The head of one of the world’s largest long-term investors has a warning for shareholders and the financial elite meeting in Davos: Start acting like owners of the companies in which you invest, or prepare for a populist backlash against modern capitalism.
Michael Sabia, who runs $270 billion Canadian pension fund Caisse de dépôt et placement du Québec, fears that finance has forgotten its original purpose as backers of corporate investment. Instead, financiers have become mere tourists who care little about the companies they own.
He’s got a point. At the same time, complaints about myopic shareholders speculating on stocks they know nothing about are as old as markets themselves.
Start with the problem. “Too many equity investors are tourists; they’re not interested in building a business,” says Mr. Sabia. Instead of stepping up and encouraging the companies they own to invest in order to enhance productivity and long-term returns, they have “completely lost sight of what the financial markets are about.”
Without action, the French gilets jaunes protests that paralyzed the country last month are just a foretaste of the populist unrest to come, he said. “Our returns are only as healthy as the societies we invest in over the long term.”
It is easy to find support for the idea that companies should be investing more, whether in physical assets, staff training or the communities they rely on. The world’s biggest investors have created multiple groups designed to combat what they perceive as the short-termism of today’s shareholders, many of them meeting this week in Davos.
Yet, it’s far from clear that low corporate investment—to the extent that there has been low investment—is related to issues with shareholders. I’ve pointed out before that investors have been happy for companies to sink money into investments with payoffs far in the future—when they believe in the narrative. Prominent recent examples include Amazon, shale oil and, back in the boom times before 2013, mining and emerging markets.
Perhaps a more plausible explanation for companies choosing not to invest is that CEOs see fewer opportunities in a postcrisis low-growth world, and shareholders agree. Technology companies able to promise expansion whatever the economy does have had money thrown at them. Whenever the oil price was high, shale companies found it easy to raise loans and equity. Companies like miners able to tie themselves to the postcrisis Chinese growth were encouraged by shareholders to pour money into giant holes in the ground, until China slowed. The rest of the corporate sector struggles to convince stockholders to believe that their projects will work out (with plenty of exceptions where the CEO has the trust of investors).
Still, there’s plenty of evidence of shareholders failing to engage, with record assets held in index-tracking funds, while computer-driven short-term traders pull in money.
“The only way we can rebuild trust is if investors hold corporates to account,” says Keith Skeoch, co-CEO of British fund manager Standard Life Aberdeen. “Unless we think about a modern version of [shareholder] stewardship, we’re going to end up with a rules-based system.”
Every boom and bust brings criticism of speculators chasing quick profits. What would be done to “stem the torrent for speculation, which bid fair to do more mischief in this time of peace than he ever recollected,” the Earl of Lauderdale was reported as asking in the U.K. Parliament in 1825, after a stock frenzy helped by the easing of rules on company formation.
Just over a century later economist John Maynard Keynes was ready to hark back to a better age of governance when shareholders were intimately involved in management of private companies—much as Mr. Sabia’s CDPQ is after shifting much of its assets away from public stocks into private assets.
“With the separation between ownership and management which prevails today and with the development of organised investment markets, a new factor of great importance has entered in, which sometimes facilitates investment but sometimes adds greatly to the instability of the system,” wrote Keynes in 1936.
Keynes was right. But more than 70 years on there’s been endless tinkering, and the problem remains the same. Perhaps this is just something investors and society have to put up with for the enormous advantage of being able to buy and sell stock when one needs to. It would be great for managers and shareholders to communicate better, but it is far from obvious that this would lead to more investment—let alone fix the political problems created by stagnant living standards.
My view of speculation roughly conforms to the response of the prime minister in 1825, the Earl of Liverpool.
“In a moment like the present, in a time of profound peace, and when the interest of money was low, it was to be expected that speculation would exist in a very considerable degree,” he said. He went on to warn investors that they should be wary of any upset to the pleasant economy. The panic of 1825 followed six months later as monetary conditions tightened, banks crashed and stock prices tumbled.
Mr. Sabia isn’t forecasting anything so bad in the near future, but booms and busts, like occasional shareholder short-termism, are something investors need to be able to live with.
Write to James Mackintosh at James.Mackintosh@wsj.com
