Institutional investors’ ownership and engagement “socially beneficial” – OECD study

A look at capital allocation and oversight of companies from a public policy perspective

The Organisation for Economic Cooperation and Development (OECD) has published a study, from a public policy perspective, of the socially beneficial role that institutional investors can play in capital allocation and overseeing companies.

It posits the idea that investors monitoring companies to keep tabs on the capital they have allocated has the wider benefit of bringing vital new information into the economy.

“The degree of ownership engagement is hardly a moral issue or a general fiduciary duty that must override other objectives, such as maximising returns to the institutions’ ultimate beneficiaries,” the study contends.

“Instead, what matters for society as a whole is the role that ownership engagement is expected to play for effective capital allocation and monitoring of corporate performance.”
It notes that the market economy relies on shareholders to price and allocate capital effectively and continues: “Since the shareholders are assumed to have a self- interest in the return on the capital that they provide, we trust that the shareholders also seek as much information as possible to identify those companies with the best future prospects.

“Since it is in their own interest, we also expect shareholders to continuously monitor corporate performance to see how well corporations actually use the capital they have been given.“If shareholders fulfil these functions, they carry out a socially beneficial role, since they bring new and unique information to the economy.” This new information improves the allocation of productive resources and makes better use of resources that are already employed. “It is therefore the very basis for genuine value creation and economic growth.”

“The very basis for genuine value creation and economic growth”

The 21-page analysis, in the twice-yearly OECD Journal: Financial Market Trends, is by Serdar Çelik and Mats Isaksson of the Corporate Affairs Division of the OECD’s Directorate for Financial and Enterprise Affairs (though it does not necessarily represent the view of the OECD).
Çelik and Isaksson aim to provide a framework for analysing the “character and degree” of ownership engagement by institutional investors. They argue that the term ‘institutional investor’ itself “doesn’t say very much about the quality or degree of ownership engagement”. Rather, it is an “evasive shorthand” for policy discussions about ownership engagement, given the widely different types and motivations of investors.
They find that the most active and engaged owners are typically under no regulatory obligations at all to vote or otherwise engage with the companies that they own.