Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 12

Ownership requires taking action

A fundamental tenet of free market capitalism is that owners choose how their assets are used to their best advantage.  It’s my belief that if our system erodes the capacity for owners to effectively exercise this choice the result will be sub-optimal.

At its simplest level ‘ownership’ connotes a set of behaviours, values and powers that co-exist with the asset owned. When exercised responsibly and actively in an informed and engaged manner, ownership plays a positive force in the economy and society.

Entrepreneurial corporate capitalism of the early 20th century aligned corporate ownership with its actual owners. Think of the founding fathers, Henry Ford and Andrew Carnegie, whose very large ownership stakes empowered and enabled its shareholder owners. Today’s form of shareholder capitalism, often called ‘fiduciary capitalism’, is in direct contrast to this.

Fiduciary capitalism

Fiduciary capitalism is the term used to describe a new style of corporate governance practised by a new breed of investor - the sophisticated institutional fiduciary.

Agency issues and lack of accountability

A key characteristic of fiduciary capitalism is that its participants, predominantly institutional investors, are not owners in the sense they benefit directly from ownership; rather they are agents of these owners. They, and myriad other fiduciary agents, form the long agency chain that exists between the owner and user of that capital. They are passive in their ownership. Fiona Reynolds, in her recent Cuffelinks article on United Nations Principles of Responsible Investing (UNPRI), described this as the ‘investment chain’ and exhorted agents to become active and responsible investors.

Ownerless capital

In a system where the gap between the owner and the user of capital is vast, any ownership empowerment is virtually impossible. This dilution has led to such capital being described as ‘ownerless capital’.

It’s difficult to see how successful governance can ensue in such a system, given the complete lack of accountability for those to whom power is entrusted.

In reality, managements are neither effectively accountable to individual shareholders or to the institutions and fund managers who are the agents of the ultimate shareholders.

Universal owners

A universal owner is a large institutional investor that holds its shares for the long term, in a portfolio that represents a broad cross-section of the economy, and mostly trades to maintain its index.

Large institutional investors have a spread of asset holdings across diversified asset classes and economies. Not only the asset in which they are invested, but also the economy itself influences returns for these institutions. This breadth of ownership is the reason they have been termed ‘universal owners’.

In these economies, universal owners come to occupy a quasi-public position in effect having an economic interest in the long-term health and well-being of society as a whole.  This somewhat unusual position suggests an interest in matters beyond standard macroeconomic policy issues, but more specifically in regulatory policy, and for example the provision of public goods such as education and health and infrastructure. Understandably perhaps, many universal owners confronted with this potential have moved cautiously not conceiving themselves as public policy makers.

James Hawley and Andrew Williams, in their article ‘Can universal owners be socially responsible investors’ predict the future may well be very different.

“… as the ultimate beneficiaries - pension fund participants, mutual fund owners, etc. - come to realise the importance of universal owners acting as such, more fund managers will find the political room to use the potential power that universal owners possess.”

Why Active Ownership Matters

In their article ‘Capitalism without owners will fail’, Robert Monks and Allen Sykes highlighted various weaknesses in today’s shareholder capitalism.

Among them are the inappropriate powers of corporate management, deeply entrenched short-termism, absentee ownership, managements not effectively accountable to individual shareholders or their agents, board composition and accountability, and remuneration practices.

They went on to say:

“The prime weakness underpinning all the others is undoubtedly the absence of effective, committed, knowledgeable long-term owners.”

Central to their debate is the notion of responsible ownership being critical to a corporate ethic. They state:

“The principal responsibility for shareholders is – or ought to be - to assure that the businesses they collectively own voluntarily disclose information necessary for appropriate law-making, exercise restraint in influencing the making and enforcement of law, and comply spaciously with the law. Only in this way can we ensure corporate functioning that is both profit-taking and compatible with the public good.”

I think we all buy the argument that accountability and responsibility rest with ownership.  Equally shared are the frustrations that exist with respect to the frameworks within which we operate where an abundance of regulations, global and domestic, are unfolding in an attempt to safeguard our somewhat rocky financial systems. But we appear to be caught in a vicious circle where weaknesses reinforce each other.

What can we do?

