stewardship theory challenges the prevailing orthodoxy in corporate governance. it makes the surprising claim that ceos should be subject to facilitative and empowering structures that unify command and allow them to exercise unchallenged authority over the corporation. the stewardship theory of ceo motivation concludes that power and authority should therefore be vested in one person, establishing a case that ceos should also chair the board. these arguments are often heard in defence of ceo duality, which remains common practice particularly amongst us corporations in spite of shareholder pressure for governance reform. stewardship theory’s optimistic view of human nature serves as a normative benchmark for the motivation and incentives of management to act in the long-term interests of the organisation. however, where ceo duality persists, insight believes other effective governance mechanisms must be in place to ensure that the ceo’s interests are indeed aligned with those of the company and shareholders.
insight’s analysis in June 2013 revealed that 115 out of 511 companies (23%) in our esg coverage universe at the time combined the ceo and chairman roles. most of these were us (61) or French (30) companies. indeed, 64% of the 96 us companies we covered combined the ceo and chairman role.
Table 1: CEO duality across regions
dual ceo-chair total proportion (%)
north america 61 107 57
united Kingdom 0 83 0
europe 41 223 18
australia and new Zealand 0 18 0
Japan and asia 1 18 6
emerging markets 12 62 19
Total 115 511 23
source: insight and gmi ratings.
3 see James davis, F. david schoorman and lex donaldson, Toward a Stewardship Theory of Management, in Academy of Management Review, volume 22, no.1 (1997). 4 see michael Jensen and william meckling, Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure, in Journal of Financial Economics, volume 3, no. 4 (1976). elsevier.
5 see michael Jensen and william meckling, ibid.
6 see peter block, Stewardship: Choosing Service Over Self-Interest (1993). berrett-Koehler publishers, san Francisco.
7 see lex donaldson and James davis, Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns, in Australian Journal of Management, volume 16, no. 1 (1991).
where there is ceo duality we also found that in almost all cases (109 out of 115), the ceo’s equity-related
compensation reflects share price performance over a five-year horizon, according to gmi ratings data. however, we did not find that ceo duality is statistically any more or less likely to be associated with performance incentives of this nature than those companies for which these roles are separated. we found that those occupying dual ceo-chairman roles were less likely to have long-term incentive awards linked to performance against a peer group of companies. but for the subset of us companies no statistically significant relationship could be found, and the proportion of those holding a combined ceo-chairman position that were subject to peer-based performance incentives was similar to those who did not hold a dual role.
our analysis did reveal that across the entire universe, of 511 companies at the time, the boards of those companies which combined the ceo and chairman role were statistically more likely to have appointed an independent lead director, according to data supplied by gmi ratings. For the us companies, three-quarters of those with a ceo-chairman had an independent lead director, although this was not found to be statistically significant.
Table 2: CEO duality and lead directors
dual ceo-chairman (%)
Independent lead director No Yes
Yes 48 58
no 52 42
Total 100 100
source: insight and gmi ratings.
during 2013, insight engaged with two financial institutions specifically on board-related governance issues. on 19 april 2013, and following an earlier meeting with bnp paribas’ chief Financial officer at insight’s offices, we raised a number of issues with management relating to board structure and effectiveness, including the independence and tenure of a number of directors, concerns about over-boarding, and the inter-locking nature of many of its member’s directorships. previously, in early march, we raised a number of concerns about the governance practices of goldman sachs in a conference call arranged with the company’s vice president of corporate governance. this followed an earlier esg risk review in which we identified a number of specific issues. principal among these was the combined role of goldman’s chairman and ceo, lloyd blankfein. the common differences between us and uK regulatory and legal contexts in relation to board roles and composition were raised. in particular, we discussed the responsibilities of goldman’s lead independent director, his previous relationship with the company while at the company’s auditor, pwc, as well as the arguments made on the previous year’s proxy statements in favour of “one voice”, clear accountability, and strong communication between the board and management. insight also highlighted the length of service of some board members, the independence of other members, and possible future changes to board composition were discussed. subsequently, and under pressure from activist equity investors, goldman sachs moved to strengthen the role of its lead director, enabling him to write directly to shareholders, set the board agenda, and arrange more board meetings for outside directors.
The enlightenment of fiduciary duty
the concept of stewardship is part of a long and vibrant debate about the scope and meaning of fiduciary duty. stewardship draws heavily on social, political and normative ethical ideas, while the notion of fiduciary duty is grounded in law, such as contract and trust law, and the positive agency view of economic relations. they therefore have different assumptions about human relationships and behaviour. stewardship may be viewed as an attempt to make the fiduciary obligation and the interests of society more compatible by “reconciling private financial aims with civic values that serve the public good”.8
as fiduciaries, fund managers, advisers and other decision-makers bear specific obligations to their respective beneficiaries. these obligations include a duty to act with loyalty for the benefit of their beneficiaries and to act both reasonably and prudently on their behalf.9 indeed, the agent must act in the best interests of the principal. the definition of these best
interests is at the heart of the debate.
