Enabling Investor Stewardship in the Global Public Equity Markets - COMMUNITY PAPER JUNE 2021
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Prepared in collaboration with Oliver Wyman Enabling Investor Stewardship in the Global Public Equity Markets COMMUNIT Y PAPER JUNE 2021
Cover: Leyre, Unsplash - Inside: Getty Images, Unsplash
Contents
3 Preface
4 1 The investor-corporate relationship
5 1.1 What is the investor-corporate relationship?
6 1.2 Who are the stakeholders in the investor-corporate relationship?
6 1.3 What are the current issues in the investor-corporate relationship?
9 2 Investor stewardship in global public equity markets
10 2.1 What is investor stewardship?
11 2.2 Why do global public markets need investor stewardship?
13 3 Enabling investor stewardship
14 3.1 Why should investors enable good stewardship?
14 Index managers
15 In-house active managers
16 External active managers
17 Activist investors
18 Intermediaries
19 3.2 Where can investors enable good stewardship?
20 3.3 How can investors enable good stewardship?
22 Conclusion and outlook
23 Glossary
24 Contributors
25 Acknowledgements
27 Endnotes
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Enabling Investor Stewardship in the Global Public Equity Markets 2
June 2021 Enabling Investor Stewardship in the Global
Public Equity Markets
Preface
For decades, the World Economic Forum This paper explores how investors engage with
has championed the notion of implementing public corporations to enhance long-term value
stakeholder-oriented business models as a means creation. It examines how varying investment
of creating sustainable value. In recent years, as horizons, stakeholder interests, strategies and
the concept of stakeholder capitalism has gained levels of resourcing can be aligned to form new
endorsements from the Business Roundtable, approaches. For tangible transformation, best-in-
academics, investors and policy-makers, the call class investor stewardship must be increasingly
for a redefined economic system that delivers holistic, with a thoughtful approach to 21st-century
shareholder returns while focusing on sustainable business risks and opportunities. This will require
Shrinal Sheth long-term value creation has grown in importance. investors to demonstrate an understanding of both
Knowledge Specialist, The work contained in this report was developed company-specific and portfolio-level systemic risks.
Shaping the Future of over several years, beginning in 2018. Focused on
Investing, World Economic identifying new insights on stewardship in public Drawing on the depth of the investor and corporate
Forum
equity markets, the project included the period of communities of the World Economic Forum, this
time when the COVID-19 pandemic and the Black paper provides a framework to help investors
Lives Matters movement pushed environmental, prioritize their stewardship activities based on insights
social and governance (ESG) issues to the forefront from index managers, active managers, asset owners
of the global agenda. During this time, addressing and activist hedge funds. As investors increasingly
ESG challenges became a top priority for many view stewardship as an important lever for generating
investors and business leaders. sustainable financial return, it will also help public
corporations map the stewardship activities of their
Central to ensuring such systemic change in long- investor base to achieve their business objectives.
term value creation is the relationship between
investors and corporations, two key players in the We thank all of the asset owners, asset managers,
stakeholder ecosystem. This relationship is complex corporates, academics, regulators and other
and deepening. As is the case with almost every experts who have contributed to this work via
industry, the links in the investment value chain are interviews and participation in World Economic
becoming increasingly interdependent and require Forum events.
asset owners, asset managers, affected communities,
individuals and corporations to work more closely We are especially grateful to Oliver Wyman for
with one another. Consequently, asset owners are their leadership in facilitating the dialogues and for
becoming more responsive to their own stakeholders: providing their deep expertise in the creation of this
the pensioners, citizens and social organizations on report. Their commitment to advancing the aims of
whose behalf they invest. They are learning to apply this initiative has been extraordinary.
their financial, economic and governance insights to
address their needs and resolve challenges through
the transformative lens of stakeholder capitalism.
Enabling Investor Stewardship in the Global Public Equity Markets 3
1 The investor-corporate
relationship
Enabling Investor Stewardship in the Global Public Equity Markets 4
The investor-corporate relationship provides the For the purposes of this paper, long-term
foundation upon which all stewardship practices are institutional investors include pension funds,
built. This paper acknowledges certain challenges sovereign wealth funds, family offices, insurance
within the investor-corporate relationship – such as companies, endowments, foundations, asset
short-termism and shifting governance paradigms managers, and certain activist investors. This paper
– and proposes investor stewardship as a tool to also considers the stewardship activities of index
improve this relationship. investors given their growing scale across global
investment markets.
The principle focus of this paper is to depict the
long-term institutional investor landscape and These classes of investors were considered
to describe how and why investors engage in because they have the incentives, capabilities and
stewardship. It assesses their goals and challenges scale to engage as prudent long-term stewards of
in conducting stewardship and highlights the portfolio companies. Retail investors and institutions
financial and non-financial incentives that motivate without multi-year investment horizons are not
them to engage in stewardship. considered to be within the scope of this paper.
1.1 What is the investor-corporate relationship?
In the most fundamental sense, this paper views on the view that agreement between investors and
the investor-corporate relationship as a relationship management on issues of corporate activity, or
between the provider and recipient of equity capital. principal-agent alignment, maximizes long-term
Publicly traded corporations issue shares that may value. In an era of heightened governance oversight
be purchased on the open market by investors. and increasing data on corporate financial and non-
Holding these shares entitles the investor to share financial performance, a strong investor-corporate
in the profits of the company and to exercise partial relationship can be harnessed to build upon this
control over it by voting on matters of corporate traditional role. It does this by incorporating a
policy. As the corporation and investment sector system of intentional and regular engagement from
have evolved, the flow of information and control both the investors and corporates, thus aligning
between them has become professionalized based views on how best to maximize long-term return.