A few practical suggestions come to mind:

  • Analyse our own behaviours, knowledge, thought processes and commitment with respect to assets we own and enhance or change what might be necessary and practicable.
  • Exhort those who act on our behalf to take responsible active roles with respect to our assets and hold these agents accountable.
  • Where we ourselves act as Trustee and/or Agents in the investment chain ensure we play an active, committed and responsible role; that we have appropriate knowledge; and that we have great clarity in decision-making ensuring the long term benefit of those for whom we act is front of mind.
  • With respect to our assets which one day will pass to our family members and others through our wills, ensure that those to whom the task falls have knowledge or the capacity to increase their knowledge to enable them to perform this task responsibly.
  • Encourage our younger family members to involve themselves in their own assets, particularly their superannuation.  First step is for these members to understand that their superannuation is an asset of theirs, they will eventually take possession of it, they have choices as owners and they stand to benefit from understanding their choices.

In today’s increasingly institutionalised and globalised world, unless empowered ownership becomes reality, capitalism, as we know it, is at serious risk. We need to act to minimise the dilution in the power that rests with the owners of assets.

 

Melda Donnelly is the founder of Centre for Investor Education and is an Independent Non-Executive Director of Ashmore Group, Treasury Group and Unisuper. She is a member of the Advisory Committee of the Oxford University Centre for Ageing.

 


 

Leave a Comment:


RELATED ARTICLES

Investor downside when management controls access to the board

banner

Most viewed in recent weeks

An important Foxtel announcement...

News Corp's plans to sell Foxtel are surprising in that streaming assets Kayo, Binge and Hubbl look likely to go with it. This and recent events in the US show the bind that legacy TV businesses find themselves in.

Warren Buffett changes his mind at age 93

This month, Buffett made waves by revealing he’d sold almost 50% of his shares in Apple in the second quarter. The sale not only shows that Buffett has changed his mind on the stock but remains at the peak of his powers.

Wealth transfer isn't just about 'saving it up and passing it on'

We’ve seen how the transfer of wealth can work well, with inherited wealth helping families grow and thrive for generations, as well as how things can go horribly wrong. Here are tips on how to get it right.

Welcome to Firstlinks Edition 575 with weekend update

A new study has found Australians far outlive people in other English-speaking countries. We live four years longer than the average American and two years more than the average Briton, and some of the reasons why may surprise you.

  • 29 August 2024

The challenges of building a portfolio from scratch

It surprises me how often individual investors and even seasoned financial professionals don’t know the basics of building an investment portfolio. Here is a guide to do just that, as well as the challenges involved.

Welcome to Firstlinks Edition 573 with weekend update

Steve Eisman, best known for his ‘Big Short’ bet against US subprime mortgages before the 2008 financial crisis, is now long and betting on what he thinks are the two biggest stories of our time: AI and infrastructure.

  • 15 August 2024

Latest Updates

Investing

Legendary investor: markets are less efficient and social media is the big culprit

Despite an explosion in data, investment titan, Cliff Asness, believes the market has become less efficient, not more, over his 34-year career. He explains why, and how you can take advantage of it.

Property

A housing market that I'd like to see

Our housing system isn't working, with prices and rents growing faster than wages, longer public housing waiting lists and more people are experiencing homelessness. Here are five ways to ease the crisis.

Retirement

It isn’t just the rich who will pay more for aged care

The Government has introduced the biggest changes to aged care in almost 30 years. While the message has been that “wealthy Australians will pay more for aged care”, it seems that most people will pay more, some a lot more.

SMSF strategies

Meg on SMSFs: At last, movement on legacy pensions

Draft regulations released this week finally provide the framework for unwinding legacy pensions cleanly and simply for members who choose to do so. There are some caveats though, including a time limit.

Investment strategies

A megatrend hiding in plain sight: defence

Global defence spending has inflected higher, bringing huge opportunity to a group of companies that have already outperformed broader market indices over the long-term.

Investment strategies

The butterfly effect, index funds, and the rise of mega caps

Index fund inflows to the US market are relatively tiny. Yet a new research paper suggests that they have distorted the size of the market's largest stocks to a surprising degree.

Investment strategies

Options for investors who don't want to sell overpriced banks

The run-up in Australian bank stocks has some investors confounded: do they continue to hold them in expectation of further gains - or sell and take profits now? There are alternative options to consider.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.