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Active Shareowner Stewardship: A New Paradigm for Capitalism

9 Pages Posted: 30 Oct 2009  

Stephen M. Davis

Yale University - Millstein Center for Corporate Governance & Performance

Jon Lukomnik

Sinclair Capital LLC; IRRC Institute

David Pitt-Watson

Hermes Pensions Management Ltd.

Date Written: October 13, 2009

Abstract

Retirement plans around the world poured the collective savings of millions of employees into the common stock of banks, corporations, and Wall Street ventures that recklessly over-compensated Chief Executive Officers, engineered artificial shortterm gains, and gambled fatally with risk. Why did this happen? The financial system needs the oversight of vigilant market participants, but in this case many pension funds, mutual funds, hedge funds, insurance funds, and other major investors were silent. Conventional investment theory about diversification also played a part; while intending to control specific risks, it had the unintended side effect of increasing risk overall. What are the root causes of these failures to exercise vigilance? Studies increasingly point to at least one important factor: flaws in investors’ own accountability. The essence of an effective financial system is that the entities in it, including pension funds, are responsible for their actions. Responsibility implies a willingness to be accountable, and that in turn requires an integrated, active approach to exercising shareowner stewardship. This article proposes a series of practical steps to that end.

Keywords: Accountability, Fund Governance, Institutional Investors, Pension Funds, Stewardship, Trustees

Suggested Citation

Davis, Stephen M. and Lukomnik, Jon and Pitt-Watson, David, Active Shareowner Stewardship: A New Paradigm for Capitalism (October 13, 2009). Rotman International Journal of Pension Management, Vol. 2, No. 2, Fall 2009. Available at SSRN: https://ssrn.com/abstract=1493279 or http://dx.doi.org/10.2139/ssrn.1493279

Stephen M. Davis (Contact Author)

Yale University - Millstein Center for Corporate Governance & Performance ( email )

250 Church Street
New Haven, CT 06510
United States

Jon Lukomnik

Sinclair Capital LLC ( email )

924 West End Avenue, Suite T-4
New York, NY 10025
United States

IRRC Institute ( email )

New York, NY
United States

David Pitt-Watson

Hermes Pensions Management Ltd.

Lloyds Chambers
1 Portsoken Street
London, E1 8HZ
United Kingdom

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