What is System Stewardship?

System stewardship is investor activity intended to prevent individual companies from engaging in business practices that threaten the critical social and environmental systems upon which diversified portfolios rely. 

This section below explains why modern investors should practice system stewardship.

Modern investing requires diversification.

Optimizing the financial risk and return of a portfolio requires broad diversification. This allows savers to earn the high returns available from risky assets (such as common stock), while diversifying away the idiosyncratic risk that would accompany concentration in one company or sector.

Diversified investors must prioritize overall market returns and broad economic performance.

This diversification means the most important factor determining investment returns over the long term will be the return of the market itself, rather than whether any particular company in a portfolio does better or worse than the market: overall market performance explains 75-94% of portfolio returns. In turn, the economy’s performance chiefly determines broad market performance.

Diversified investors considering sustainability questions should prioritize the macroeconomic effects of company actions.

Diversified investors considering sustainability questions should prioritize the macroeconomic effects of company actions. Investors should ask, “How will the company action in question affect my overall return from the market?” because overall returns are what allow investors to meet their financial goals and liabilities. Often, the answer to this question is the same as the company action that will optimize its returns. For example, the answer to the question of whether to support a bylaw creating greater shareholder rights may be “yes” because those rights will create greater accountability, so that the company is more likely to protect shareholders’ financial interests, improving both company returns and total market returns.

For some sustainability questions, however, individual companies’ interests are not aligned with their diversified shareholders’ interests in optimizing macroeconomic returns.

It is not always the case a company action promoting its own returns is also best for portfolio returns. Strategies that maximize cash flow for a company but that also externalize costs onto social or environmental systems may threaten the systems that support the economy upon which diversified portfolios depend. This cost externalization of can undermine the value of the macroeconomy.

For example, an investor might be concerned that an investee company is emitting GHG at a rate that’s inconsistent with a global temperature increase that preserves value across the economy; that investor might choose to vote against directors of the company if it didn’t change its behavior, even if company managers believed the emissions reduction would reduce the company’s financial returns. For in-depth discussion as to how this perspective affects shareholder action regarding climate change, antimicrobial resistance, and wages, see the case study section of our website.

Shareholders can and should vote in their own interests (or those of their beneficiaries), even when those interests conflict with isolated company interests.

Neither law nor commercial reality constrain shareholder stewardship or advocacy designed to preserve or enhance a portfolio’s long-term value: if a portfolio company creates social or environmental costs that threaten their overall portfolio returns, investors can (and should) use their stewardship tools to oppose such behavior, even if doing so could reduce enterprise value at an individual company. (A memo explaining this concept is available here.)

System stewardship is best implemented through shareholder adoption of guardrails.

• Voting against directors at public companies that don’t follow guardrails;
• Voting for resolutions asking companies to adhere to guardrails;
• Voting against going-private transactions that don’t include guarantees to adhere to guardrails; and
• Ensuring companies entering the market through IPOs are committed to guardrails.

Investors can also use their influence as limited partners to ensure private equity, venture capital, and hedge fund sponsors bring portfolio companies within guardrails. Even companies not subject to such governance tactics can be affected through their participation in supply chains.

System stewardship leverages investors’ unique powers.

Some investors who recognize the threat extractive corporate practices pose to their diversified portfolios believe policy advocacy is the best method to address corporate excess. While such advocacy can be useful and important, it doesn’t leverage the unique power shareholders have as rightsholders in companies, which can be particularly important during periods where policy solutions are unlikely.

Update your Proxy Voting Guidelines & Investments Beliefs.

Adoption of proxy voting guidelines along the lines set forth in this model will give staff and advisors the direction they need to act on systemic issues and ensure trustees have accounted for the full effect of their stewardship choices. See model language here.

Subscribe to Portfolios on the Ballot, our annual proxy voting guide for system stewards.

This free publication flags votes where proponents are arguing that a company needs to take measures to ensure it’s not following business practices that compromise critical systems that all underpin diversified portfolios. During proxy season, subscribers receive a weekly alert as to important upcoming votes. Subscribe here.

Integrate System Stewardship/Portfolio Value considerations into proxy actions for the coming season.

By integrating portfolio-level considerations into proxy actions, we can shift the nature of our engagements, focusing on what’s best for beneficiaries and moving away from a singular focus on what’s good for one company. See examples of such arguments here. Initiatives that include such arguments may be eligible for inclusion in Portfolios on the Ballot.

Work with asset managers to ensure shares are voted on a system stewardship basis.

Asset owners with diversified portfolios should make sure each manager mandate aligns the manager’s actions with the owner’s interests in stewarding systems. Explore model provisions that can be integrated into an asset management mandate.

Drive Demand for a System Stewardship Proxy Advisory Service.

Our proxy system contains a yawning gap, in that none of the off-the-shelf proxy advisory platforms is specifically designed to provide advice that optimizes the returns of diversified investors. TSC has design a model RFP requesting such services, and you can help scale adoption of system stewardship by using it to encourage the creation of proxy voting advice that takes portfolio value into consideration.

Deploy Guardrails to Mitigate Systemic Risks

Guardrails allow investors to establish limits on corporate behaviors that excessively externalize social and environmental costs. TSC spearheaded two demonstration guardrails in 2024 and 2025, and is currently supporting investors in their own use of the tool. Learn more.