Thursday, 3 July 2008

Shareholders and the public, again

The RSA is carrying out an interesting little project called Tomorrow's Investors about shareownership, based on the familiar (if you read this blog anyway!) idea that ownership is becoming more democratised. Here's what they say:

Today, roughly two-thirds of the UK population own shares. But only a small minority engage with their investments. Tomorrow?s Investor is the first project to look at the corporate system from the perspective of ordinary citizens. Are we getting what we want from our investments? Is there a gap between the decisions that are taken on our behalf and the decisions that we would take if we were really engaged in this process? Do we want to or have the tools to get involved?

The RSA is conducting deliberative research to look at these questions. This will be the first stage of a project with the potential to deliver sweeping change in the culture of investment.

What is the problem?

Most people in the UK own shares. We own them not only in our own names, but also through our investments in pension companies and investment funds, a capital stake amounting to more than £500 billion in UK markets alone.

This democratisation of share ownership has changed the way public companies are owned. As recently as the 1970s, corporations were controlled by handfuls of wealthy individuals. Now, taken together, ordinary investors own large stakes in many of the biggest companies in the world.

Yet despite high profile scandals, increased criticism of the behaviour of some hedge funds, and widespread public dissatisfaction with boardroom pay raises, we largely remain passive and uninformed owners. As a result, people often find themselves with shareholdings that conflict with their interests. And the corporate system has a vacuum of power at its very centre.

Our response

By law and by tradition, companies are accountable to their owners. Yet it is not often acknowledged that true accountability is a two-way process. It involves not only being held to account, but also giving an account.

This kind of accountability only emerges out of a dialogue - one that is fair and honest on all sides. Tomorrow's Investor wants to kick-start this conversation.

And if you open this PDF it details some basic research the RSA has done into what indirect investors think about shareholder engagement. Here are the headline findings:

Over 70 per cent of respondents owned shares by some indirect means, mostly through private pensions or managed investment funds.

33 per cent of respondents did not know where any of their indirect shareholdings were invested. Most people had never had any contact with their fund manager, or with the trustees of their pension fund.

66 per cent of respondents felt that they did not want to be more involved in the financial management of their indirect shareholdings.
49 per cent felt they did not want to be more involved in ethical management.

However, the vast majority of respondents felt that public companies would benefit from greater investor involvement. 59 per cent felt that ethical management needed investor input; 47 per cent felt that this was the case with financial affairs.


The Great Simpleton said...

"10. Do you feel public companies would benefit from greater investor involvement in their ethical affairs?"

I notice they didn't ask the 127 respondents if they would accept lower returns, and hence a reduced standard of living in their retirement.

yes I know that the 2 don't necessarily correlate but it does get across the message that if they interfere in the management of their investments this may be the outcome.

Tom P said...

It's a bit of a simplistic question (the whole survey is to be honest).

That said, if they are asking whether there should be greater investor involvement that implies that they aren't talking about selling/screening the shares of "unethical" companies, since if you sell the shares by definition you aren't an investor in the company. So the portfolios of the investors concerned shouldn't be affected. So the question then is whether ethical corporate behaviour is less profitable and so feeds through into lower returns.

Back on the investment question I'm not a proponent of ethical screening, but being fair-minded about it the research I have read about the affect on returns suggests it is neither positive or negative (according to Willliam Mercer). It's just another flavour of active management really.

Rowland said...

Hi Tom. I work on this project at the RSA.

You're right - the survey was a bit simplistic (an early attempt at sampling opinion on a complex area). Hopefully other material will be better.

You might be interested in the debate we're holding on these issues:

Would be good to see you there

Tom P said...

Hi Rowland

I'll definitely come along to the event (and the Richard Thaler on ethe same day). Maybe we could have a chat afterwards? I'll be the bloke with the beard!

I actually found out about your event and project from a mate who is a trade union rep on a pension fund who is also planning to come along.