Humor Blogs - Blog RankingsBlog DirectoryRSS Search

Inanity in Business – Institutional Investors Are Not Great Stockholders

by George Jones on April 6, 2011

Since the 1980’s the amount of stock held by individual investors has shrunk from over 90% in the 1950’s to about 30% now.

A consequence of this development is that institutional investors have a great deal of leverage on corporate America but they really aren’t into anything “long-term.”

See No Evil Image

The Modern Money Manager

Money managers for institutional investors don’t act like “owners” in the conventional sense of owning stock – they are more like renters.

Typically, stockholders would be a check on a company’s board of directors, but since institutional investors aren’t really into the job of corporate governance – they are money managers after all – the boards are free to do pretty much whatever they want.

corporate governance

Without anyone to check their largesse, corporate boards have handed out dizzying CEO compensation packages that would make a whore blush. Millions of dollars that could have been spent on research, development, marketing or other projects to improve the viability of a company were otherwise directed to company executives for their personal indulgence.

CEO compensation in 1980 was 42x the salary of the average worker; it is now almost 400x the salary of an average worker. Clearly, talented CEOs are worth a lot of money, but the expansive disparity recounted here is not the sign of a market imperative; it’s the rather self-evident consequence of capitalism gone awry.

Perhaps the most stunning example of CEO compensation-gone-mad is the approximately $1.6 billion-dollar compensation given to UnitedHealth Group CEO William McGuire in 2006, in essence, for being a fuck-up.

What corporation – one with real owners – would ever contemplate a billion-dollar severance package for one person? How would this be in the shareholders’ interest?

Clearly, it isn’t.

But the institutional investor, while not keen on corporate governance, is keen on corporate profit.

This translates into a pretty narrow focus for corporate America. Instead of focusing on long-term strategies that build companies up and make them profitable over the long-term, the focus becomes “do anything that drives the stock price up.”

Business cartoon

Corporate America then embraces the concept of “cooking the books” and then affixing an innocuous label to it like “financial engineering.”

It guts its labor force, exports jobs, and then complains endlessly about regulations. The stock price rises, the money managers sell, the stock price falls, the CEO leaves (collecting his millions of severance upon exit) – then the company finds a more expensive CEO.

The corporate version of wash, rinse, repeat.

Until the money managers of institutional investors start acting like real stockholders there is not much hope that this dynamic will change.

{ 1 comment… read it below or add one }

Melba Perkins April 25, 2011 at 11:03 am

This is such a great resource that you are providing and you give it away for free. I enjoy seeing websites that understand the value of providing a prime resource for free. I truly loved reading your post. Thanks!


Cancel reply

Leave a Comment