Enabling Investor Stewardship in the Global Public Equity Markets 51.2 Who are the stakeholders in the
investor-corporate relationship?
There are two main stakeholders in the investor-corporate relationship within the public equity markets. The
two stakeholders below are part of the larger public equity value chain, detailed in section 1.3. The focus of
this paper is on capital providers (investors).
FIGURE 1 Stakeholders in the investor-corporate relationship
Capital receivers: corporations whose primary goal is
Capital providers: both retail and institutional investors
to maximize long-term value for their stakeholders.
whose primary goal is to maximize long-term financial
Within these corporations, institutional investors are
returns. This paper focuses on institutional capital
primarily interested in working with the two groups
providers, divided into two categories:
that represent the corporation publicly
Asset owners: institutional Asset managers: profit- Management: typically, the Board of directors: a group
investors who own the end driven investment most senior leaders who of shareholder-elected
capital themselves or on institutions that receive manage the overall individuals tasked with the
behalf of end beneficiaries their investment mandates business, finance and hiring and overseeing of
(e.g. a pension fund owns from the asset owners. operations of the company the chief executive officer,
capital on behalf of Some asset owners also and establishing policies
pensioners). These are delegate voting authority to for corporate governance
often mission-driven asset managers, further and oversight
institutions investing for augmenting their relevance
multigenerational returns as stakeholders
and therefore voting their
shares from a long-term
point of view
1.3 What are the current issues in the
investor-corporate relationship?
Though both capital providers and capital receivers achieve alignment because of issues within the
share the common goal of maximizing long-term investor-corporate relationship, three of which are
financial returns, the two groups often fail to listed here.
Time horizon misalignment within the public equity value chain
Misalignments between capital providers and As the public equity investment value chain has
capital receivers exist due in part to the increasing lengthened, achieving alignment on issues of
complexity of the public equity investment value duration, level and risk associated with financial
chain and the associated principal-agent problems.1 return has become a more difficult proposition.
Enabling Investor Stewardship in the Global Public Equity Markets 6FIGURE 2 Public equity investment value chain
INVESTMENT VALUE CHAIN
1 End beneficiaries 2 Capital providers 3 Intermediaries 4 Capital receivers
DISCUSSION FOCUS
Asset owners
Retail investors (primary capital providers) Operators Public companies
Individuals/affluent Pension plans Equity exchanges Common stock
High net worth Insurers Index providers Preferred stock
Sovereign wealth funds Data providers Options
Ultra high net worth
Endowments/foundations
Flow of capital
Employees/pensioners Watchdogs
Family offices
Institutional investors Market regulators
Asset managers
Financial corporations (Secondary capital providers) Professional organizations
Non-financial corporations Traditional asset managers Advisers
Central governments Index asset managers Brokers/investment banks
Local governments Activist investors Proxy advisers
Central banks Venture capital/private equity Investment consultants
Source: World Economic Forum and Oliver Wyman Analysis
Enabling Investor Stewardship in the Global Public Equity Markets 7Internal misalignment between capital providers driven returns in recent years,2 but from a portfolio
(asset owners and managers) results in a more perspective, this may be exacerbating the challenge
pronounced conflict between the investors and of short-termism in public equity markets by
the corporates. Many asset owners invest to placing greater emphasis on their ability to provide
achieve returns over a multi-year horizon; however, liquidity. This may therefore impose short-term
many of the intermediaries described above face pressure on asset managers, whose incentive
shorter-term incentives. In response, asset owners structures (discussed at the end of this section) and
are making increasingly large allocations to long- investment mandates from the asset owners reward
term-oriented, illiquid asset classes that have short-term returns.
Pressure to sustain short-term growth
This short-termism of capital providers results performance, while neglecting long-term needs
in increased pressure on management to such as delaying critical capital expenditure.
prioritize actions that result in a good short-term
FIGURE 3 Change in pressure on senior executives to demonstrate strong short-term financial
performance over the past five years, % of respondents by office location
North America 2016 31 34 26 7 0
North America 2013 20 38 29 10 2
Europe 2016 35 29 26 9 1
Europe 2013 36 32 24 5 1
Developing markets 2016 41 41 5 7 5
Developing markets 2013 33 27 24 9 3
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: FCLT3 Significant increase Moderate increase No change Moderate decrease Significant decrease
However, certain capital providers note that about the future milestones to ensure that the
this challenge may be partially overcome if capital providers are engaged in the long-term
corporates can tie short-term performance into performance of the company.
long-term strategic guidance and provide details
Stakeholder capitalism
Underlying all of these issues within the investor- annual letter to CEOs, and a community of more than
corporate relationship is a broader, evolving discourse 80 global businesses,4 effectively expands the playing
proposing that business models must incorporate field of issues considered material to long-term
stakeholder interests if they are to prosper over business success. This thematic broadening has
the long term. This discourse and shift in business created a more holistic set of issues that corporations
behaviour, supported prominently in recent years must address if they are to succeed financially.
by the Business Roundtable, the World Economic Consequently, there is a broader set of issues on
Forum, BlackRock chief executive officer Larry Fink’s which investors must engage.
Enabling Investor Stewardship in the Global Public Equity Markets 82 Investor stewardship
in global public equity
markets
Enabling Investor Stewardship in the Global Public Equity Markets 9Given the potential impact of the investor-corporate provides a roadmap to engage on these
relationship on global public equity markets, it is misalignments and move towards better business
vital that these issues of misalignment between practices that contribute to a company’s ability to
capital providers and capital receivers are resolved. deliver sustainable financial returns.
