Posts Tagged ‘Institutional investor’

The Failure of British Institutional Investors

February 12, 2009

Robert Peston today gave a pretty scathing assessment of British institutional investors.

And here’s the tragedy. Those owners were us – the millions of British people saving for a pension, who innocently mandated a bunch of numpties at investment institutions to look after our retirement savings.

These investment institutions were supposed to ensure that the big companies in which we’re invested serve our interests – instead of which they encouraged these companies to maximise short-term profits regardless of whether the future was being dangerously mortgaged to the hilt.

To call this a failure of corporate governance is the equivalent of describing the second world war as a breakdown of diplomatic relations between Britain and Germany.

What does Richard think about this?

Many British institutional investors have taken a very short-term view to the world, rather than pressurising the boards of our biggest companies into making decisions for the long term they were happy to sit back and as long as the dividends kept on coming they didn’t care what the company was doing. I don’t know why this is the case but here are some possible reasons:

  • Lack of accountability on institutions to invest their customers’ money wisely. Indeed £7bn of investors’ money is languishing in so called “dog” funds where they have consistently underperformed their index over a three year period.
  • Because institutional investors’ performance is assessed relative to their peers. They don’t want to deviate from the crowd in case they make a mistake. A cause of bubbles, with everyone feeling the need to jump on the bandwagon even if rationally they should not.
  • Believed that they could rely on board members to make the right decisions, not necessarily a failure of the investors but of the implementation of corporate governance guidelines.

I plan to look at corporate governance soon.

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