How Institutional Investors Should Step Up as Owners

While bankers and brokers remain everyone's favorite culprits for causing the great financial crisis two years ago, a less likely suspect - the institutional investor community - is increasingly coming under scrutiny for passive corporate governance and a focus on short-term returns that enabled the great financial crisis.This article argues that by rethinking their approaches to portfolio diversification, engagement with boards, and compensation, institutional investors could usher in a new ownership culture that would not only benefit their customers but also placate regulators, which are poised to intervene if voluntary progress is slow. Recommended steps include revamping performance metrics, reducing reliance on intermediaries, strengthening in-house expertise, rationalizing portfolio holdings, and refining the passive investing model.Note: This article is drawn from a fuller piece entitled "Why Stewardship is Proving Elusive for Institutional Investors," which appeared in the July/August 2010 issue of the Butterworths Journal of International Banking and Financial Law (available at http://ssrn.com/abstract=1635662)