• Written by Warren Staples, Senior Lecturer in Management, RMIT University

In the wake of systemic corporate misconduct scandals such as those brought to light in the banking royal commission, and issues such as income inequality and climate change, there are growing public demands for increased corporate accountability and less emphasis on shareholder returns.

Corporate governance reform has become a hot button political issue and big business is feeling nervous.

“Social licence to operate” and “trust” are now popular buzzwords in board land.

While company annual general meetings (AGMs) have long been the forum for individual vocal and activist shareholders to embarrass boards, large shareholders are increasingly being criticised for not pressuring company boards enough to be more socially environmentally responsible.

But relying on shareholders to make corporations more accountable and socially responsible is misguided. There are far more direct and systemically effective measures available to do that.

What are institutional investors?

Large shareholders can be wealthy individuals and other corporations, but so-called institutional investors are now by far the most dominant shareholders in terms of total funds under management, and in most cases, voting power at corporate AGMs.

Institutional investors are a mix of commercial, state and not-for-profit entities such as investment banks, unit trusts, insurance companies, pension funds, hedge funds, sovereign wealth funds, and charitable organisations that invest on behalf of, or for the benefit of others.

Because they’re intermediaries it’s argued institutional investors are morally responsible where they invest and how they vote at corporate AGMs. Because they invest widely, a whole advisory industry has grown to guide institutional investors. Stock exchange corporate governance codes encourage boards and senior executives to “engage” and have a “meaningful dialogue” with institutional investors because of their perceived expertise and knowledge.

In this context institutional investors are seen as pivotal actors to influence corporate boards. Shareholder activism by institutional investors is seen as the way to improve corporate accountability.

That’s why institutional investors are being pressured by high profile shareholder activists, others in the wider community and politicians to be more active and exercise their voice to pressure boards on an increasingly diverse range of issues. This includes things like executive pay, carbon intensive investments and social issues.

Some institutional investors, such as the Rockefeller Foundation, do have a growing record of advocacy on important issues such as climate change. This activism, while laudable, is not a systemically effective solution.

Shareholder activism won’t work

Aside from the fact most shareholder resolutions are non-binding, the interests of institutional investors are not always the same. As well-intentioned US and Canadian pension funds discovered in their campaign to stop Google using tax havens, fellow institutional investors sided with Google’s founders to vote down their shareholder proposal.

Institutional investors are large, sometimes foreign entities, often with their own shareholders. It’s not always clear whose interests an institutional investor is representing when it meets with CEOs and boards.

Most shareholders, including institutional investors, remain largely uninterested unless they are being hurt financially. This is exemplified in the pattern of voting at Australian bank AGMs.

In the decade preceding the Banking Royal Commission, few institutional investors questioned why Australian banks were consistently among the most profitable in the world. Shareholders have only cared about runaway CEO salaries when things aren’t going their way.

And unfortunately, giving shareholders more voice will create perverse problems.

First, the mechanisms allowing well-intentioned institutional investors more influence over boards will also allow other large investors greater say. For example Gina Rinehart’s controversial foray into newspaper publishing may well have succeeded in a more shareholder activist-friendly environment.

Second, allowing greater shareholder voice will undermine the responsibilities and duties public companies and their directors already have. For example, the public interest duties of directors include ensuring corporations do not trade while insolvent.

What has to happen instead

Institutional shareholder activism is not likely to systemically improve governance and accountability because they’re primarily concerned with returns. And there’s no evidence they will consistently work together in ways that promote the wider community interest.

Instead what we really need is real corporate governance reform, better leadership from government, and regulatory oversight.

We already know from GFC research that well designed corporate governance including two-tiered boards and worker/union representation on boards improves accountability. Stricter lobbying prohibitions can prevent corporations undermining attempts to tackle issues like climate change.


Read more: Solving deep problems with corporate governance requires more than rearranging deck chairs


The Australian Prudential Regulation Authority is already re-emphaising directors’ duties in mitigating climate change risk. These duties should be strengthened rather than being undermined by unaccountable and un-elected institutional investors trying to exert greater influence which may or may not coincide with the public interest.