Appropriately conducted, investor stewardship
2.1 What is investor stewardship?
Investor stewardship can be defined as an creation for shareholders of the company and (the
investor’s “engagement with public companies use of thoughtful) voting to provide shareholders
to promote corporate governance practices that with the opportunity to express those views”.5
are consistent with encouraging long-term value
FIGURE 4 Overview of investor stewardship
INVESTOR STEWARDSHIP
Definition: voting shares allocated to
1 Voting the shareholder or cast on behalf of a
shareholder
Definition: working directly with the
2 Engagement corporate entity to influence corporate
outcomes
In this context, investor stewardship implies active principal-agent misalignment. Rather, it is to assess
investor participation as shareholders of their and provide feedback on whether the company’s
respective portfolio companies. As outlined in policies to ensure appropriate business practices
Figure 5, the investor’s role is not simply to minimize support the investor’s long-term objectives.
FIGURE 5 Goal and objectives of investor stewardship
Objective 1. Protect and enhance asset financial value An investor should understand…
How can the investor maximize long-term risk-adjusted financial returns?
In a diversified portfolio, when and on what basis should the investor engage with What does a sound
portfolio companies? long-term strategy
How do investors manage internal conflicts of interest in stewardship issues? look like for
the company?
Does the way the
STEWARDSHIP GOAL:
organization makes
LONG-TERM decisions align with
FINANCIAL RETURN its long-term goals?
Do the company’s board
Objective 2. Support sustainable financial growth and top executives have
access to the right information
What are the corporate decisions that drive prosperity and wealth for its to make well-informed
stakeholders? long-term decisions?
How should the company respond and adapt to change?
How can the interests of the corporation align with those of long-term shareholders?
Enabling Investor Stewardship in the Global Public Equity Markets 10While buy-sell decisions may act as a powerful Many of the world’s largest asset owners and asset
mechanism for influencing companies, both managers, including the Canada Pension Plan
investors and academics recognize their limits. Investment Board (CPPIB) and Blackrock, have
Thus, investors6 look to stewardship (and publicly stated that they believe investor stewardship
particularly active corporate engagement7) as is a driver of financial value and a shareholder
a means of driving better investor returns and responsibility. As a result, there has been a shift
stronger governance systems8 to reduce investor- away from the traditional buy-sell view of the
corporate agency problems. investment industry towards one that values active
ownership and the responsibilities that come with it.
2.2 Why do global public markets benefit
from investor stewardship?
The global economy depends in part on vibrant complex investment value chain described above.
public equity markets that provide equity capital to What follows are insights from a World Economic
corporations in a manner consistent with long-term, Forum expert group, which identified some of the
sustainable economic growth. Stewardship is a key most important reasons why public markets benefit
tool for ensuring alignment across the increasingly from stewardship.
Ensure health of public markets
While the recent increase in SPACs (special purpose Meanwhile, the average stock holding period for the
acquisition companies) has somewhat reversed the securities traded on the New York Stock Exchange
trend, Bloomberg states that, in the US, “the rate has dropped from eight years in 1960 to just eight
at which new businesses have been offering shares and a half months in 2019 and five and a half
to the public is less than half of the rate prevalent months in 2020.10
in 1980s and 1990s. US stock exchanges listed
~3,500 firms at the end of 2020, down more than
half from 1997.”9
FIGURE 6 Number of publicly listed companies in the US, UK and China
10
8
6
4
2
0
1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: World Bank11 US UK China
The declining number of publicly listed companies to their balance sheets. They can’t invest too
is due in part to the challenges of balancing investor much, otherwise profits will drop and so will their
expectations – in particular, the pressure to ensure share prices. At Huawei, we are willing to face
short-term financial performance (as described the struggles necessary to achieve our ideals. We
in section 1.3). Private companies, on the other understand that if we fertilize the soil it becomes
hand, have far less pressure to prioritize short-term more bountiful, and we achieve a better harvest than
concerns over long-term goals. In a 2019 interview others.”12,13
with the BBC, Ren Zhengfei, founder and Chief
Executive Officer of Huawei Technologies, said, Ultimately, a lower number of companies going
“Why have we succeeded when others failed? public has the potential to deprive the economy of
Publicly listed companies have to pay attention innovation and retail investors of wealth creation.14
Enabling Investor Stewardship in the Global Public Equity Markets 11Additionally, public markets provide a number of alignment between shareholders and managers.
benefits in areas where private capital falls short, It can be a crucial piece of the larger solution to
including improved wealth creation opportunities convince more companies that public markets value
for employees and a lower-cost, more stable long-term focus and that institutional investors in
source of capital for companies.15 However, public companies share a long-term vision.
investor stewardship provides a tool to bring better
Shifts in global macro trends
Additionally, the current macro environment expectations and climate change. These trends
reinforces the need for stewardship in public are reshaping how stakeholders think about
markets in response to three structural changes: company growth and development as well as risk
the rise of emerging markets, changing governance management (Figure 7).
FIGURE 7 Macro pressures for investor stewardship
Rise of emerging markets Change in corporate expectations Need to address climate change
Emerging markets account for Asset owner power is The world faces the cost of
more than half of the world’s increasing, and their younger man-made climate change and
GDP (largely driven by China) beneficiaries will soon become companies must begin
and are projected to grow the largest working demographic internalizing their externalities.
further over the next decade. on the planet.
Many investors and corporates
Investor stewardship helps to In turn, asset owners are believe in the need to work
address the evolving corporate becoming more responsive to together to create businesses
governance and regulatory the expectations of their end that are not only financially
landscape to help ensure that beneficiaries and using sound but also environmentally
stakeholders benefit in line with investment stewardship as a tool sustainable for future
economic progress. to meet these demands. generations.
