Streams of recommendations have begun to flow from bodies tasked with remedying the persistent problem of institutional investor passivity and short-termism. While the suggestions of the Institutional Shareholders’ Committee (ISC) and Walker Review are generally sensible, they are incomplete because significant asset owner issues remain unresolved. 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.
Current reform efforts assume that asset owners maintain a strong interest in, and possess capabilities to meaningfully evaluate, their fund managers’ corporate governance activities. Many don’t.
To fulfill obligations under the Myners Principles to monitor fund managers’ adherence to the ISC Statement of Principles on the Responsibilities of Institutional Shareholders and Agents, many asset owners ask their investment managers the following annually: “Does your firm comply with the ISC Principles?” It is disconcerting that a perfunctory “yes” is often a sufficient response. Equally worrying, this exercise frequently transpires between the owner’s pension consultants and the manager’s client relationship team. Little or no effort is made by pension fund trustees or staff to speak directly with investment firm personnel who vote and engage on their behalf to discuss successful and problematic interventions, sufficiency of allocated resources, and areas for improvement.