How Conflicts of Interest Thwart Institutional Investor Stewardship

Abstract

This article examines conflicts of interest in the investment industry and remedies to enable institutional investors to be more active on corporate governance matters. The key points are: Conflicts of interest at investment firms arise at three levels – institution, individual, and group – all of which can impede their willingness and ability to engage investee companies actively on corporate governance matters; Resolving these conflicts requires strong remedies, ranging from their elimination to outsourcing voting decisions to independent third parties to establishing the right organisational culture; If existing conflicts of interest are left unchecked, efforts to promote institutional investor stewardship will falter and the “absentee landlords” share-ownership model will likely prevail.

Keywords: Institutional investors, conflicts of interest, stewardship, corporate governance

JEL Classification: G30, G34