environmental and social issues in both the US and the EU,Footnote ⁴³ asset managers may well be more pro-ESG abroad than at home in cases where foreign legislation (as in the EU) is clearly more favourable to ESG factors than domestic legislation. Last but not least, foreign institutions wield less influence over politics when it comes to shaping the very laws that affect engagement.

Given the potential implications of asset managers’ nationality, we track the shareholdings held by the 16 US investors comprised in our sample at Stoxx 50 companies and the top 15 FTSE 100 companies. We focus on the US because investors domiciled there account for almost one-third of total cross-market equity investments globally and have a dominant position in EU and UK markets as well.Footnote ⁴⁴

We find that blocks held by top US investors are (by far, in many cases) larger than those held by the top European investors in all the companies included in our sample. Interestingly, US asset managers are among the largest shareholders also in two insurance companies included in the Stoxx 50 (Allianz, Axa), which control two of the top European asset managers. On average, the 16 US asset managers included in our sample own 15.56 per cent of the equity, while the 16 European institutional shareholders in the sample own a mere 5.71 per cent. While the average weight of the 16 European institutional shareholders in the top 15 FTSE 100 companies and Stoxx 50 companies is similar (5.93 per cent and 5.64 per cent, respectively), the average weight of the 16 US asset managers in the sample is significantly higher in top 15 FTSE 100 companies, where they account, on average, for 21.40 per cent, whereas their average holding in Stoxx 50 companies is 13.81 per cent.

I.4 The Shift towards ESG-Related Engagement: End-clients’ Preferences and Potential Regulatory Backlash

The analysis above is not sufficient to draw any conclusion on the actual ability and willingness of institutional investors to engage with investee companies, as other factors can similarly affect asset managers’ approach.

First, it must be considered that, as is widely recognised in the literature,Footnote ⁴⁵ the propension of institutional investors to engage with investee companies may depend on the balance between costs and benefits arising from engagement initiatives. Resource and cost constraints are particularly pronounced for passive fund managers. In fact, costs associated with stewardship impinge much more significantly on asset managers’ income, as passive funds have much lower fees. No performance fees apply for passively managed vehicles, but rather, if any at all, management fees proportional to the amounts invested in the fund: therefore, the financial incentive for asset managers to allocate funds to stewardship activities with the aim of improving the fund’s return appears to be nil. In addition, passive fund managers face significant collective action problems that can limit potential benefits arising from engagement activities. As each fund tracking the same index holds the same stocks in the same proportion, ‘funds managed by other index fund managers will capture exactly the same returns from the stewardship activity’.Footnote ⁴⁶ Therefore, index fund managers are able to capture only a small fraction of the benefits from stewardship, given the very low fees that they charge.Footnote ⁴⁷ Indeed, sensitivity to the free-rider problem is particularly high within the asset management industry where fund managers compete to attract assets under management based on performance relative to alternative investment opportunities.Footnote ⁴⁸

While it is true that the cost issue remains a key constraint to engagement, the propensity of institutional investors towards engagement also largely depends on the preferences and priorities of their end-clients. Indeed, given their interest in preventing asset outflow and attracting new clients, there is growing reputational pressure for leading fund managers – chiefly the largest passive fund managers – to be active monitors.Footnote ⁴⁹ In the light of this, it is also credible that creating the appearance of active ownership will help fund managers win over clients. Fund managers may see corporate engagement ‘as a branding or marketing tool that provides them with another dimension on which to compete for assets’.Footnote ⁵⁰

This seems to be especially true for ESG-related engagement. Indeed, despite signs of a slowdown in the demand for funds that incorporate ESG into their investment strategies due to a number of factors, including the ESG backlash in the US,Footnote ⁵¹ there is no doubt that there has been a significant shift in the preferences of a large part of end investors. In this respect, the incorporation of ESG issues into the investment strategies and engagement policies is intended – perhaps above all – to attract the increasing share of clients that give central attention to those aspects.

