The inquiry could bring corporate governance looking into the pay packets of fund managers, seek to reduce charges on investors, and redistribute investment away from tracking the FTSE-100 to small and medium-sized enterprises.
Institutional investors range from pension funds through insurance companies to unit trusts, banks, investment trusts and foreign investors. Together they control almost £900bn of funds.
However, the so-called Megarry Judgement confirmed that pension fund trustees, in determining investment policy, have to deal exclusively with maximising financial well-being in the interests of scheme members. They should not take into account political or other considerations.
Since all fund managers take the same view, this means that investments will bloweth where they listeth – where the returns are greater.
Arguments that fund managers when placing their investments in a company should take into account the interests of the work force, those who buy the company’s goods and services, those who are its suppliers, the community where the company operates, faded when Tony Blair moved away from the stakeholder economy.
Gordon Brown would seem intent on bringing the emphasis back so that the institutional investor must be looking to more than the best financial return available.
In the United States there is shareholder activism where institutions have sought to influence company policy. Institutional investors produce their own codes of practice which they expect companies to follow. They write long-termism into their policy statements – a route already followed by certain United Kingdom institutional investors.
Studies made into the impact of these codes show that a company generally improves its performance and adds to the return on investment.
In the United Kingdom, institutional investors ask fund managers to invest on their behalf – and these play safe in tracking the FTSE-100.
The government will not be prescriptive in dealing with any recommendations arising out of the enquiry, but the enquiry might blow fresh air through the offices of institutional investors, trustees and fund managers.
And remove some of the cobwebs in the process.
Stuart Bell is Labour MP for Middlesbrough and adviser to Ernst & Young
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