Companies should favour relationships with long-term investors: report

Institutional investors also in a position to influence sustainability at hedge funds and private equity houses.

Companies should work more closely with investors who see themselves as capital ‘stewards’ rather than with short-term speculators such as hedge funds, in order to strengthen long-term relationships, according to a report by Tomorrow’s Company a leading London-based think tank. The report says investors currently have to be treated the same, but argues that companies, and potentially regulators, need to “reinforce” the effectiveness of those investors who act in the company’s long-term interests. However, the report said different types of investors had different roles in the capital markets and argued against criticism of hedge fund managers and private equity houses as being responsible for the current market crisis. It questioned though whether pension funds should allow stock lending when it might harm their role as long-term investment stewards. Tomorrow’s Company, a respected research body, was developed out of the UK Royal Society for Arts, Manufactures and Commerce (RSA), to formulate thinking based on the premise that successful businesses should establish long-term relationships with all stakeholders, rather than focusing on short-term returns for shareholders. Its reports have been used in the past to inform UK company law.
The latest report says the continued dominant influence of pension funds and long-term investors in terms ofstock market size means they are in a position to dictate how hedge funds and private equity companies should operate if they want to run institutional assets.It links this to the growing importance of ESG and SRI considerations as a driver in institutional investor strategy because of growing evidence that their inclusion can support long-term performance and risk management. As a result, Tomorrow’s Company said private equity companies were increasingly aware that ESG impacts could affect performance and some hedge funds were already factoring social and environmental factors into their decision-making.
Significantly, the report argues that the credit crunch and loss of confidence in the financial system will increasingly prompt retail investors to ask “Is my investment in safe hands?” and that as a result institutions will need to position themselves as able to manage risks responsibly. It says a by-product of this will be growing demand for more transparency over “the motivations, objectives and remuneration of investors”. Other questions raised in the report include the lack of alignment between the interests of some investors and some companies as well as whether responsible investment criteria should be applied to debt holders as well as equity.
Link to Tomorrow’s Company