Shareholders in the United Kingdom
This paper, a version of which will appear in Research Handbook on Shareholder Power (Randall Thomas & Jennifer Hill eds, forthcoming 2015) analyses the extent of shareholder power in the United Kingdom.
In part, it confirms the generally held view of institutional dominance of the share registers of listed companies and the consequent capacity of institutional shareholders to influence the ?rules of the game? as they relate to shareholder influence over management. This is especially true for rules set by subordinate rulemakers (ie not by the legislature directly) or self-regulatory bodies. However, institutional shareholder influence has always been more extensive in relation to rule setting than with regard to interventions to alter managerial policy at portfolio company level, a disparity which is attributed mainly to free-rider problems and conflicts of interest. However, the paper argues that the standard account of institutional shareholder influence in the UK is likely to be significantly affected for the future by four developments. First, the proportion of the overall market for listed shares held by UK institutions, especially insurance companies and pension funds, has declined this century to the point where it is little or no higher than it was in the 1960s. Second, their place has been taken foreign investors, predominantly US or continental European institutional investors. Third, government is no longer content to leave the level of portfolio company intervention to be decided by the institutions in their own interests but, through the imprecise notion of ?stewardship?, generates some pressure on institutional shareholders to intervene, to combat ?short-termism?. Fourth, hedge fund activism, although less developed than in the US, is a distinct feature of the current market. The combined result of these factors for institutional activism, at both ?rules of the game? and portfolio company level, is uncertain. UK institutions may have a lesser capacity to intervene in view of their lower overall holdings, whilst foreign institutions may be less motivated to do so. The coordination costs of both types of investor may increase. This does not bode well for the stewardship policy. On the other hand, the crucial matter for intervention, at least in the medium-term, may not be the concentration of share ownership but the concentration of share management. There is some evidence that investment in the UK market continues to be concentrated in the hands of UK-based managers, even whilst institutional shareholding has become less concentrated. Finally, the coordination costs of institutional shareholders, domestic and foreign, may be reduced by hedge fund activism.