The role of institutional investors in enacting stewardship by corporate boards

• Pages: 728-747
• DOI: https://doi.org/10.1108/CG-09-2017-0210
• Published date: 10 May 2018
• Date: 10 May 2018
• Author: Danielle A.M. Melis,André Nijhof
• Subject Matter: Corporate governance,Strategy

The role of institutional investors in

enacting stewardship by corporate boards

Danielle A.M. Melis and André Nijhof

Abstract

Purpose –This paper aims to clarify the relationshipbetween the voting and engagement behaviour of

institutionalinvestors, i.e. institutional investorstewardship behaviour, and the enactmentof stewardship

by corporate boards. In doing so, this paper contributes to the evaluation of contemporary corporate

governancesystems and provides recommendationsfor the redesign of these systems.

Design/methodology/approach –This paper is based on a qualitativeexploratory descriptive research

study into assumed, prescribed and the actual behaviour of institutional investors. Their behaviour is

exploredthrough a survey and in-depth interviewswith global institutional investors.

Findings –The prescriptionof institutional investor stewardshipbehaviour and the exploration of actual

behaviour from an investors’ perspective led to the conclusion that assumed institutional investor

stewardship exists variously as either ‘‘in form’’ (i.e. measured by compliance to the relevant corporate

governancecode) or ‘‘in substance’’(i.e. the actual behaviour from theinvestors and investee companies’

perspective).The results suggest that that institutional investors’actual stewardship behaviouras global

investorsrequires a nuancedconclusion about theexistence of institutionalinvestor stewardship.

Research limitations/implications –Although the number of semi-structured interviews with

institutional investors was limited to just 14, these interviewees represent the majority share in terms of

market capitalisationof Dutch listed companies.Additional research couldclarify the perspective of other

investors,such as pension funds and private investors.

Practical implications –The outcome of this research can serve as input for corporate governance

reforms in the preambles of governance codes and the prescribed principles and best practice provisions

of corporate governance and stewardship codes. Thisresearch identifies opportunities for further academic

research to enrich the understanding of the role of institutional investors in enactingcorporate stewardship.

Social implications –This paper contributes to furthering the understanding of the mechanisms by

which institutional investors, through their behaviour, contribute to enacting stewardship through their

corporate boards.This is an important part of the corporate social responsibilityof institutional investors.

It also triggersa dialogue about the social andenvironmental impacts of stock listedcompanies.

Originality/value –This paper fulfilsan identified need to develop knowledgeabout new paradigms and

offers a more integrated approachto corporate governance reforms in terms of the role of institutional

shareholdersin the promotion of good corporategovernance.

Keywords Corporate citizenship, Boards of directors, Stewardship, Investors, Corporate strategy

Paper type Research paper

1. Introduction: boards as stewards of society

1.1 Mutual dependency corporations and society

The adoption by the UN of the Sustainable Development Goals in September 2015 has

given a clear direction for the transformation towards a more sustainable society. However,

there is still much debate about the role of the public and private sector in living up to the

expectations of the UN Sustainable Development Goals. This paper focusses on the role of

the private sector. It explores how institutional investors, through their voting and

engagement behaviour, are expected to contribute to the enactment of stewardship by

corporate boards.

Danielle A.M. Melis is

Senior Fellow at Erasmus

School of Law, Rotterdam,

The Netherlands.

Andre

´Nijhof is Professor

Sustainable Business and

Stewardship at Nyenrode

Business Universiteit,

Breukelen, The

Netherlands.

Received 9 September 2017

Revised 25 January 2018

27 February 2018

Accepted 4 March 2018

The authors thank the

Nyenrode Corporate

Governance Institute of

Nyenrode Business Universiteit

for providing support that made

it possible to do the research

and publish this article.

Furthermore, the authors thank

the reviewers and editor of this

journal for their valuable com-

ments on an earlier version of

this article.

PAGE 728 jCORPORATE GOVERNANCE jVOL. 18 NO. 4 2018, pp. 728-747, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-09-2017-0210

As a starting point, this paper builds upon the assumed trade-off between corporate

financial returns and positive impacts on society (the Berle–Dodd debate in Berle and

Means, 1932;Friedman, 1970;Handy, 1991;Jensen, 2010). If corporate cultures are

oriented towards maximising profits, the impact on stakeholders will only be sustained as

long as there is a solid business case to do so (Nijhof and Jeurissen, 2010;Andersen,

2015). This culture is embedded in the business case for sustainability that asks, “can we

afford to invest in it?” Corporate cultures that embrace stewardship should turn this around

and, instead, start from a sustainability case for business, asking, “can we afford not to

invest in it?” This triggers a discussion about the connectedness between companies and

society and how crucial it is to manage these interfaces for the wellbeing of us all (Karns,

2011;Peylo, 2014).

Such a starting point requires organisations to go beyond simply doing something valuable

for society. It requires a profound understanding of how the actions of some trigger different

reactions of others and how the formal and informal rules of the business game determine

the outcome of corporate activities. This paper deepens the theoretical conceptualisation of

such relationships to deliver stewardship and explores the assumed, prescribed and actual

stewardship behaviour of institutional investors in their relationship with boards of the listed

companies they invest in.

1.2 Relevance of institutional investors

In a report of the Organisation for Economic Co-operation and Development (OECD) in

2012 about the role of Institutional Investors in Promoting Good Corporate Governance, the

OECD stated that “the effectiveness and credibility of the entire corporate governance

system and company oversight will [...] to a large extent depends on institutional investors

that can make informed use of their shareholder rights and effectively exercise their

ownership functions in companies in which they invest.” Existing data on investor types are

“superficial” (OECD, 2012, p. 25), and “the relative importance of different investor classes

in particular markets is [...] still limited so that many data sources need to be utilised”

(p. 26). As reported, the OECDInstitutional Investors Database shows that investment funds

represented the largest class of investors, although, compared with the holdings of

autonomous pension funds or insurance companies, they were by no means the dominant

investor class.

While market capitalisation of all stock exchanges combined increased in the range of

1.1-7.8 times between 1990 and 2009, trading value during the same period increased in

the range of 4.8-41.7 times (p. 30, 31). Although the attributed relevance of institutional

investors in the enactment of stewardship is high, Madden (2011) warned that these

“categories of investors, some of which, like large program traders, showed no interest in

management or operations as they traded on technical market data on a moment to

moment basis”.

In his 2018 annual letter to the chief executive officers (CEOs) of the world’s largest

companies, Blackrock’s CEO Larry Fink (2018), representing the world’s largest institutional

investor, called for a “new model of shareholder engagement”. He stated: “Just as the

responsibilities your company faces have grown, so too have the responsibilities of asset

managers. We must be active, engaged agents on behalf of the clients [...] who are the

true owners of your company.This responsibility goes beyond casting proxy votesat annual

meetings –it means investing the time and resources necessary to foster long-term value.”

He stressed that “companies have been too focused on quarterly results; similarly,

shareholder engagement has been too focused on annual meetings and proxy votes. If

engagement is to be meaningful and productive –if we collectively are going to focus on

benefitting shareholders instead of wasting time and money in proxy fights –then

engagement needs to be a year-roundconversation about improving long-term value.”

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