“There is not just a societal good to be done, but As Larry Fink wrote in his 2021 letter to CEO’s:
excess return to be captured in identifying and “The pandemic has presented such an existential
investing in businesses that are emphasizing and crisis – such a stark reminder of our fragility – that it
addressing environmental and societal problems,” has driven us to confront the global threat of climate
said Jeffrey Ubben, founder and Chief Executive change more forcefully and to consider how, like the
Officer of activist fund ValueAct.16 pandemic, it will alter our lives.”17
Though the economic, governance and climate shifts At a micro level, stewardship is a means of aligning
described above require a response from policy- investor and management perspectives to improve
makers, investors are increasingly viewing these an individual company’s long-term financial return.
challenges as stewardship issues because of their At a global level, stewardship can positively shape
relevance to generating sustainable financial return. how long-term societal trends drive financial returns.
Enabling Investor Stewardship in the Global Public Equity Markets 123 Enabling investor
stewardship
Enabling Investor Stewardship in the Global Public Equity Markets 13Stewardship requires resources and commitment stewardship’s often unquantifiable value, as well
from both investors and corporations. Therefore, as the multitude of engagement and stewardship
both parties must understand and believe in options available.
3.1 Why should investors enable good stewardship?
This section reviews the universe of long-term asset This framework serves to identify the unique
owners and asset managers (Figure 8) and consists challenges faced by each of these institutional
of four constituent pillars of institutional investors, investors, as well as the incentives that motivate
each with distinct end goals for stewardship. them to actively conduct stewardship activities.
As with any framework, this is a simplified
generalization that may not always hold (e.g.
activists use a wide array of investment strategies).
FIGURE 8 Investor goals, challenges and incentives for stewardship
Goals for good Challenges to effective Incentives to conduct good
stewardship stewardship stewardship
END BENEFICIARY Address fundamental Low fees and large number of Fiduciary duty and mandate
governance and risk issues of holdings make deep from long-term asset owners
A holdings to improve universal engagement unfeasible
Business growth and
Long-term asset owner/manager (institutional investors) beta
Inability to transact as they simultaneous debt-equity
cannot “vote with their feet” holdings
A B C D
Capture alpha with lower Organizational challenges due to End beneficiaries want to align
cost and better principal- a leaner staffing approach and invested capital with their
agent alignment than external smaller AUM (assets under philosophical beliefs
Pillar 1 Pillar 2 Pillar 3 Pillar 4 active managers management)
B Multigenerational return needs
Better organizational Internal resource allocation incentives ensuring long-term
Index In-house External Activist alignment of governance and challenges survival of companies
(passive) active owner active investor control issues
investor and manager manager
Add long-term value for end Incentive structure favours Fiduciary duty and mandate
asset owner through better demonstration of short-term from long-term asset owners
performance over relevant performance
C Competitive advantage by using
index benchmark
Conflicts of interest if companies stewardship for long-term value-
are clients of other business add over pure indexing
divisions
Stewardship interactions (project focus)
Create alpha through large Corporate suspicion due to Fundamental value proposition
corporate change reputation for aggressive tactics
D Portfolio requires significant
Minority investor attention on each holding
Corporation
Source: World Economic
Forum and Oliver Wyman
Index managers
Analysis
Assets under management (AUM) by index A 2016 study noted that the “Big Three” index
managers increased significantly in the past two managers (BlackRock, Vanguard and State Street)
decades as investors fled actively managed funds. manage more than 90% of all index funds in the
At the end of 1998, there were 6.5 times as many US.20 The same study found that the Big Three
assets in actively managed US stock funds as there together represented the largest owners in 438
were in index funds.18 However, as of April 2019, (88%) of the S&P 500 corporations, and in 1,662
US passive AUM matches active AUM, moving from (40%) of all publicly listed firms (~3,900) in the US.
$0.25 trillion in 1998 to almost $4.5 trillion in 2019.19 By the end of 2017, they managed ~$8 trillion in
index equity globally (Figure 9).
Enabling Investor Stewardship in the Global Public Equity Markets 14FIGURE 9 Total indexed equity managed by the Big Three ($T), mid-year
7.7
6.9
5.7 5.5
5.3
4.1
3.3 3.3
2.5
1.1 1.4 1.4 1.1
Source: Pensions &
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Investments.
Note: BlackRock acquired
BlackRock Vanguard State Street
Barclays Global Investors in
200921
While these funds have grown in size, there are setters, nudging corporate behaviour via public
some challenges that may disincentivize them from letters and by telegraphing voting intentions on
conducting stewardship. One reason is that asset evolving risks such as climate change and board
managers bear the costs of stewardship activities, gender diversity. Moreover, it has become a vital
but because fees are often fixed as a percentage part of their value propositions, given the increasing
of AUM, managers capture only a small part of client demand for good stewardship. The Big
the benefits generated.22 Most of the benefit flows Three have invested heavily in building portfolio
into the portfolio and hence to the asset owners. stewardship teams and continue to evaluate
Another reason is that there is a belief that the how much investment can help them become
index-manager business model based on low credible stewards of their portfolios. BlackRock,
fees, broad-based holding and an inability to make for example, has built the largest stewardship team
individual buy-and-sell decisions does not allow in the industry, with more than 45 stewardship
them to be effective stewards. Academic literature,23 specialists, and expects to continue to grow the
however, has found that despite their inability to team in the coming years.
exit investments, index funds have a quantifiable
influence on a firm’s governance choices via “We must be active, engaged agents on behalf of
ownership rights and dialogue, resulting in long- the clients invested with BlackRock, who are the
term benefits such as more independent directors, true owners of your company. This responsibility
the removal of takeover defenses and so on. goes beyond casting proxy votes at annual
meetings – it means investing the time and
Despite these challenges, the behemoth managers resources necessary to foster long-term value,” said
understand that there are significant incentives Larry Fink, co-founder and Chief Executive Officer
to conducting stewardship. At the systemic level, of BlackRock in his 2018 annual letter to chief
the Big Three have emerged as de facto standard executive officers.