This has been the case not only for major investors such as large pension funds and sovereign wealth funds but also for a significant portion of retail investors, who have been redirecting their capital to sustainable investments at a steadily increasing rate in recent years. Indeed, it may well be the case that ultimate beneficiaries may prefer to see companies behave responsibly toward the communities with which they interact, even if profits suffer, an intuition upon which Oliver Hart and Luigi Zingales build upon in Chapter 1 to set out a new corporate governance paradigm. Moreover, this trend is set to increase as investment choices move into the hands of Millennials and GenZs, who are particularly attuned to such attitudes.Footnote ⁵² Acceptance by this increasing segment of the clientele of lower financial returnsFootnote ⁵³ and, even more importantly, higher management fees,Footnote ⁵⁴ may prompt asset managers to invest more in engagement activities, as the possible corresponding increase in fees charged does not necessarily lead to fund outflows. Furthermore, institutions can reduce engagement expenses by joining institutions, like the PRI and 100+, which are promoting an increasingly relevant number of ESG-focused collective engagement initiatives. Relatedly, signing up to the collective engagement initiatives promoted by these institutions can also help fund managers attract clients by demonstrating a commitment to ESG initiatives.Footnote ⁵⁵

Against this background, it seems credible that, insofar as an increase in their returns and/or assets under management may follow, asset managers can engage with companies on ESG matters to win over clients sensitive to social and environmental issues.

Yet, other factors can limit asset managers’ willingness to engage with investee companies on ESG-related matters.

Engaging on environmental and social issues can bring a substantial risk of regulatory backlash.Footnote ⁵⁶ While ESG-related engagements can help asset managers win over end clients sensitive to social and environmental issues, the same kind of engagement can draw criticism from a part of the client base and from public opinion. According to some conservative groups and commentators,Footnote ⁵⁷ giant asset managers, like the Big Three, are using their power to play a political role that goes beyond institutional investors’ duties and may undermine their legitimacy. Indeed, ‘conservative critics decry the Big Three’s effort to decide hotly contested questions of environmental and social policy outside the political arena’.Footnote ⁵⁸ Institutional investors are seen as private regulators that bypass the democratic process of electing officials to political positions to pass laws and appoint regulators.Footnote ⁵⁹ Such mounting criticisms can affect asset managers in several ways.

First, even though leading asset managers reiterate that stakeholder capitalism is not about politics and reject the accusation of ‘wokism’,Footnote ⁶⁰ ESG backlash mainly inspired by conservative groups can harm asset managers’ business by alienating conservative-minded clients.

Second, and perhaps more importantly, the belief that asset managers are increasingly using their power to impose a (supposedly, leftwing) ideological agenda has fuelled political initiatives aimed at limiting the influence of leading passive fund managers. For example, several commentators and organisations are calling for a breakup of the Big Three, or the introduction of ownership limits that would prevent the Big Three from owning more than a certain threshold (say, 10 per cent) in the equity of any portfolio company.Footnote ⁶¹

In May 2022, a group of Republican Senators introduced the Investor Democracy Is Expected Act (Index Act) which would require passive investment-fund managers that own more than 1 per cent of a public company to collect instructions from their clients on how to vote their share.Footnote ⁶² In the light of this, while pass-through voting might also serve as a lever for offering an advantage to a firm’s current and potential clients, it seems credible that the increasing regulatory pressure over investors’ vast voting power was among the reasons behind BlackRock’s decision to enable institutional clients, such as pensions and endowments, invested in certain pooled vehicles managed in the US and the UK, to give vote-through instructions where legally and operationally viable.Footnote ⁶³ Similarly, the aim to limit the potential negative consequences of a political and public backlash against their power may help explain why BlackRock and other leading asset managers have decided not to support climate-related shareholder proposals that are too prescriptive.Footnote ⁶⁴

The political controversy over (anti-)ESG investing is substantially limited to the US, where state laws having an impact on ESG investing significantly diverge depending on a state’s political orientation.Footnote ⁶⁵ Things are very different in the EU, where consensus is wide on the opportunity to integrate ESG factors in investing decisions and institutional investors are strongly nudged to play a role in the transition to a more sustainable economic model. Indeed, over the last few years, the European legislature has introduced several pieces of legislation that clearly promote the pursuit of ESG goals by institutional investors.

