Tackling the Root Causes of Shareholder Passivity and Short-Termism

Abstract

Recent reform efforts to increase activism and engagement by institutional investors have focused insufficiently on asset owner issues.Until the root causes - particularly the inability of pension funds and other institutional asset owners to robustly monitor asset managers and the misalignment of interest between the two parties - are tackled head-on, reforms in this area will have limited impact.

This article discusses the root causes of institutional investor passivity and short-termism, and proposes measures to strengthen alignment in time horizon, ensure coherence of investment approach across all asset classes, and so forth.

Note: This article served as the basis for an op-ed that appeared in the Financial Times on December 14, 2009.

Keywords: corporate governance, institutional shareholders, engagement, activism

JEL Classification: G3, G34