How the Financial System Fails Us and How To Fix It

Where were the directors?” is the plea often heard in the wake of corporate failure. [1] Critics will also ask “Where were the shareholders?”, by which they typically mean institutional investors. [2] But observers usually ignore an equally important question: Where were the beneficiaries? Statutes, regulations and codes around the world have sequentially addressed the duties of corporate managers, the responsibilities and structure of boards of directors, and optimum stewardship behavior by institutional investors. But the governance ecosystem includes few parallel efforts to generate guidance, safeguards or incentives to animate retail savers as a force in corporate governance. This would seem perverse since, in the US alone, an estimated 92 million Americans entrust retirement and other capital to investing institutions, and would presumably have a powerful interest in ensuring that their nest eggs are deployed at portfolio companies in ways that promote value over the long term. However, structural barriers have impeded accountability of institutional investors to beneficiaries, making it difficult for retail savers to police the stewardship behavior of their agents in respect of investee companies. Such barriers have roots in law, regulation and commercial practice that have failed to keep pace with market change. But with hostility to Wall Street a recurring theme across political parties in the US presidential campaign, prudent remedial steps may be in sight.

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