Active Shareowner Stewardship: A New Paradigm for Capitalism

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