by Ian Fraser for Qfinance, March 22nd, 2011.
Can investors be relied upon to police corporate behavior (governance) and guide the companies in which they invest to take decisions likely to create enduring value, and bring wider benefits over and above short-term profitability gains?
Can investors – which I take to include institutional investors like pension funds and intermediaries such as asset-management companies – be trusted to guide corporate managements around the Scylla of self-destructive behavior that might flatter short-term share prices but be catastrophic in the long-term, and the Charybdis of the pursuit by management of self-enrichment at the cost of long-term shareholder value?
Increasingly, I’m beginning to doubt it. Even though the UK and US governments still seem to believe that investors can be trusted to do such things, and despite all the hype surrounding the UK’s “Stewardship Code”*, and the rise of movements such as socially-responsible investment and environmental and social governance, the answer to these questions is sadly “no” and “no”.
There are clearly exceptions. A minority of institutional investors (including the California pension fund CalPERS, Dutch pensions giant ABP and the “Sage of Omaha” Warren Buffett), plus a select band of asset-management companies (such as Hermes Pensions Management and Fidelity in the UK) have a track-record of responsible intervention/activism with an eye on long-term sustainability.
But most CFOs and directors of listed companies tell me that the voices of responsibility are invariably drowned out by the baying hoard of more rapacious short-termist investors including hedge funds and high-frequency traders. And their time horizons are myopic. (continue reading… )