John Gray writes:
The real underlying issue is of course about the principle of “ownership”. Fund managers have a fiduciary duty to their companies and shareholders – not to the pension funds who employ them. Yes, in theory they have contractual and regulatory obligations. Experience has shown us that the vast majority of fund managers care only for short term profits and have not been interested in the long term harm that their investments can cause to the wider economy. Their mandates are typically 3 years at best not 30.
I fully agree and would also argue that issues of ownership have been crucial in understanding this crisis. This has been a constant theme over at Stumbling & Mumbling.
I liked this article on Bloomberg about Hoare & Co, one of the few British banks still structured as a partnership.
Hoare & Co. is an unlimited liability partnership, which means the family’s personal wealth, including Alexander Hoare’s solar-panel-topped residence and 50-foot yacht, can be seized if the lender collapses. That gives clients confidence, Hoare said.
“Everything apart from the shirt on our back is at risk,” Hoare said. “It keeps you jolly nervous.”
Compare and contrast to Sir Fred.
There is a real issue with fund managers caring too much about short term performance. In defence of my industry much of this pressure comes from clients rather than managers. The requirements of monthly and quarterly reporting on returns is not conducive to long term thinking.
I do wonder if the tax system couldn’t be of use here. Stamp duty on share transactions is currently 0.5%. If it was raised to 5%, what would happen? Well, trading would quickly become very expensive and I suspect the average holding period of a share would rise substantially. If fund managers wanted to perform well they could not rely upon trading short term trends and would be forced to take a longer term view. They also might be forced to get more involved with company management.