A “Stewardship Code” for Institutional Investors

by Ben W. Heineman, Jr., for Harvard Business Review, January 18, 2010.

The role of shareholders in corporate governance has become one of the hot-button issues following the credit melt-down and economic crisis. Would more active involvement by shareholders have helped to prevent or lessen the crisis?

Broadly speaking, there are those who believe that short-term institutional shareholders — with concern about making their own quarterly or annual numbers, with opaque governance and improper incentives for fund-managers — are part of the problem, and that they have been one of the causes of short-sighted, risk-indifferent behavior by financial institutions.

On the other hand, there are those who believe that longer-term institutional shareholders are part of the solution — that increased shareholder involvement in governance, not just through exercise of market power, is essential to creation of sustainable, long-term corporate value, and to holding boards of directors and senior business leaders accountable. Such shareholder proponents advocate regulation or voluntary corporate action on key issues like “say on pay” or “proxy access.”

A “third way” emerged late last year in the UK — a “Stewardship Code” for institutional investors.

While not fully developed, it is an interesting and potentially controversial approach which puts new responsibilities on the investor and investee communities. But amidst the UK furor over the government’s decision to impose a 50% “super-tax” on bonuses over £25,000 in the financial sector, it has not received the attention it deserves…(continue reading)


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