To conclude, the different degree of political consensus over ESG investing on the two sides of the Atlantic and the backlash ESG is currently facing in the US are among the factors that contribute to explain why European asset managers are keener to engage on ESG issues and to support ESG-related resolutions than their US-based competitors. Indeed, the political risk arising from the ESG backlash (in addition to its potential impact on financial riskFootnote ⁶⁶) may affect the stewardship strategies of US asset managers by pushing them to adopt a less ESG-friendly approach. For example, amid the ESG backlash fuelled by conservatives, votes on environmental, social, and governance resolutions in the US fell by around a third in 2023 compared to 2022.Footnote ⁶⁷ It is also worth noting that since 2017, BlackRock has voted in favour of shareholder proposals on environmental and social issues 87 per cent of the time in Europe, where there is a large consensus on ESG issues, while voting against such proposals 84 per cent of the time in North America.Footnote ⁶⁸

I.5 An Overview of the Book’s Contents

This book’s focus is on the dialogue between corporations, and boards more specifically, and their institutional shareholders. First, however, it sets the scene thanks to contributions, first, on the purpose of the corporation and, next, on the current landscape of engaged, ESG-sensitive asset managers, asset owners, and beneficiaries. Oliver Hart and Luigi Zingales’ chapter presents their provocative vision of the shareholder-welfare maximising corporation as an alternative to the traditional shareholder value maximising one. They are followed by Paul A. Davies’ critique of Colin Mayer’s idea, popularised in his book Prosperity, of purpose statements as a key tool to ensure that companies create value for society rather than profiting from the creation of negative externalities. A response by Colin Mayer follows.

The book then shifts focus from corporations to their institutional shareholders, first with a chapter by Dorothy Lund and Adriana Robertson that explores the misconceptions and oversimplifications associated with the term the ‘Big Three’ to refer to the three largest managers of index funds: BlackRock, Vanguard, and State Street. Those three asset managers, together with the fourth giant one, Fidelity, are the epitome of universal owners, which some scholars consider suitable for engaging in ‘systematic stewardship’. Kahan and Rock’s chapter before this analyses the trade-offs and challenges faced by universal owners in adopting a systemic stewardship approach to tackle environmental externalities and systemic risks.

Dionysia Katelouzou’s chapter also explores engagement and stewardship by institutional investors, tracing its historical development and examining the motivations behind micro-level shareholder stewardship. It discusses the engagement practices of various institutional investors, including hedge-fund-style activists, and the impact of engagement on corporate practices and shareholder proposals.

Subsequent chapters explore the phenomenon of ESG investment and engagement. Lisa Fairfax takes an optimistic perspective on shareholders acting as defenders of other stakeholders’ interests, based on the available evidence in this regard. The intuition is that promoting such interests leads to higher returns in the long-term.

Wolf-Georg Ringe notices how ESG engagement relies on coalition-building even more than traditional activism and builds on this finding to recommend policies aimed to remove obstacles to investor collaboration. Such obstacles are then comprehensively described in the chapter by Peter O. Mülbert and Alexander Sajnovits.

One way to gauge the impact of any governance tool is to assess how it performs in the context of a merger or acquisition. Afra Afsharipour’s chapter analyses how the consideration of ESG matters has affected the dynamics of the M&A market, including the dialogue between boards and shareholders in the context of an M&A transaction.

The remaining chapters examine the mechanics of the dialogue between companies and their boards from various angles and in different contexts. The chapter by Matteo Gatti, Matteo Tonello and one of us provides much needed empirical evidence on the reality of closed-door board-shareholder engagement through a survey of US public corporations, documenting the scope, contents, and perceived impact of initiatives for shareholder engagement.

