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Institutional
shareholders, it's time to wake up
I found it very interesting to hear that the New York Police Officers
Pension Fund, which is an institutional shareholder in General Electric,
the largest company in America in terms of shareholder value, had
protested at the shareholder AGM over the company's alleged dealings
with Iran, which is closely watched by America with regard to its
nuclear policy. The fund had also attempted to pass a resolution
to prevent the board from doing so in the future. This was a classic
situation of an institutional shareholder exercising its power.
Who
are institutional shareholders?
Institutional shareholders are firms who invest in other
firms for long-term value realisation. Typical institutional shareholders
in Sri Lankan listed companies would include:
* Pension funds such as EPF and ETF
* Insurance funds
such as National
Insurance
Corporation
* Unit trusts
* Foreign and local
investment trusts
* Banks and other
corporates
How
are they different?
Institutional investors generally tend to hold large parcels
of a company's shares. Therefore they have the right to appoint
directors to the board. They have management and financial staff
who can analyse the performance of companies and who also possess
the clout to demand for further information as well as exercise
the pressure to perform on the companies they invest in.
What
do institutional investors want?
Institutional investors are generally not speculators.
They invest in corporates with a long term objective in mind.
They are either holding the investment to obtain a steady stream
of dividend income or they are looking forward to a strategic divestment
at some point where they could realise significant capital gains.
How
have institutions acted in Sri Lanka?
This varies from institution to institution. The Stassens
and Distilleries Groups led by tycoon Harry Jayawardena have been
very aggressive with regards to the companies where they have stakes.
A performance improvement has been visible at Aitken Spence where
shareholder value has increased tremendously in recent times. Richard
Pieris has also seen a significant turnaround in recent times since
the fund managed by Dr. Sena Yaddehige invested in it. The company
is now gaining momentum with significant increase in earnings as
well as shareholder value.
Other
institutions such as state pension funds as well as some of the
insurance funds have played a low profile with regard to their approach
to managing their investments.
What
can institutional investors do?
The events at Aitken Spence and Richard Pieris clearly
indicate that many listed corporates are simply in a state of slumber
where infusion of vision, leadership and the right direction could
take them to greater heights in terms of shareholder value. All
they need is basic reinventing of business models as well as change
of leadership. Institutional investors can play a significant role
in bringing about such changes. Institutions also can put pressure
on corporates they manage for better social responsibility and also
towards better systems of corporate governance. This will help them
to sustain the wealth they create.
Message
to the small investor
When you invest in a company take a look at who the institutional
investors in the company are. The right institutions will generate
wealth for you by exerting pressure on the management to perform.
The wrong ones will of course be in a state of slumber along with
management minimising the shareholder value.
If
all institutions wake up many corporate dragons will be unleashed
generating greater value for all shareholders. With great power
lies great responsibility. Institutions should utilise their power
better. |
