How institutional investors should step up as owners

Overhauling investment practices that reward short-term returns could benefit shareholders and the global economy.

September 2010 | bySimon C. Y. Wong

While bankers and brokers remain everyone’s favorite culprits for causing the great financial crisis two years ago, a less likely suspect—the institutional-investor community—is increasingly coming under scrutiny. These investors, in particular pension funds, insurance companies, and investment-management firms, are major market players around the world. In the United Kingdom, for example, they own and manage more than 70 percent of the stock market. Now, politicians and regulators say that such institutions must share the blame for enabling the crisis through passive corporate governance and a focus on short-term returns.

The European Union recently charged that the financial crisis has shaken the assumption that shareholders can be relied on to act as responsible owners. Former US vice president Al Gore and David Blood, cofounders of an investment fund dedicated to long-term investing, have criticized the common practice, among asset owners, of reviewing and rewarding their asset managers based on short-term performance. Indeed, a movement is afoot in Canada, France, the Netherlands, the United Kingdom, and other markets to encourage institutional investors to become better “stewards” of the companies they invest in, by adopting a more active and long-term stance.

Asset owners (including pension funds, insurance companies, sovereign-wealth funds, and endowments) and asset managers (such as mutual funds and other money managers) should take these calls seriously. By rethinking their approaches to portfolio diversification, engagement with boards, and compensation, they could usher in a new ownership culture that would not only benefit their customers but also placate regulators, which are poised to intervene if voluntary progress is slow.

Reforming the ownership approach of institutions won’t be easy. Many have poorly aligned incentive structures. They must tackle other structural impediments too. One is increasing portfolio diversification, which makes it difficult to allocate the necessary time and resources to monitor and engage with companies. Another is a growing distance between the professionals who manage the money and the asset owners, representing hundreds of millions of people who depend on the former for their long-term savings and financial security when they retire.

--------------30--------------

This BLOG  looks at pensions and their impact on what are called Public Private Partnerships or P3’s these are not really about private funding at all but about two streams of public funding, pensions and government with private capital a third partner.
We will also deal with other pension matters, such as Defined Contribution Plans (DC) vs Defined Benefit (DB) PLANS, the weakness in private plans, the need for pension reform in public pensions to have shareholder rights, directorships and ethical investment directives and policies. 
Finally taking the long view we will show how these funds are forms of evolving social capital that is dominating private capital as we evolve into socialization of capital. 
Click HERE to read more....