Institutional investors are expected to exert the influence and exhibit the values of “owners” but are incentivised to behave as “investors”, with performance scrutinised on a quarterly, monthly or even a daily basis.
In this context, we have almost certainly understated the profound challenges faced by the majority of institutional fund managers in fulfilling expectations in respect of the broader definitions of governance where they relate to ownership (here I exclude those fund managers who place governance at the core of their commercial offering).
To put it simply: most institutions are not set up to act as owners; they don’t have the mindset of owners and are not incentivised by their clients to act as owners. They are investors- leaseholders rather than freeholders.
And:
Short termism, as practised by pension funds, is self-defeating for those charged with delivering pensions over many decades in to the future, and yet it remains a predominant form of behaviour.
A focus on “shareholder value”, as measured by relative share price performance over quite short time periods lies at the heart of a number of behaviours which have delivered less than ideal outcomes, such as:
the ascendancy of momentum investing which discourages contrarian thinking by all but a small minority;
a partiality to merger & acquisition activity which so often fails to deliver the outcomes promised;
the adoption of aggressive and inappropriate capital structures to fend off predatory activity by private equity and others; and
A failure to take account of the longer-term consequences of investment activity, including impact on the broader economy and society.
Great stuff. When I was still at the TUC I wrote a paper whilst I was on the beach on holiday one year, trying to sketch out the problem of 'ownership' in terms of the company-shareholder relationship. I never put it out, because I thought it was too negative (a friend in the governance world who read it told me it made them want to kill themself!). Funnily enough I reached pretty much the same conclusions as above.
I realise I am a bit of a geek about this stuff, but it does surprise me that (with a couple of honourable exceptions) Labour supporters and other lefties aren't more interested in this ownership issue, since it's pretty important in our model of capitalism. (And it has ramifications in a number of others areas - like exec pay). It's especially surprising given that the City minister is clearly interested in this issue, understands it (and I can't think of another Treasury minister who has grappled with it to this extent) and is trying to find some policy options that would address the problems that we have at present.
If you have any thoughts about this, now is the time to be getting them off your chest (and into the Walker Review). We won't have a better opportunity for a long time.
2 comments:
What really strikes me, even these days, is how interwoven the personnel and backgrounds are between senior managers, executive directors, non executive directors and institutional investors (to say nothing of the regulators) given that the roles are all fundamentally different. So it perhaps no wonder that they never say boo to a goose.
Given that this problem has been around for years and to my mind is behind most the corporate governance and regulatory failures in the UK perhaps now is the time for some legislation with real teeth and to admit that self regulation has not worked. Perhaps the appointment of a fewer worker directors would also be a good thing. I see Bob Piper has a recent post on this subject.
Yeah I think instituting employee directors is a decent reform proposal - and cheers for alerting me to Bob's post.
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