The shareholder advisory committee.

AuthorKoppes, Richard H.
PositionChairman's Agenda: Balancing Shareholder Interests

The Shareholder Advisory Committee

Who owns GM? What about IBM? Xerox? The chances are that, with any given major U.S. company, the answer to this ownership question is found in two words, two words that are creating shockwaves throughout Corporate America - "Institutional Investors." The emergence of institutions as the predominant investor in today's market is undisputed. According to Carolyn Kay Brancato, chief economist for the Columbia Law School's Institutional Investor Project, institutions owned only about 8% of outstanding corporate equity in 1950; by 1981, this percentage had increased to 38.5%, and by 1990, it rose to 45%.

What is even more amazing is the concentration of this growing level of ownership in fewer and fewer institutions. Pension funds, both public and private, represent over 40% of the total assets controlled by "institutions." With control of over $2.5 trillion worth of assets, pension funds own more than 25% of all publicly traded equity in U.S. companies. Moreover, the 20 largest of these pension funds account for more than 25% of all pension assets, thus controlling at least 7.7% of the outstanding stock of America's 10 largest companies.

But what does this concentration of stock ownership mean? Certainly, as institutions control more equity, individual investors will have a declining ownership stake in our corporations. Some have contended that this changing shareholder body represents something negative for America's businesses, global competitiveness, and economy.

Such a view, however, does not consider what - or who - an institutional investor really is. Particularly in the case of pension funds, the institution is the retirement system that provides benefits (e.g., death, disability, and/or retirement) to this country's workers and their dependents. In a manner of speaking, the concentration of share ownership in pension funds is simply a way of dispersing America's wealth among those whose efforts are instrumental in earning it - a form of "socialism," if you will, that is as American as apple pie.

While we may debate the advantages and disadvantages of this phenomenon, such a debate will not alter reality. The reality is that institutional investors are growing in size and will continue to control larger and larger blocks of outstanding equity. This size, coupled with the current trend toward utilizing an "index" method of stock selection, results in a shareholder group that is profoundly different than the group that existed a mere 20 years ago.

Contrary to some assertions, today's institutional investor is a long-term holder of equity; since large institutions cannot easily buy and sell...

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