with regard to the principal’s best interests, the legal position of the fiduciary is arguably unclear.10 a narrow interpretation
of fiduciary duty as an overriding duty to maximise returns can discourage fiduciaries from considering underlying fundamentals and the systemic factors that can influence long-term outcomes for beneficiaries, resulting in short-termism and the neglect of factors which are not immediately monetisable.
such concerns have led to the proposal of an “enlightened fiduciary” approach, which encourages fiduciaries to consider a wide range of factors that could affect the beneficiary’s long-term interests. For example, the implications for investment returns of social and environmental factors, and the impact that investment activity may have on communities and the environment. although such an approach would not place purely non-financial considerations ahead of the need to secure financial returns, under this approach, a fiduciary can also be cast in the role of steward when the best interests of the beneficiary coincide with these broader interests. in this vein, the un-supported principles for responsible investment (pri) uphold the fiduciary duty of institutional investors to “act in the best long-term interests of our beneficiaries”, and recognise that environmental, social, and governance (esg) issues can affect the performance of investment portfolios. the un- supported pri also enshrine the idea that by applying the six principles investors may “better align” their investment goals with the broader of objectives of society.11
For many advocates of corporate responsibility and sustainability, the enlightened fiduciary model ensures that financial considerations take precedence over all others whenever they conflict. others contend that prioritising long-term self- interest could be disingenuous as it leads one to claim an interest in the needs and interests of others only because they are instrumental to one’s own.12
Beyond the enlightened fiduciary
many contend that a narrow view of fiduciary duty ensures that financial considerations and shareholder interests trump all others, and argue for a more balanced approach. management should, they maintain, carefully balance the competing interests of a range of stakeholders.
however, others respond that this approach could undermine the duty of loyalty and establish accountability that is diffuse and ineffective. in turn, they argue that company managers should not serve the interests of multiple masters but, rather, the interests of the organisation alone.13
we therefore find an emerging consensus that stewardship implies a wider social dimension to decision-making. Financial considerations remain of vital importance to the long-term sustainability of a business, but corporate financial objectives are deemed an intermediate goal towards the wider social good.
From this perspective, the ultimate aim of a business is to profitably contribute to the long-term value or total wealth of society at large.14 the range of social goods in which the public has a legitimate interest includes the goods and services a
business provides to meet the needs of society, as well as others which may be less tangible. these include values, norms or expectations towards, for example, the provision of meaningful work, resilient communities and other components of social capital, or the preservation of a healthy natural environment.
9 see benjamin richardson, From Fiduciary Duties to Fiduciary Relationships for Socially Responsible Investment (2010). presented at the principles of responsible investment academic conference in copenhagen, may 2010. also see benjamin richardson, Fiduciary Law and Responsible Investing: in Nature’s trust (2013). routledge, oxon.
10 For example, see statements from Fair pensions, now shareaction, including Protecting our best interests: rediscovering fiduciary duty (2011), and The Enlightened
Shareholder: clarifying investors’ fiduciary duties (2012).
11 see the six principles on the principles of responsible investment web site, at http://www.unpri.org/about-pri/the-six-principles/
12 see william ransome and charles sampford, Ethics and Socially Responsible Investment: A Philosophical Approach (2010). ashgate publishing, aldershot. 13 see david owen, Corporate Social Reporting and Stakeholder Accountability: The Missing Link (2005). research paper 32 for the international centre for corporate social responsibility.
14 some commentators call for a more expansive concept of long-term value or wealth creation. For example, see steven lydenberg, Corporations and the Public
Interest: Guiding the Invisible Hand (2005). berrett-Koehler publishers, san Francisco. also margaret blair, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century (1995). brookings institution press, washington dc.
the development of a framework for integrating financial values with other values, including externalities, is proposed by the international integrated reporting council (iirc) in its draft reporting framework.
Toward stewardship investment
there are several variations of the basic principal-agent relationship, especially when one strives to incorporate the additional concerns of stewardship, which can highlight ambiguities in the role of the fiduciary (see table 3).
the ambiguities surrounding fiduciary law may be resolved in a way that allows financial fiduciaries to safely assume wider responsibilities.15 but even if investment decisions must always rest on strict financial materiality alone, the activities of
so-called “responsible investors” may still serve the public good as they monitor their investments and hold investee company management accountable, not only for the financial value they create but also for the wider impacts their businesses have on society at large. this could be thought of as an implicit social contract with the investment community: to act as stewards on behalf of a wider public whose interests (as a principal) are inserted into the investment chain of delegated responsibilities.
