This paper analyses investor stewardship’s evolving purpose, critiquing traditional views that confine stewardship to managing agency costs and corporate governance failures. It proposes “enlightened stewardship” as a broader, integrated framework balancing immediate financial interests of clients and beneficiaries with wider stakeholder concerns, including societal and environmental issues. Institutional investors are positioned as influential stewards capable of aligning long-term financial value with sustainable practices.

Institutional investors’ evolving roles: Insights from the UK Stewardship Code

Institutional investors historically acted as capital allocators, primarily managing financial risks and returns for clients. Since the 2007-08 financial crisis, their role has expanded significantly towards active corporate governance engagement. The UK’s Stewardship Code, introduced in 2010 and revised in 2012 and 2020, marked this transition. The 2010 and 2012 versions primarily emphasised firm-specific governance engagement, voting, and monitoring practices aimed at mitigating governance risks and short-termism. By contrast, the 2020 version broadened stewardship definitions to explicitly incorporate ESG (Environmental, Social, and Governance) factors, urging institutional investors to address systemic risks and wider societal issues.

The overlooked purpose of stewardship: Challenges and complexities

Several complexities have limited clear articulation of stewardship’s broader purpose. Historically, institutional investors’ roles have evolved rapidly, often prioritising short-term corporate governance and investment returns without deeper inquiry into broader responsibilities. Agency theory predominantly framed stewardship narrowly as monitoring management to reduce agency costs, focusing heavily on governance rather than systemic or societal concerns.

Structural complexities, such as layered accountability within investment chains (asset managers, asset owners, and end investors), create challenges. Conflicts between immediate fiduciary duties and long-term societal impacts further complicate stewardship. Additionally, earlier UK Stewardship Codes implicitly prioritised short-term financial outcomes and micro-level corporate governance without sufficiently addressing broader stakeholder interests.

Defining the purpose of stewardship: Balancing client objectives with the interests of unseen others

Stewardship involves exercising power responsibly, on behalf of direct clients and beneficiaries but also considering wider stakeholders—termed “unseen others,” such as end investors, companies, society, and future generations. The paper identifies four stewardship roles for asset managers: client stewardship (fiduciary duties to immediate clients), end-investor stewardship (long-term interests of ultimate beneficiaries), asset stewardship (corporate governance and asset oversight), and sustainability stewardship (addressing systemic risks, including ESG factors).

Enlightened stewardship aims for careful balancing between short-term financial obligations and long-term systemic considerations, acknowledging potential short-term financial trade-offs. Stewardship codes, particularly the 2020 UK version, can promote responsible investor behaviour through “crowding in,” encouraging broader societal considerations beyond narrow fiduciary duties.

Enlightened stewardship and the quest for a shared vision of purpose

The concept of enlightened stewardship aligns closely with “enlightened shareholder value,” promoting long-term corporate success alongside societal and environmental considerations. Institutional investors, through enlightened stewardship, can significantly influence corporate governance, encouraging responsible and sustainable business practices. However, the paper recommends explicitly recognising broader stakeholder interests within stewardship definitions to ensure meaningful integration and avoid reducing stewardship merely to financial metrics.

It proposes updating the UK Stewardship Code definition explicitly to balance fiduciary obligations with the interests of broader stakeholders clearly. This would enable stewardship to be meaningful and practical, reinforcing long-term sustainable value creation and societal impact.