Corporate stewardship: making the leap from theory to practice

THE chairman of a well-known property company was reminiscing, in private, on the boom years before 2008. He admitted that, to his great regret, he had failed to resist the pressure from institutional shareholders to increase the company's debt and pay out more to those shareholders. This decision left the company dangerously exposed when the cost of credit increased. He hadn't thought it was the right thing to do at the time. He just didn't know how to resist.

Short-termism is costly, to companies as well as economies. As Dominic Barton and Mark Wiseman pointed out recently in an April 1 article for the London Financial Times, the pressure to meet quarterly earnings targets has been estimated to have reduced research and development spending and cut US growth by 0.1 percentage point a year. In contrast, stewardship is about building enduring companies which are the cornerstone of a civilised economy. They sustain human existence through the needs they meet; they train and educate; they create working communities in which people can be their true selves; they pay salaries and dividends; they build infrastructure.

If companies are to live up to this potential, they need stewarding. That requires the joint effort of the management, board and owners. Together, they have the responsibility to keep the company on course. In our first article ("Boards and owners need to be stewards", BT, March 17), we defined stewardship as the management of assets with which we have been entrusted so that we hand them on in better condition. And we talked about the "golden thread of stewardship" connecting the management to the board, the board to the asset manager, the asset manager to the asset owner and all the way back to the individual saver. In this second article, we deal with the effective practical steps that make stewardship work.