Steps towards stewardship and 'responsible ownership'

The UK has its new Stewardship Code for institutional investors, the European Union is discussing something similar, and in other countries similar initiatives are afoot. They set the broad outline, but not the details of process that a fund management organisation would need to follow. Simon Wong, a London-based US lawyer associated with Cass Business School in London, Northwestern University in Chicago and the advisory firm Governance for Owners, has penned an essay for McKinsey's house journal discussing what asset managers should do. Stewardship, he writes, concerns wider issues than voting for directors. "Governance issues such as board effectiveness, executive remuneration, and succession planning should be high on the agenda, alongside matters such as strategy and risk. Just as important, investors should not pressure a company to deliver short-term returns," he says. The move to do it involves:

• New performance metrics: Fund managers should encourage long-term thinking and active ownership by lengthening the period for performance reviews and reducing the emphasis on relative returns.
  
• Reduce intermediaries: Instilling a mindset of ownership involves stripping away layers of external asset managers, investment consultants and funds-of-funds. Pension funds in particular should building internal expertise.
  
• Less passivity: Passively managed funds – index-trackers and other low-cost investment forms face a challenge, as their business model relies of avoiding expensive things like engagement. Wong suggests alternatives: "As investment houses expand their offerings of passive products, they should supplement the traditional marketing focus on low costs with an emphasis on good stewardship, perhaps charging clients for the expenses incurred in scaling up monitoring and engagement resources. In addition, firms that construct market indexes can help by reducing the number of companies in the largest ones or by developing benchmarks that provide a broadly equivalent exposure to each market segment but contain fewer companies."

Source document: The article "How institutional investors should step up as owners," by Simon Wong, is available in McKinsey Quarterly online.