Does corporate governance matter? Or, to be more precise, do investors really care about it? This is a question that I have been pondering for two reasons. First, huge amounts of passive investment has made questions about corporate decision making irrelevant for many investors. When you are just tracking the index, you are not looking at what a company is really doing on the ground and whether its leaders are making the right calls. You are simply passing the buck to the market.
But there is another, less explored, way in which investors may be passing the buck. Institutional investors have come to own roughly two-thirds of all the outstanding shares in US corporations. That gives them tremendous power over executives and their decisions. Yet a large chunk of that power is outsourced to proxy advisers like Institutional Shareholder Services and Glass Lewis, which give investors advice on how to vote on everything from management to corporate pay packages. While it is understandable that large asset managers like BlackRock or Fidelity and myriad smaller institutions would want to offload this task, the result is that individual corporate decisions sometimes get short shrift.
Companies, trade and lobbying groups (the Conference Board and the Business Roundtable, for example), as well as some academics and corporate governance experts, have begun complaining that proxy advisers are incentivising the wrong behaviour — focusing not on the nuances of corporate governance, but rather creating rigid checklists that must be followed lest the proxy adviser vote no on issues like pay or board membership.