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.
Highlights
A passive investor is one who does not participate in the day-to-day decisions of running a company
The key research question of this paper is to explore the major implications for corporate governance from the emergence and perspective of passive investors
A major implication for corporate governance from passive investors is to focus upon their desire for a new investor relations approach
Summary
A passive investor is one who does not participate in the day-to-day decisions of running a company. 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 do not want the traditional investor relations approach in which CFOs and other corporate executives offer revenue and earnings guidance for the upcoming quarter. 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 such passive investors. The major sections of this paper are as follows: literature review, short-term focus of traditional financial accounting, long-term focus of emerging financial accounting on strategic assets, data as a strategic asset, 2021 crossover point for passive investing, the importance of corporate governance for a long-term sustainability focus, three key board committees for passive investors, emerging corporate governance focus, and conclusions
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