Increased focus on stewardship and governance
Stewardship with respect to investee companies has been a small-scale part of the investment industry to date. The issue is whether this changes and investors play a much bigger part in corporate governance and activism, with accompanying impacts on the performance of corporations and on investors’ own performance.
- The fundamental issue for investors is dealing with corporations that seem less than fully aligned with a legitimate long-term, sustainable value proposition. Conflicts of interests are a primary source of doubt for investors. Such doubts may grow in the future as corporations face transformation and situations in which corporate assets become stranded. Investors face considerable challenges to be effective in their thinking and their corporate actions.
- There is a current view that the exercise of ownership rights and responsibilities is easier said than done. With ownership stakes in companies so fragmented, it may be difficult for corporations to be constructively influenced by the exercise of investor stewardship. The question is whether stewardship can achieve net positive outcomes. Doubts exist that investors can understand the long-term drivers of value the way that companies’ leadership does.
- Just 11% of those surveyed think that the successful implementation of long-horizon investing will progress significantly in the coming 5–10 years. There is a much more positive outlook, however, on the application of stewardship and ownership rights to portfolios, with 64% expecting this to grow during the same period.
- In this narrative, significant influence comes from three investment models: first, increased cooperation among investors; second, the growth of index-tracking portfolios managed by investment firms that take stewardship seriously; and third, the activist model, which may not always have long-term time horizons in mind, and always has capacity constraints, but still has a part to play.
- The purpose of corporations is not a settled concept and has evolved from shareholder-centric versions to stakeholder-centric ideas. A Financial Times editorial on 1 January 2018 expressed a conviction widely shared on this challenge: “Capitalism needs a new social contract…The relationship between business and society requires repair. For businesses, the bottom line is that they have to trade in ways that are competent, ethical, and fair—and be seen to do so” (“A Better Deal between Business and Society” 2018).
- In the Progressive Capitalism scenario, there is a growing ancillary stewardship issue concerning wider responsibility whereby “firms, including investment institutions, try to integrate their wider purpose alongside their profit motivations in business models incorporating corporate social responsibility.” In this narrative, there is an optimistic view that stronger versions of stakeholder responsibility will emerge.