Investor Capitalism Prevailed; Now What for Long-Termism? Institutional investors need to continue pushing for board leadership.

• Author: Useem, Michael
• Position: THE CHARACTER OF THE CORPORATION: Long-Term Thinking

It has been a quiet revolution.

In the old days, circa 1950, small holders, our parents and their parents, owned most of America's largest publicly traded companies. Now, some 70 years later, they have been replaced by the great institutional holders, Blackrock, Fidelity, State Street and Vanguard among the most prominent.

With trillions of dollars under management and index funds at the core, they now dominate the ownership of virtually all listed companies. One apples-to-oranges but still instructive comparison: the $5 trillion-plus at each of the largest holders exceeds the GDP of almost all countries, including Germany, India and Russia.

Fortunately, that concentration of economic power has come with governance responsibility. Through ratings, proxies and good sense, institutional investors have compelled directors to junk their poison pills, compensate executives with options over cash, institute "lead directors" and sovereign committees, and make boards more workable, less ceremonial.

The age of investor capitalism--professional owners calling the shots instead of senior managers keeping control--has triumphed. We're not gloating over the American way, but a victory dance might be in order.

Yet, if institutional investors stop there, they will have gone only half the distance, provoking a revolution without ensuring that their efforts have led to better managed companies for the long-term, not just short-term returns.

Thankfully, many institutional owners in recent years have allied with company directors to finish the job, empowering the latter with a roadmap for co-leading the enterprise.

And as boards become more engaged and exercise greater leadership, directors can and often do bring more long-term thinking into the enterprise.

A detailed study of scientific innovation in large pharmaceutical companies, for instance, found that empowered directors with scientific expertise actively advised company researchers on their long-term discovery agendas, and also that these directors then brought the firm's innovation challenges into the boardroom for deliberation and guidance (tinyurl.com/empowereddirectors).

Engaged directors, in other words, are proactively shaping their company's innovation strategy in addition to monitoring it.

And since the major institutions, especially those with indexed funds, have become large and enduring holders in virtually all publicly-traded companies, they have added their voices for long-term thinking...