In-house active managers
A study by Northern Trust Asset Servicing shows Though improved net-of-fee returns is a strong
that 40% of global asset owners increased the incentive, in-house investment management faces
number of in-house investment staff in 2015–2018, certain organizational challenges. Due to a leaner
and nearly a fifth (19%) have upped the proportion staffing structure, resourcing the right personnel to
of assets they manage internally.24 This is primarily manage active strategies and conduct stewardship
driven by the need to improve net-of-fee investment becomes a daunting task. Often the AUM is smaller
returns and governance. An industry study from than the external active managers and hence the
CEM Benchmarking found that funds with more in- overall transaction costs may be higher. Further,
house active management performed better (after effective risk assessment and analysis can be a
costs) than externally managed active investments. challenge in the absence of appropriate internal
This was driven by lower fees.25 Therefore, asset systems and a team of experts.
owners are considering increasing in-house
investment management to better align with their
long-term investment goals.
Enabling Investor Stewardship in the Global Public Equity Markets 15Coupled with an improved return profile, these To address this, pension funds such as the
asset owners have two other strong incentives to CPPIB are building stewardship-focused in-
engage in stewardship activities. First, they have house management teams. The CPPIB noted
long-term funding obligations that encourage them that its success in active management relies on
to ensure the long-term survival of companies in having “expert talent, skill and global capabilities,
the public markets to safeguard the health of their appropriate internal systems, processes and strong
portfolio. Second, many asset owners manage operational support”.26
investments for multigenerational returns and
many younger beneficiaries are pressuring them
to exercise their rights as shareholders to support
corporate behavior that is consistent with their
philosophical beliefs.
External active managers
“If you look at the hot stocks, US active managers However, there are also certain incentives to
own almost exactly the same as passive index conducting stewardship. First, external active
managers,” said the late founder of Vanguard, managers handle substantial long-term capital and
Jack Bogle.27 Active investing is notoriously difficult some asset owners have investment mandates that
and as index investing gains popularity, long-term require asset managers to conduct stewardship
asset owners increasingly demand that active activities. Second, in an environment in which
managers demonstrate the returns they generate external active managers must prove their
through active management are sufficiently superior value-add exceeds management fees charged,
to demonstrate the higher fees they charge in stewardship offers the opportunity to create
comparison to index investing. The Financial value through engagement in addition to security
Conduct Authority (FCA), a UK financial regulatory selection.
body, issued a study in 201728 on the UK asset
management market which concluded that the Further, understanding of corporate fundamentals
majority of active managers underperform their is their prime differentiator as a steward. Through
benchmarks after fees. stewardship, asset managers can vote thoughtfully
and directly engage with companies to reassess
Given this background, there are certain challenges their bottom-up investment thesis, and whether it
that the external active managers face in conducting creates a compelling valuation for asymmetric risk-
stewardship. First, their incentive structure rewards reward in favor of the asset owner they represent.
short-term performance by nature. Therefore,
investing in issues such as stewardship with no As Jean Raby, Chief Executive Officer, Natixis
immediate financial gains is difficult, especially Investment Managers, said, “We believe in an
when faced with performance concerns at existing environment where returns will be much less
spending levels. Second, active managers often rely correlated going forward and our strategy of being
on the portfolio manager to conduct stewardship, bottom up and fundamental will pay off. We see
rather than a centralized stewardship team. While an evolving need of our clients towards solutions;
this may offer strong financial alignment in that this implies the need for a dynamic strategy
stewardship and risk-taking are both led by the with various allocations. We bring expertise that
portfolio manager, it may hinder the application of (institutional investors) don’t have internally and add
value-additive stewardship practices across the a global perspective.”29
entire holdings of the asset manager.
Enabling Investor Stewardship in the Global Public Equity Markets 16Activist investors
Activist investors invest in a company with the major strategic or structural changes, often by
aim of influencing the company’s decision-making obtaining seats on the company’s board. Over the
process. They do so by purchasing a sizeable past decade, their influence has grown, as has the
equity stake in a public company and using this number of companies targeted by activist investors
stake to pressure the management into driving globally (Figure 10).
FIGURE 10 Global activist targets by year
1041
943
887 922
856
775
645
607
Source: Activist Insight30
2013 2014 2015 2016 2017 2018 2019 2020
Despite the growth of their influence, activists face long-term investors, they also did not hurt the
certain challenges in conducting stewardship. long-term investor.32 Another challenge they face is
Critics of activist investing associate these that they’re minority shareholders and, to move the
shareholders with aggressive, adversarial corporate stewardship needle, they may need support from
engagement, and believe that they want only quick, other institutional shareholders.
short-term returns by moving the share price.
However, proponents brand activists as shareholder However, the activist business model of portfolio
advocates and believe that they have a clear role to concentration and active engagement can greatly
play in reducing management-shareholder agency encourage them to conduct good stewardship.
problems arising due to poor corporate governance A thoughtful and collaborative activist can play
and lax board oversight. an important role in driving fundamental changes
that deliver long-term value, as demonstrated in
Admittedly, not all activists work in a constructive the case study below. However, long-term owners
manner. A 2015 study of the topic supports the should not rely solely on the activists to do their
idea that short-term gains from activists do not stewardship due diligence, as activists engage
come at the expense of long-term performance.31 only when the value generated is significant and
A 2018 follow-up study by a separate set of represent only a fraction of the global AuM
researchers found that, while activists did not help in equity.33
BOX 1 Constructive activism: ValueAct Capital’s role in the revival of Microsoft
By 2013, Microsoft (NASDAQ: MSFT) faced years served as the catalyst for change in Microsoft’s
of weak stock performance due to a shrinking senior management and corporate culture. Just
PC business. Rivals Google, Apple and Amazon days after Ballmer’s resignation, the activist fund
had taken market share from the once-dominant acquired a board seat, which was needed to
software giant in businesses ranging from search actively discuss making drastic changes to the
engines to smartphones and cloud computing. company with management – an extraordinary
Chief executive officer Steve Ballmer had grown step rarely welcomed by companies.
