The UK government is wrong – governance cannot be outsourced to investors

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… )


1 Response to “The UK government is wrong – governance cannot be outsourced to investors”

  1. 1 Brian Finch March 22, 2011 at 3:27 pm

    I am not so sure that the UK government expects as much from investors as you imagine. I think their backing for a stewardship code was just one of many initiatives aimed at building confidence in corporate governance in the wake of the shocks to the system we have endured over the past few years.

    However your main points about the investor group covering a host of conflicting interests and the likely extreme short-termism of their approach are very true. Much the same set of problems apply to expecting investors to control executive pay when the fund managers share very similar interests.

    Investors are likely to be at their best when they see a company underperforming and believe a short campaign to secure change will achieve an immediate improvement in the value of their investment.

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