Paul Myners, Financial Services Secretary to the UK Treasury, has accused institutional shareholders of being ‘absentee landords’ and failing to involve themselves constructively in the managment of listed companies. It seems to me that this is only a half truth; as we explain on page 225 of The Puritan Gift, the great age of American capitalism occurred when shareholdings were widely dispersed and the shareholders were largely inactive. By default, therefore their outlook was ‘long term’. Since this coincided with a culturally long-term attitude on the part of senior managers, the outcome was highly beneficial for all concerned.
Things went wrong around 1980 when over half of shares passed into the hands of institutional investors, who demanded that each company publish ever-rising quarterly earnings per share, whatever the cost to the health of the company or the economy, and punished those companies that did not comply by dumping their shares. Group think and financial cosmetics became the order of the day.
However, Myners is half right. We are not going to go back to the state of affairs which existed at the mid-twentieth century. Institutional investors will continue to hold the majority of shares. It is therefore highly desirable that they should abandon their ‘group think’ approach and start to take part in an intelligent debate on how companies are run. Above all, they should insist that the managers take a long-term view. If they cannot, the next best thing is that they become inactive, like the private investors who dominated the scene before 1980.