net income under his tenure, but the company’s
institutional asset owners had become increasingly Jeffrey Ubben, founder and Chief Executive Officer
concerned that the company’s sluggish internal of ValueAct Capital, stated that ValueAct prefers
culture was missing the new computing age. to keep a low profile, work behind the scenes
and use public pressure as needed. ValueAct
Against this backdrop, ValueAct Capital acquired a believes in addressing areas in which engagement
$2 billion stake in Microsoft in April 2013. Owning by traditional long-term investors has failed. It
just 0.8% of the company, ValueAct’s influence has a long term-oriented model and focuses
Enabling Investor Stewardship in the Global Public Equity Markets 17its resources on sitting on boards, working in grew its enterprise cloud computing division that
collaboration with management and allowing them had begun under Ballmer (e.g. Azure) and made
to take credit for positive changes. strategic acquisitions that embraced social
networking and open source (e.g. LinkedIn
While the investment world expected an outside and GitHub).
hire as the chief executive officer, ValueAct
Source: Discussions welcomed insider Satya Nadella to the role in By the end of 2018, the changes had helped
with Jeffrey Ubben, Chief February 2014. He helped to reset the perception propel Microsoft to the world’s most valuable
Executive Officer, ValueAct
Capital, supplemented by
and fortunes of the company. Microsoft continued public company by market cap. Its share price
articles from The Financial to reform its business model to focus on traded at $100, up from the $30–$35 range in
Times and Bloomberg subscription-based products (e.g. Office 365), 2013, when ValueAct first made its acquisition.
Intermediaries
Finally, ambitions with regards to strengthening they are relevant to the discussion about enabling
investor stewardship have also been growing investor stewardship.
rapidly among public-market intermediaries. While
they are not investors, they provide important The table below summarizes a few important
services necessary for well-functioning global public intermediaries and the major benefits they
equity markets and have the ability to affect the provide and the challenges they present to
level of value creation through stewardship. Hence, effective stewardship.
TA B L E 1 Benefits created and challenges posed by important market intermediaries
to investor stewardship
Key benefit created for Key challenge posed to
Intermediary
investor stewardship investor stewardship
Competitive environment for winning
new listings does not incentivize
Set basic governance standards
Equity exchanges increasing listing requirements (e.g.
for publicly listed companies
dual class stock limitations, board
diversity, ESG reporting)
Provide standardized benchmarks Index products create market
Index providers for performance measurement and correlation and fail to reward or
index creation punish corporate behaviour
Aggregate data to facilitate more Limit investor access by making
Data providers
efficient analysis data access expensive
Create regulations
Provide oversight to both
counterproductive to investor
corporations and investors and
Market regulators engagement or sometimes
ensure that markets follow strong
overshoot on policies that create
standards
market volatility
May fail to advise companies
sufficiently well on the level of
Help to bring companies on to
Investment bankers investor scrutiny public listing will
public markets
bring to governance, processes,
and behaviours
Help asset owners think about Recommend shifts in investment
Investment consultants where to invest and focus allocation or changes in asset
stewardship activities manager
Enabling Investor Stewardship in the Global Public Equity Markets 18Key benefit created for Key challenge posed to
Intermediary
investor stewardship investor stewardship
Provide baseline voting Concentrated power in voting
recommendations to investors recommendation and becoming
based on strong standards aligned “quasi-regulators”
Proxy advisers
to those set and used by asset Arguably understaffed and provide
owners and asset managers little time for recommendation
disputes
Focuses on the “loudest” stories,
Provides information and voice
resulting in “media hype,” and may
Media to all players in the stewardship
not point to issues that truly affect a
landscape
company in the long term
Provide a standardized
May be wary of flagging poorly
assessment of a company’s debt-
Rating agencies performing corporations as they pay
repayment abilities, which helps
for the rating assessments
flag poorly performing companies
3.2 Where can investors enable good stewardship?
The following framework (Figure 11) can help While this hierarchy is simplified, and in practice
investors think about where they should focus investors will engage wherever they feel they may
their stewardship activities based on their place add the most value, it offers a starting point for
in the earlier investor pillar framework (Figure 8). understanding how different classes of investors
It can also help corporations understand which may engage in stewardship.
issues may be front of mind for their investor base.
FIGURE 11 Hierarchy of stewardship impact area
01
Tier 1: Change corporate fundamentals
Good stewardship: requires the investor to have a long-term view with unique
knowledge in individual geographies, regions and market direction
Corporate Most suitable for: active managers both in-house and outsourced (Pillars 2 and 3), but
transformation activists (Pillar 4) with a long-term view can also provide valuable support
and long-term
investments
act
mp
Board governance
Tier 2: Influence long-term strategy
02
te i
and
tra
representation Good stewardship: requires the investor to conduct bespoke engagements
ons
on unique strategic issues affecting the corporation
dem
Capital Executive Most suitable for: active managers (Pillars 2 and 3) in collaboration with
activist investors (Pillar 4) with deep insight into corporate operations, and
to
structure and leadership and
red
allocation exec comp vote backing from passive investors (Pillar 1)
qui
e re
Risk and
Tim
03
financial Human Tier 3: Promote strong standards
management capital Good stewardship: requires a fundamental understanding of
corporate best practices and their applicability
Corporate Reporting Impact and Most suitable for: passive investors (Pillar 1) to help engage
culture and and regulatory sustainability corporation and best-practice discussions and create demand
diversity disclosures and influence using the large equity stakes held
Source: World Economic Forum and Oliver Wyman Analysis
Enabling Investor Stewardship in the Global Public Equity Markets 193.3 How can investors enable good stewardship?
