The Promise and Peril of the Institutional Investor.

• Author: Elson, Charles
• Position: EDITOR'S NOTE

The rise in prominence and influence of the institutional investor over the last 30 years has been the source of great good for the American corporate scene. The modern corporate governance movement was initiated and propelled to spectacular success by the efforts of the institutional investor class. However, to the surprise of many, the power of the largest investors lately has been used in ways never contemplated a few years ago and may have a particularly negative impact of the future of our entire corporate system.

The institutions, as the agents of the investor, have become more politically oriented principals rather than the neutral, responsible stewards of other people s assets. For boards and the investing public, this is a dangerous turn of events.

All the way back to the 1920s, in most of our largest corporations, few if any investors had a large enough position to exert much influence on corporate direction. This explains the origins of the management-appointed and -dominated board once so prevalent in corporate America. Managerial accountability was diminished, and this led to, among other things, disappointing results.

But when shareholdings reaggregated in the 1970s and '80s in the form of large institutional holdings, these new investors, as the stewards of the capital of millions, began to press for significant changes in corporate board structure to ensure greater shareholder accountability and better corporate results.

The notion of the independent equity-holding director with significant corporate expertise was in part developed and transformed into a reality by large institutional investors. This resulted in a profound shift in the composition and function of the modern board. The active, management-monitoring board became the norm and helped bolster corporate success. The investing American public owes a great debt of gratitude to these modern-day economic pioneers.

In recent years, with the rise of the social justice movement, the investing approach of a number of these large investors, particularly BlackRock, began to shift significantly. Traditionally, the polestar of investment strategy has been the creation of long-term shareholder value. Much effort was exerted to ensure that companies had appropriate accountability and took the form of demanding enhanced governance procedures at the board and managerial level. While nothing has changed outwardly in their ultimate goal, how institutional investors believe these...