Companies are owned by their shareholders. But who are the shareholders?
Companies are either 'public' or 'private'.
Private companies do not have a quoted (or 'public') share price. The owners cannot easily sell their shares, so they are of little interest for indivdual savers (although they have great interest for their private owners). Public companies can be bought and sold on a market provided for the purpose. In the UK this is the London Stock Exchange.
Only 15% of the shares on the London market are held by individuals. The rest are held by 'Funds' - collective investment vehicles, each serving the needs of a specific group of beneficiaries. Funds might be categorised as 'pension', 'retail' or 'insurance' but many hybrids exist.
One way to get a pension is to get someone else (often, in the past, your employer) to set up an investment pool to provide you with one. These investment pools are the pension funds. They are controlled by Trustees on behalf of the beneficiaries - those who are, or will be, receiving a pension.
Small investors either found it difficult to invest in a wide enough range of shares to spread their risk or were persuaded that they did not have the expertise to invest themselves. Thus grew up the retail investment funds (of which unit trusts are typical) aimed at individuals.
If you insure your life you will (hopefully) pay premiums for many years before your descendants get any cash back. This leaves the insurance companies with surplus cash to be set aside to pay future claims. That is the origin of insurance funds.
It was a natural development for insurance companies to marry that position as an investor with their sales and distribution networks to become big players in the retail investment market. Their three main business strands are:
- marketing retail investment funds indistinguishable from those of the regular providers (called 'managed funds'),
- selling annuities (pensions by another name) to individuals
- devising products like with-profits policies that are hybrids of insurance and investment. The funds backing these hybrids are called 'life funds'.
.......so the beneficiaries aren't the owners
In all cases the ultimate beneficiaries are private individuals like you and me. The trustees or corporate owners of these funds are not beneficiaries. But they have all the rights of ownership over the funds' investments.
So 85% of the London market lies in the hands not of beneficiaries but of their agents. These 'agents' often belong to major corporations acting in most corners of the financial services industry. And 'agents' is not really the right word, since the principle of 'agency' is enshrined in law and carries obligations that usually do not apply to these 'agents'. It is better to call them 'intermediaries'.
It is not difficult to see the potential conflicts of interest.
......and don't forget the traders
The efficiency of the stockmarket means that shares are tradeable commodities. The managers of many of the funds do not regard themselves as owners but as traders. So they have no interest in using their ownership rights for the long-term benefit of the business.
Much of the current weakness in the mechanisms of corporate direction and control ('corporate governance' in the jargon) can be traced to this trend.