Stephen L. Weiss is Chief Investment Officer and Managing Partner at Short Hills Capital Partners LLC. This post is based on his SHCP memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here) and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).
The interests of shareholders are too often subjugated to those of interested parties. This circumstance has resulted in the transference of significant value from the rightful owners, the shareholders, to those unentitled. Institutional fund managers have undertaken commendable initiatives toward improving compliance with environmental, social and governance (“ESG”) principles at their investee companies but structural constraints have limited their actual impact on governance. The diversity of portfolios, coupled with broad ESG initiatives, may dilute these efforts since it is impractical and costly to directly engage with individual company managements on a broad and timely basis to proactively ensure that shareholder interests are being considered on critical events. Most often, by the time shareholders are informed of the corporate action, the damage has been done, leading to inefficient remedial measures such as litigation, an avenue that institutional managers rarely take. Preventative measures, on the other hand, would act as a significant deterrent as well as a solid defense to deleterious behavior ensuring that shareholders are not disadvantaged. Thus, while the impact on portfolios from driving awareness of environmental and social issues is real but somewhat difficult to define, the destruction of shareholder value from poor corporate governance is substantial, tangible and preventable.