Greater oversight by key public agencies to improve corporate accountability is also important.

Finally, better regulation designed to directly address issues such as climate change, wage theft and inequality and more intense enforcement of those regulations will be much more effective than the theatre created by encouraging shareholder activism.

Warren Staples has received funding from Australia China Council, Department of Foreign Affairs and Trade (DFAT), and the Victorian Managed Insurance Authority (VMIA). Warren is currently a member of the Institute of Public Administration Australia (IPAA) Victoria’s Sustainability Community of Practice (CoP) Advisory Committee.

Andrew Linden received funding from RMITs EU Centre to conduct his doctoral research. The Centre is funded by the European Union

Authors: Warren Staples, Senior Lecturer in Management, RMIT University

Read more http://theconversation.com/shareholder-activism-might-sound-good-but-its-delusional-to-think-it-will-change-anything-much-125807

Global report gives Australia an A for coronavirus response but a D on climate

The global Sustainable Development Report 2020, released this week in New York, ranks Australia third among OECD countries for the effectiveness of its response to the COVID-19 pandemic, beaten by onl...

John Thwaites, Chair, Monash Sustainable Development Institute & ClimateWorks Australia, Monash University - avatar John Thwaites, Chair, Monash Sustainable Development Institute & ClimateWorks Australia, Monash University

Nine Melbourne tower blocks put into 'hard lockdown' – what does it mean, and will it work?

The Victorian government’s decision to “close and contain” nine public housing towers in Flemington and North Melbourne represents a significant escalation in the fight against COVID...

Philip Russo, Associate Professor, Director Cabrini Monash University Department of Nursing Research, Monash University - avatar Philip Russo, Associate Professor, Director Cabrini Monash University Department of Nursing Research, Monash University

Tips to get Australian Rubber Stamps

If you are from Australia and need self-inking stamps for your home or business, there are many reputable and reliable stamp manufacturers to choose from. The easiest way to reduce product and sup...

Patoluna - avatar Patoluna

Best 4x4 wheels

The best for 4x4 wheels are a matter of debate for collectors. People see real potential in the Ozzy Tyres that they are buying. That brand can stand up to the test in almost any kind of setting t...

Diogenes Cnc - avatar Diogenes Cnc

How can you use competitor keyword research to enhance your SEO strategy?

What are Keywords? Typed in queries in a search engine often gives us insight into what people are looking for and how they are targeting their queries using a set few words to maintain relevancy.  ...

News Company - avatar News Company

The US has bought most of the world's remdesivir. Here's what it means for the rest of us

Dimitri Karastelev/Unsplash, CC BYTo beat the coronavirus pandemic, countries need to collaborate. We need the best possible science to develop vaccines and drugs, and to test, track and contain the v...

Barbara Mintzes, Senior Lecturer, Faculty of Pharmacy, University of Sydney - avatar Barbara Mintzes, Senior Lecturer, Faculty of Pharmacy, University of Sydney

Why some people don't want to take a COVID-19 test

Last week, outgoing chief medical officer Brendan Murphy announced all returned travellers would be tested for COVID-19 before and after quarantine.Some were surprised testing was not already required...

Jane Williams, Researcher at the Centre for Values, Ethics and the Law in Medicine (VELiM), University of Sydney - avatar Jane Williams, Researcher at the Centre for Values, Ethics and the Law in Medicine (VELiM), University of Sydney

How To Make The Most Of Your Morning When You Have Small Children

It’s unclear how they got themselves organised when, for all we know, they can barely even tie their own shoes or drink from a glass without spilling it but, all the children in the world have man...

News Company - avatar News Company

Beginner’s Guide to Changing an Apple Watch Band

An Apple watch says a lot not only about the taste of the wearer but also his style. It shows you are on the head of the most recent things in innovation, and it flaunts your design sense. Custo...

Daisy Bell - avatar Daisy Bell



News Company Media Core

Content & Technology Connecting Global Audiences

More Information - Less Opinion