In its recent green paper, the European Commission expressed concern about the effects of conflicts of interest on institutional investors’ willingness and ability to engage investee companies actively on corporate governance matters. Given the pervasiveness of asset manager conflicts and their adverse impact on shareholder engagement and voting behaviour, the remedies pursued must venture beyond the EC’s proposal of requiring ‘independence of the asset manager’s governing body’.

Three Layers of Conflicts

Conflicts of interest at investment firms arise at three levels – institution, individual, and group – all of which pose risks to effective stewardship by institutional investors.

Institutional conflicts

Institutionally, the core conflict of interest pertains to asset managers’ unwillingness to actively engage and hold the boards and management of investee companies accountable because they fear losing corporate business. In reality, the risk of commercial harm varies by market. In the UK, for example, companies do not usually retaliate by withholding business when investment managers vote against management’s proposals. Nonetheless, the occasional veiled threat – such as when the company secretary of a UK manufacturer reminded a fund manager who was intending to vote against the company’s remuneration report that his firm was bidding for an investment mandate from the corporation’s pension plan – may be enough to make investment houses hesitate about embracing stewardship.

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