Many of the nation’s largest institutional investors—including BlackRock, Vanguard and State Street, among others—are increasing the pressure to get Corporate America to think more long term.
To derail the short-termism freight train, a group of senior corporate governance heads from major investors and global asset managers launched the Investor Stewardship Group (ISG) and the group’s Framework for U.S. Stewardship and Governance.
In the works for at least two years, the ISG released a framework in February for investors and boards to follow in order to shift the focus from the short term to the long term.
“There has been a recognition that short-termism is a problem,” says Martin Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz, who specializes in advising major corporations on mergers and acquisitions and corporate policy and strategy. “When businesses fail to make investments to improve research, development, employee training, it’s a problem. It leads to a decrease in the national economy, and it’s a drag on the GDP.”
Institutional investors have been concerned about this issue since 2009, following the financial crisis, but Lipton said the concerns have reached a “crescendo.”
The ISG, whose 16 founding members in aggregate invest over $17 trillion in the U.S. equity markets, “was formed to bring all types of investors together to establish a framework of basic standards of investment stewardship and corporate governance for U.S. institutional investor and boardroom conduct,” according to the collaborative.
The ISG framework is based on principles developed by Lipton in his seminal paper on the short-termism phenomenon he wrote last year for the World Economic Forum’s International Business Council: The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth.
From Lipton’s report:
The New Paradigm recalibrates the relationship between public corporations and their major institutional investors and conceives of corporate governance as a collaboration among corporations, shareholders and other stakeholders working together to achieve long-term value and resist short-termism.
Indeed, the institutional investors behind the ISG are looking for just that collaboration. The group stresses on its website that the principles are not meant to be “prescriptive or comprehensive in nature.”
But in the end, stresses Lipton, “It’s not just about the principles.”
“What boards have to recognize is that companies need to understand the interest and objectives of their major shareholders, and engage with them,” he explains. “And also help management develop strategies in order to end up in a position where their major shareholders are satisfied with what they’re doing.”
Here’s an overview of the ISG principles:
CORPORATE GOVERNANCE FRAMEWORK FOR U.S. LISTED COMPANIES:
Principle 1: Boards are accountable to shareholders.
Principle 2: Shareholders should be entitled to voting rights in proportion to their economic interest.
Principle 3: Boards should be responsive to shareholders and be proactive in order to understand their perspectives.
Principle 4: Boards should have a strong, independent leadership structure.
Principle 5: Boards should adopt structures and practices that enhance their effectiveness.
Principle 6: Boards should develop management incentive structures that are aligned with the long-term strategy of the company.
STEWARDSHIP FRAMEWORK FOR INSTITUTIONAL INVESTORS:
Principle A: Institutional investors are accountable to those whose money they invest.
Principle B: Institutional investors should demonstrate how they evaluate corporate governance factors with respect to the companies in which they invest.
Principle C: Institutional investors should disclose, in general terms, how they manage potential conflicts of interest that may arise in their proxy voting and engagement activities.
Principle D: Institutional investors are responsible for proxy voting decisions and should monitor the relevant activities and policies of third parties that advise them on those decisions.
Principle E: Institutional investors should address and attempt to resolve differences with companies in a constructive and pragmatic manner.
Principle F: Institutional investors should work together, where appropriate, to encourage the adoption and implementation of the Corporate Governance and Stewardship principles.
(For more details on the principles to go the ISG website:)