The options investors use to engage in stewardship Figure 12 outlines the options available to investors,
are a function of an internal assessment of their goals, ranging from those that are less tailored and
challenges and benefits and the agendas they want principle-driven and therefore can be applied
to drive or react to as explained through the earlier broadly across a portfolio, to those that are more
investor pillar framework (Figure 8) and the hierarchy bespoke and consequently more expensive
showing stewardship impact areas (Figure 11).
FIGURE 12 Options for investor-directed stewardship
3 7
2
4
6
1 5
1 Coordinated standards (least expensive)
Work alongside other shareholders to make better use of finite stewardship resources through standard setting via principles
Example: The Investor Stewardship Group (ISG), a collective of some of the largest US-based and international institutional investors and global asset
managers, was formed to bring all types of investors together to establish a framework of basic standards of investment stewardship and corporate
governance for US institutional investor and boardroom conduct
2 Vote proxies 3 Direct management engagement
Vote all shares held and be ready to vote against management if Discussions with management and board members on issues relevant to the
active dialogue does not have a satisfactory outcome company’s long-term sustainability (e.g. wage policies, environmental policies,
Example: BlackRock votes on thousands of proxies, both succession planning etc.)
company-sponsored and shareholder proposals. Due to the more Example: Vanguard conducts engagements with companies in order to drive
controversial nature of shareholder proposals, BlackRock tends to changes in board, compensation, risk and strategy, and structure
evaluate shareholder proposals in the context of materiality to the
company’s long-term performance
4 Nominate/replace directors 5 Discuss/introduce shareholder proposals
Review, nominate and vote for board members who share Discuss shareholder proposals with long-term financial impact. If necessary, put
shareholders’ long-term interests (e.g. improving issues on the shareholder meeting ballot to signal concern or as a catalyst for
experience/knowledge, diversity, gender etc.) engagement (e.g. separating chairperson/chief executive officer roles etc.)
Example: Throughout 2017, State Street voted against the re-election Example: In 2018, As You Sow, a non-profit foundation chartered to promote
of directors at 400 companies on the grounds that they failed to take corporate social responsibility, filed a shareholder proposal with Starbucks to
steps to add women to their boards and failed to make steps to eliminate plastic straws that subsequently gained more than 30% approval and
address the issue the company’s commitment to phase out all straws by 2020
6 Sit directly on board 7 Control company capital (most expensive)
Push stewardship agenda by having representatives sit directly on Provide liquidity to companies in order to maintain the companies as
the company's board of directors going concerns, improve cost controls or improve capital efficiency
Example: In 2018, ValueAct Capital took a stake in international Example: In 2017, Warren Buffett, through Berkshire Hathaway, injected
electric power producer AES. Jeffrey Ubben, founder and Chief $400 million equity and provided a $2 billion line of credit to Home
Executive Officer of ValueAct, sits on AES’s board of directors, with Capital Group that helped stave off a liquidity crisis at the Canadian lender
the goal of helping to push for cleaner energy resources
Enabling Investor Stewardship in the Global Public Equity Markets 20By harnessing these options, asset owners and Furthermore, this can increase overall shareholder
managers can raise the industry’s standards and benefits as asset owners who have strong
their own portfolio values by setting a strong mandates can use the specialized expertise of their
stewardship mandate, customizing engagements asset managers in the context of capital allocation
for the target company to improve their anticipated and long-term risk assessment.
returns and providing the means for productive
collaboration with their portfolio companies.
Enabling Investor Stewardship in the Global Public Equity Markets 21Conclusion and outlook
Investors and corporations must work in tandem 3. Can investors quantify the value of
to create sustainable long-term businesses that stewardship? Some experts are looking to
benefit the stakeholder community. quantify the value of stewardship and develop
criteria to help differentiate firms on the basis of
This paper focused on the institutional investor who stewardship. A discussion of the topic would
holds large volumes of public equity. As the topic help more investors evaluate identifiable financial
of stewardship is changing rapidly, our steering and value in their own stewardship investments as
expert committees recommend the following areas well as which portfolio companies require focus.
of potential exploration to build out the topic: Some global initiatives, such as the Task Force
on Climate-Related Financial Disclosures (TCFD),
1. What structural solutions can remediate have begun to develop intellectual frameworks
short-termism? Some investors and corporates that tie non-financial issues directly to financial
cited activism as merely the symptom of a short results, making it easier for both investors and
term-focused market system. Looking beyond corporations to consider how business decisions
traditional agency theory into recommendations and engagements translate into financials.
of structural solutions to the market (e.g.
differential voting rights based on length of time Additionally, the maturation of stewardship as
shares have been held, changes in the nature a component of investment organizations, and
and time frame of investor compensation etc.) as an investment function in general, should be
could help both the investment industry and further assessed to identify implications on the
regulators think about potential solutions to skill sets and resourcing that will be required.
