Why Stewardship is Proving Elusive for Institutional Investors

Abstract

As the dominant owners of listed companies in many developed markets, institutional investors have been under increasing pressure to act as responsible shareholders. In the UK, Canada, France, the Netherlands, and other markets, stewardship codes have been developed or are under consideration to encourage pension funds, insurance companies, and their asset managers to monitor and engage investee companies actively with the view to protect and enhance shareholder value.

However, attempts in recent decades to convince institutional investors to act as active, long-term oriented “stewards” have fallen short. This is because modern investment management practices and characteristics – such as financial arrangements that promote trading, excessive portfolio diversification, lengthening share ownership chain, misguided interpretation of fiduciary duty, and flawed business model and governance approach of passive funds – make genuine stewardship challenging for institutional investors.

Although these deficiencies are extremely serious, they may be remedied through a combination of actions, including by eliminating unnecessary intermediation, developing in-house investment management capabilities, revamping performance metrics, and rationalizing portfolio holdings.

While not all investors need to be stewards and stewardship obligations should be allowed to be discharged in different ways, tackling the underlying structural impediments will make it easier – and more natural – for asset owners and asset managers to adopt an active, long-term oriented mindset.

Note: The author published a complementary follow-up article ("Is Institutional Investor Stewardship Still Elusive?") in September 2015 (available at http://ssrn.com/abstract=2654229).

Keywords: stewardship code, institutional investors, shareholder responsibility, corporate governance

JEL Classification: G22, G23, G34, G38