Shareholding equal ownership, but in practice?

David Pitt-Watson, an ex-fund manager, made the following comments which appeared on FT.com:

Our system of capital markets is not one that focuses on ownership. Investors are encouraged to diversify in order to avoid risk, but not to manage it. Having diversified, shareholders then trade shares. Many know little about the companies they invest in, because they invest in so many. Those who do know sell their shares as soon as problems arise. Thus we have created ownerless corporations. Among such corporations, as Adam Smith would remind us, “negligence and profusion” will prevail.

So what can we do? Well, doubtless there will be pressure on investors to play their proper ownership role. Companies will need to understand investors better, think through their requirements and prescribe the right solutions. As a fund manager, I rarely came across companies that, when they came to present their results, had that on their agenda. Few asked what sort of fund I ran, why it had bought the shares or who its investors were.

Too few companies focus on using their operating and financial review and their accounts as honest and open reports “for the owner”. Indeed, their understanding of their shareholders as owners belied their apparent commitment to shareholder value. After all, no one today would treat seriously someone who said they were delivering value for their customer when no market research had been carried out.

Resolving these problems will require all of us to make the chain of ownership work: from the pension fund to the fund manager to the board. Some may say that this is impossible if the investors are short-term or ill-informed. But if the directors think of themselves as professionals, like doctors, that would be a helpful model. After all, we defer to our doctor’s judgments, even if they do not accord with our own views. But we only trust those who have asked about and understood our condition, and who can explain why their treatment will be effective.

The benefits of a more professional relationship would be enormous: a brake on excessive risk-taking, a respect for sceptical criticism and a joint commitment to well-judged strategy.