Table 3: Features and problems of principal-agent relationships
Relationship Perspective Predicted behaviour Features and problems
principal - agent agency theory self-interest, opportunism
moral hazard, adverse selection; transaction costs; agency loss. Focus on contract design, monitoring, bonding to optimise agency costs
principal - Fiduciary Fiduciary law loyalty and prudence law as a governance mechanism. enforce alignment with sole/ best interest of beneficiary
principal - steward stewardship theory alignment/
empowerment governance for empowerment/partnership/participation, rather than control. risk of instability due to misaligned behavioural expectations
steward - steward ethical stewardship service/common
interest mutuality; shared communal values/societal purpose; co-operation; balance of power
refining the principal-agent relationship found in standard economics into a relationship between two stewards requires that the interests of both parties are aligned with a shared or common purpose. For a responsible investor, this may mean trustees or other fiduciaries carefully agreeing investment aims with their beneficiaries, including the purpose and objectives of the fund.16 this may specify the stewardship responsibilities (including powers and discretion) delegated to the fiduciary
and other investment actors who have fiduciary-like obligations. in addition to the narrow fiduciary obligation to deliver an agreed risk-adjusted financial return, a defined level of environmental, social and governance (esg) performance or risk may form part of the overall investment aims.
the greater challenge remains to monitor investment performance against these goals. this may involve the measurement of social or environmental impacts of the companies as part of the investment decision-making process. it may also include engaging with management as an active investor, exercising voting rights, and performing a constructive governance role as described by the principles of the Frc’s stewardship code.
The new tools of stewardship
on the practical side, stewardship principles are increasingly finding their expression in new tools of governance and decision-making. according to the draft framework published by the iirc in 2013 (known as <ir>), integrated corporate reporting enhances transparency and accountability. it suggests that whether the various capital assets employed by a business are owned by it or not, stewardship responsibilities may be imposed on it by law or regulation. where it does not do so, organisations may nevertheless accept stewardship responsibilities in response to growing stakeholder demands.
15 a Kay review recommendation led to a law commission review of fiduciary duties, and a consultation began in october 2013. 16 in the case of uK pensions, these may be defined in the trust deed and the statement of investment principles.
this integrated approach to corporate reporting therefore emphasises the importance of ongoing positive relationships with stakeholders as a source of value. according to <ir>, value can be created by “serving the interests of, and working with, all its key stakeholders”. the insights of stakeholders help the organisation to understand how they “perceive value”, develop strategy and respond to “material” matters. its responsiveness to the legitimate needs, interests and expectations of stakeholders is consistent with the “value creation story” developed in <ir> and the following three drivers:17
Financial drivers: such as pricing, sales growth and market share; operational efficiency; brand equity; and the cost of financial capital.
Relational drivers: customer relations; responses to societal expectations and environmental concerns; innovation and corporate governance.
Organisational values: such as integrity, trust and teamwork.
according to <ir>, total value creation includes various forms of value created as a result of the transformation of the different types of capital employed by a business, each of which affects financial returns. it suggests that the maximisation of financial capital at the expense of, say, human capital is unlikely to maximise value in the longer term.
the iirc’s proposed integrated reporting framework would help investors to exercise their stewardship responsibilities in monitoring performance and measuring value creation. it may also help investors and other stakeholders understand the extent to which companies themselves are assuming these responsibilities.
among the guiding principles of the <ir> framework are those of stakeholder responsiveness and materiality. both of these are shared by other standards, including the AA1000AP (2008) accountability standard and the Global Reporting Initiative (gri). they emphasise the importance of reporting and disclosure on matters that may affect their user’s assessment of the value created by the business and influence their decisions. but they also acknowledge the two-way nature of genuine dialogue: both the <ir> and gri g4 guidelines encourage organisations to disclose how they have listened to and responded to the needs, interests, and expectations of their stakeholders (see table 4).
Table 4: Stakeholder accountability in new reporting standards
Global Reporting Initiative (G4) <IR> Framework
Stakeholder claims reasonable expectations and interests legitimate needs, interests and expectations inclusiveness identify stakeholders Quality of stakeholder relationships
specific disclosures how it has responded how it understands, takes into account and responds list stakeholder groups engaged
Materiality definition significant economic, environmental and social (ees) impacts, or
influence on stakeholder assessments and decisions influence on primary intended users' assessments of value creation
rationale/guidance take account of sustainability interests, topics and
indicators raised by stakeholders stakeholders provide insights into matters of importance to them and assist in the identification of material matters stakeholder perspectives are critical to materiality assessment, as their actions can affect value creation over time
specific disclosures material aspects and boundaries material matters and determination process
Disclosure on stakeholder influence
processes for consultation on ees topics Key features and findings of consultations used in strategy and resource allocation plans
stakeholder representation on governance bodies whether stakeholders consultation is used by governing body to identify and manage ees impacts, risks and opportunities
how strategy and resource plans are influenced/respond to external environment
the formation of stewardship relationships is therefore being encouraged by new standards from both the investor and investee ends of the savings chain. they both create and facilitate the processes of governance and accountability through which interests and values may be discovered and aligned in relationships marked by trust and respect, in the common pursuit of societal value.
Stewardship as an investment strategy
how might responsible investors employ these new tools as part of a stewardship approach to investment? at the least it means being an active owner in the sense implied by the Frc stewardship code and the principles described therein. it also means adopting the wider principles enshrined by the pri concerning the integration of esg considerations into investment decision-making.
however, as discussed above, stewardship may be viewed as a step further on from the enlightened fiduciary model defended by both of these industry codes. under this view, stewardship defines “materiality” from the perspective of society as a whole, rather than from the narrower standpoint of financial returns alone. the significance of externalities in
investment decisions therefore lies not in their actual or potential impact on investment returns, but rather on their impact