implement that encourage long-term investing
and investor stewardship. Concurrently, the 4. Can investor stewardship extend beyond
structure of the investment landscape is shifting, equity? Further study of the influence that
as increasingly large and sophisticated asset debt holders (or simultaneous holders of both
owners turn to stewardship as a differentiator in debt and equity of a single company) have on
a consolidating asset management industry. that company’s strategy would help formulate
stewardship best practices outside of the public
2. How can retail investors become thoughtful equity market.
voters? Explorations into mechanisms for
increasing retail investor engagement, such Academics have reviewed simultaneous debt-
as the use of technology to encourage retail equity holdings as incentives for more effective
investor participation in voting, can aid regulators investor engagement in areas where investors
who want proportional retail shareholder voter have a very strong reason to engage, such as
representation. Companies, in particular, wish to bankruptcy.36 Institutions such as the Financial
understand whether technology can improve the Reporting Council also promote the idea that
efficiency of the overall voting process. non-equity investors can exercise their rights to
monitor and engage issuers.37
Many academics and industry experts believe
that well-informed retail investors who vote their As interest in the topic is on the rise, investor
shares add positive value to companies. SEC stewardship continues to evolve. Better data,
chairman Jay Clayton noted the importance technology and regulation related to the topic will
of this, saying it would be useful to better emerge over time. Over the past 10 years there has
understand “the extent to which relatively been a lot of activity in stewardship. Both investors
low retail investor participation should be of and corporations need to continually reflect on what
concern and should inform analysis of existing has worked well, and what needs to change.
regulation”.34
The ideal long-term investor-steward will work
Research has indeed demonstrated that retail alongside corporations to meet relevant challenges,
investors vote their shares far less frequently not simply as a checkbox exercise but to ensure
than institutional shareholders.35 However, long-term value creation. Such actions also latently
the rising discourse of stakeholder capitalism improve the health of public markets and stakeholder
suggests that proxy voting could become an outcomes. As stakeholders become more influential,
outlet for increasingly vocal stakeholder groups. and as managers increasingly understand their
In recent years, non-profits and other advocates importance to business success, the stewardship
have attempted to harness the influence of retail landscape will continue to broaden. So, while the
shareholders. If successful, the mobilization fundamental mandate of investor stewards centres
of retail investors as active proxy voters could on good governance and value creation, their
bring new activity to the stewardship landscape. actions will beneficially shape the whole economy.
Enabling Investor Stewardship in the Global Public Equity Markets 22Glossary
Term Definition
Active investor Investors who actively buy and sell securities, with the goal of outperforming an investment benchmark
A shareholder who uses an equity stake in a corporation to put pressure on the company’s management
Activist investor
to achieve financial or non-financial goals
Asset manager Profit-driven investment institutions that receive their investment mandates from the asset owners
Asset owner Institutional investors who own the end capital themselves or on behalf of end beneficiaries
Assets under The total market value of financial assets an asset owner or manager manages on behalf of clients and
management themselves
A measure of a stock’s historical volatility relative to that of the market. Index funds attempt to replicate
Beta (β) the market return where β=1.0, a stock more volatile than the market has β>1.0 and a stock less volatile
than the market has βContributors
Project Team
Maha Eltobgy
Head of Future of Investing, Member of the Executive Committee, World Economic Forum
Wenhan (John) Lin
Engagement Manager, Oliver Wyman
Samir Misra
Partner, Wealth & Asset Management, Oliver Wyman
Adam Robbins
Director, Wafra
Additional content support
William Hoffman
Platform Curator, Shaping the Future of Investing, World Economic Forum
Justin Jensen
Associate, Financial Services, Oliver Wyman
Shrinal Sheth
Knowledge Specialist, Investors Industries, Shaping the Future of Investing, World Economic Forum
This report was prepared by The World Economic Forum in collaboration with Oliver Wyman.
Enabling Investor Stewardship in the Global Public Equity Markets 24Acknowledgements
This publication reflects the ideas and contributions of many individuals, through interviews, workshops,
events, and external publications. The project team would like to offer its special gratitude to the members
of the project steering and expert groups who graciously shared their time and insights.
Steering Committee
Christian Edelmann, CFA, Managing Partner, Co-head of Europe, Global Head of Wealth & Asset
Management, Oliver Wyman
Mark Machin, Former President and Chief Executive Officer, Canada Pension Plan Investment Board
Ron Mock, Former President and Chief Executive Officer, Ontario Teacher’s Pension Plan
Barbara Novick, Co-Founder and Senior Advisor, BlackRock
Jean Raby, Chief Executive Officer, Natixis Investment Managers
Alison Tarditi, CFA, Chief Investment Officer, Commonwealth Superannuation Corporation
Jeffrey Ubben, Founder and Chief Executive Officer, ValueAct Capital
Jean-Baptiste Wautier, Managing Partner, BC Partners
Andrew Weinberg, Founder and Managing Partner, Brightstar Capital Partners
Theresa Whitmarsh, Executive Director, Washington State Investment Board
Expert and Working Group
Corporates
Sarah Elton-Farr, Head of Global Investor Relations, GlaxoSmithKline
Raimundo Fernandez-Cuesta Laborde, Executive Director of Markets & Investor Relations, Acciona
Peter Hutton, Head of Investor Relations, Equinor
Nikolai Lyngø, Chief Executive Officer, Sval Energi
Ronald Shaich, Founder and Former Chief Executive Officer, Panera Bread and Managing Partner and
Chief Executive Officer, Act III Holdings
Natalie Worley, General Manager, Investor Relations, Rio Tinto
Investors
Dominique Barker, CFA, Head, Sustainability Advisory, Canadian Imperial Bank of Commerce
Ray Cameron, Head of Investment Stewardship – The Americas, BlackRock
Michael Cantara, CFA, Senior Managing Director, Global Client Group, MFS Investment Management
Stephen Carlin, CFA, Global Equities Chief Investment Officer (Interim), Canadian Imperial Bank of
Commerce
Michelle Edkins, Managing Director, Global Head of Investor Stewardship, BlackRock
Enabling Investor Stewardship in the Global Public Equity Markets 25You can also read
