Passive investors: Implications for corporate governance

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Abstract

The key research question of this paper is to explore the major implications for corporate governance from the emergence and perspective of passive investors. Passive investors care more about long-term governance practices than short-term financial metrics. They do not trade shares when accounting balances or stock prices fluctuate since they have a long-term perspective. They desire a new investor relations approach, based upon independent directors discussing key corporate governance topics of board refreshment, sustainability, and compensation with the stewardship officers of passive investors. Thus, financial accounting is moving back to a stewardship purpose of accounting versus an investment valuation model. The corporate governance literature relating to investors has only focused on active, not passive, investors. The emergence and perspective of passive investors are relevant for updating the theory and practice of corporate governance as follows. Passive investors have a long-term sustainability perspective, not a short-term focus to make financial analysts’ quarterly predictions. Passive investors focus upon three board of directors’ committees: nominating, audit, and compensation, with emphasis on a stewardship officer, a lead director, board refreshment, an indefinite investment horizon, and sustainability risks.

Keywords: Passive Investors, Corporate Governance, Strategic Assets

Authors’ individual contribution: Conceptualization – T.K.; Methodology – H.G. and T.K.; Resources – M.C.; Writing – Original Draft – H.G.; Writing – Review & Editing – M.C. and T.K.; Visualization – H.G.; Funding Acquisition – M.C.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G3, G30

Received: 12.12.2019
Accepted: 18.06.2020
Published online: 01.07.2020

How to cite this paper: Grove, H., Clouse, M., & King, T. (2020). Passive investors: Implications for corporate governance. Corporate Governance and Organizational Behavior Review, 4(2), 8-17. https://doi.org/10.22495/cgobrv4i2p1