Better Finance castigates institutional investors' short-termism

Europe
On the 08/01/19 at 12:13PM

by

Adrien Paredes-Vanheule

The European federation of investors and financial services users has answered ESMA's survey on collection of evidence on undue short-term pressure from the financial sector on corporations.

In its response to ESMA's survey, Better Finance expressed concerns about the institution only asking for a timeframe to define long-term investment. The association argued "not only the duration of a holding is decisive to decide if something is long-term or not."

"Decisive may also be the overall strategy of the asset manager or other factors. A clear and precise definition of long-term investment and short-termism would be very helpful", said Better Finance, for which a long-term investment timeframe goes from 11 to 30 years and more. In the association's view, factors resulting to a large extent in short-termism thinking by retail investors include macroeconomic environment, market pressures, profitability, business objectives, client demand and executive remuneration structure.

Commenting on the engagement of institutional investors - that it branded "investment managers" - with investee companies, Better Finance said short-termism is turning them into short-term performance-focused "transient intermediairies" with high turnover in portfolios. It added institutional investors fail to act as "responsible stewards of the corporation".  The European federation of investors and financial services users tackled institutional investors' insufficient engagement with investee companies, "preferring to respond to a poor performance by just selling their shares due to costly and time-consuming monitoring."

The association believes that "in most cases if not all", a much shorter time horizon prevails on institutional investors' economic interests compared with that of the investments they manage. It is also convinced common practices in the remuneration of fund managers and of corporate executives contribute to short-termism.

SRD II is a failure

Besides, Better Finance took the opportunity of questions around institutional investors' struggles with investee companies to assert the Shareholders Rights Directive II (SRD II) "failed again" to adopt a standard definition of shareholder across the European Union. Ergo, "agency owners" still hold and exercise voting rights instead of the real shareholders.

"For example, in France, most foreign held shares in the French blue-chip companies are voted at AGMs by global custodians who never disclose who are the shareholders they are voting for, and claiming they have a general proxy agreement from those. We requested to see these agreements and could never see any. These agency owners have totally misaligned interests from the shareholders and are often those who are most active in the securities lending markets", Better Finance outlined.

The association views as "extremely damaging" to long term shareholder engagement the absence of an EU definition of “shareholder” in EU rules.

"SRD II has not been implemented yet so its effect remains to be seen. However, the obligations on investment firms in SRD II are not far reaching enough to change their investment behaviour", replied Better Finance, for which SRD II does not terminate potential conflicts of interest of proxy advisors.

In line with the SRD II Directive, the European federation of investors and financial services users assesses that individual shareholders should have a say on remuneration policy. A good corporate performance would eventually be rewarded with a remuneration package "geared to the achievement of stretching targets" but not encouraging 'imprudent risk-taking, excessive conservatism or continuation of strategies that are no longer appropriate or drive short-termism."

Better Finance stated that among other means to avoid short-termism, one would be the provision to retail clients of sustainable finance products "ensuring that sustainability preferences of long-term and pension savers are taken into account in the suitability assessment."

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