Tim Bowley, Jennifer G. Hill and Steve Kourabas, in turn, survey the various engagement techniques that shareholders use, such as behind-the-scenes approaches, participation in shareholder meetings, public campaigns, and discussion boards and messaging apps oriented towards retail investors. They counter the idea that shareholder meetings are a relic of the past, arguing that they should instead be recognised as crucial when a company faces significant governance issues.

Anne Lafarre and Christoph Van Der Elst look into whether distributed ledger technologies (DLTs) can be the game changer in corporate governance that blockchain enthusiasts referred to them as only a few years ago. While acknowledging DLT’s potential to tackle custody chain issues, improve the transparency of stock ownership records, and strengthen shareholder and stakeholder rights, the authors also question whether DLT is necessary to achieve outcomes that centralised systems with secure and transparent digital record-keeping may be sufficient to attain.

Hedge funds play a significant role in the dialogue between boards and shareholders, particularly in some countries. Lin Lin’s chapter examines hedge fund engagement in China, Japan and South Korea and shows that, while hedge funds in these East Asian countries have similar objectives and strategies to their counterparts in the UK and the US, the patterns of hedge fund engagement within the three countries differ.

Anna Christie’s chapter spotlights one of the most intense forms of shareholder engagement, namely the election of institutional shareholders’ nominees on corporate boards. While in the experience of some countries, such as Italy, traditional institutional investors take advantage of mandatory minority shareholder representation on the board to appoint independent directors, in the US, it is hedge-fund activists that tend to express shareholder nominees as a lever to force change at target companies.

Shareholder proposals are the most traditional form of engagement by institutional investors. Jill Fisch and Adriana Z. Robertson focus on proposals requesting environmental and social disclosures. Their empirical analysis provides evidence of their frequency and support by institutions and should guide the SEC in its current attempts to extend the mandatory disclosure framework to include ESG matters.

While the law is mostly silent on the processes and mechanisms to facilitate meaningful dialogue between companies and their shareholders, corporate governance codes typically do provide guidance on how to structure the dialogue with shareholders. Ana Taleska’s chapter provides an analysis of various such code provisions across Europe, finding that most of them add very little to the existing hard-law framework or just replicate the most diffused practices, while the few that also require companies to spell out their policies on shareholder engagement should serve as a model.

The final two chapters in this book focus on a formidable obstacle to board-shareholder dialogue, namely the broad-scope insider trading rules set out by the European Union’s Market Abuse Regulation (MAR), which still applies in the UK as well. Lars Klöhn’s analysis provides a detailed account of MAR’s serious impact on board-shareholder dialogue but concludes that the case for a safe harbour permitting the selective disclosure of inside information to institutional investors would not be justified, suggesting that greater disclosure on the board-shareholder dialogue should be preferred.

In the final chapter, Jennifer Payne focuses her attention on MAR’s market soundings rules and asks whether they could serve as a valuable template for board-shareholder engagement. She reaches a negative conclusion but also concurs with Lars Klöhn’s view that a broader safe harbour would not be justified.

In addition to the book’s contributors, we wish to thank the discussants that provided their views and comments on earlier versions of the chapters included in this volume at the Assogestioni Conference on Corporate Governance held in Rome in October 2022 namely, Mirza Baig (Aviva Investors), Alice Bordini (GLC Advisors), Amy Borrus (CII), George S. Dallas (ECGI), Anna Gatti (Intesa Sanpaolo), Claudia Kruse (APG Asset Management), Karina Litvack (Terna), Aeisha Mastagni (California State Teachers’ Retirement System), Marco Maugeri (Università Europea di Roma), Robert McCormick (PJT Camberview), Massimo Menchini (Assogestioni), Chiara Mosca (Consob), Maria Ortino (Legal & General Investment Management), Valeria Piani (Phoenix Group), Daniel Summerfield (Pomerantz), Sachi Suzuki (HSBC Global Asset Management) and Michael Younis (State Street Global Advisors).