Myners warns institutional investors over 'lack of responsibility for ownership'

Published on Tuesday 24 November 2009 21:25

LORD Myners, the treasury minister, yesterday called for institutional shareholders to take responsibility as owners of companies and warned they are "sleep-walking their way to another financial crisis".

In a speech to a conference in London, he criticised short-termism and a failure by shareholders to take a more active interest in companies.

"Institutional investors have the power to act and intervene in companies but most have been reluctant," he said. "Most argue – correctly – that clients look at short-term performance only. It is ridiculous that pension funds that need to meet liabilities over three to four decades focus on investments over 90-day periods."

Investors had the power to ask for change, but chose not to, he said.

Well-run companies are founded on good governance, Myners argued, adding: "If the banking crisis has taught us anything, it's that bad decisions went unchallenged. Good governance needs good judgment, robust decisions and requires owners to care.

"Shareholders need to be the drivers. It lies fairly and squarely with the owners of companies, not government and regulators. Shareholders should not be gamblers, they are owners. Most do not believe they are owners, do not feel responsible for companies. Ownerless corporations disadvantage public equity, because agents are not held to account by owners."

He warned that this will lead to future potential losses for investors.

"Without significant steps forward, the ownerless corporation will sleepwalk into another financial crisis."

The same conference heard that attempts to fundamentally change the banking system were misguided and there is no going back to a simpler era.

According to Sir Stephen Green, executive chairman of HSBC, big mistakes were made in the lead up to the credit crunch and recession, but he said that, 75 years after the Great Depression, "people have come once again to despise our version of capitalism". He said: "We had persuaded ourselves that the good times would roll forever. This misguided belief allowed consumption to grow faster than income.

"This led to bubbles and ephemeral trading in financial instruments."

But Green said wholesale change was not desirable.

"There is no alternative but to improve the system and move forward. We cannot turn the clock back to a simpler era when things were more controllable."

However, an Edinburgh conference heard that while UK banks had stepped back from the brink of disaster, difficult times lay ahead.

Simon Pryke, head of private investment management at Newton Investment Management, told the firm's annual conference that banks would be less profitable in future because of regulatory requirements to hold more capital. UK banks faced a period of inevitable deleveraging, several years of weak loan growth and a protracted bad debt cycle, said Pryke.