Have fund managers ruined capitalism?

Google offices © Getty Images
It is in the long-term interest of companies like Google to pay their tax

In the MoneyWeek editor’s letter this week I issued a call to arms. Subscribers can read the full letter here (please do – it is a very important subject). The point was to beg the nation’s fund managers to have a go at saving the shareholder capitalism that served us all so well in the 1980s and early 1990s by using their power as owners to force big companies to behave better.

I wasn’t expecting much of a response (the industry isn’t that good at this stuff). But before our magazine had even rolled off the printing presses, one manager was out there saying the right things. “Top investor turns on Google over tax sham” said the headline in yesterday’s Times.

James Anderson of Scottish Mortgage (which holds a substantial stake in Google’s parent company, Alphabet, and which is a core part of MoneyWeek’s investment trust portfolio) went public with this comment emailed to Patrick Hoskings: “My take is that it is in the long term interests of Google and others of that ilk to pay decent rates of tax and that they and others would be best served in taking the lead in volunteering this… they are beneficiaries of state spending on many levels and in return they would get a lot a respect.”

We don’t disagree with any of that – although we do rather think the government has a responsibility to update our old fashioned tax code to take account of the activities of capital-light tech firms, too.

However, as Anderson’s office (Baillie Gifford) is a mere five minutes’ walk from our Edinburgh office I bought him a latte in our local coffee shop (I am keen on BG in lots of ways, but I really look forward to the day when the partners to have saved up enough to splash out on a proper coffee machine) and stopped in for a further chat.

What, I ask, is the problem with other fund managers? It seems clear to most people that one of the things that helps with long-term commercial success is having the support of your host country’s government and population. If the world’s big companies don’t start showing a little love to those people there will be blood on the streets (or the balance sheets at least).

The rise of the middleman shareholder – the fund manager – is one of the least studied economic factors in the economy, says Anderson. This is a “different world” relative to all previous versions of capitalism. Business used to be about the “personal connection of individuals”. Now it is all about “certificates to be traded” – and the incentives within that are short-term not long-term. So big companies aren’t pressured to behave in the same way they might have been 30 years ago.

At the same time, the rise of firms that don’t require much capital means that many of the big firms that come to market now are still largely “founder owned”. That means that they don’t have to – and often don’t – listen to the views of other shareholders and stakeholders.

Anderson’s hope is that this will be somehow self-correcting – that fund managers will start to look more to the long term (there is evidence this is happening) an that the “deeply intelligent people” running the likes of Google, Facebook, etc will realise that if they play their cards right they will get a “position in society” that will make them more influential within society than governments. But that they will only get there by being seen as supporting a common good rather than an elite good.

We’ll be writing much more on this – the Google row has kicked off some fascinating conversations on the nature of our version of capitalism that MoneyWeek intends to be part of! But for now, have your say below – we’d love to hear your views on this core question:  has the rise of the fund manager destroyed the good in capitalism?

  • G Jones

    The removal of the direct relationship between the investor and the companies they are placing their money with has diluted the holding to account of executives for company performance, executive rewards and general governance. Many, though not all, fund managers see their interests more aligned with the senior management of the businesses that they place their funds in rather than their customers whose savings they are investing and who pay their fees. To be specific I mean excessive Pay packages for mediocre performance and measures on which bonuses are earned rewarding highly short term investment decisions and excessive marketing and historically commissions (for open ended funds) in order to make their funds ever bigger.

    It does feel that the tide is slowly beginning to turn, with The Retail Distribution Review replacing high and often opaque commission payments with transparent fee arrangements and an increasing focus on both the fees and performance of the fund managers themselves. The death of final salary pension schemes will also provide a greater emphasis on investment performance and good corporate behaviour from both trustees and Pension plan holders as employers can no longer be called on to top up fund deficits.

    However, if we are apportioning responsibility then individual investors do need to shoulder their fair share as we have been too docile for far too long.

  • Nico Metten

    This is complete nonsense. The state is not society. The state is a predatory institution on top of society. The market is the real society. That is where people come together to voluntarily cooperate to better their lives. And it works wonderfully. That is why it is in the best interest of anyone that capital stays in private hands. Productive companies like google do all of us a big favour avoiding paying taxes. They can use that money to invent the next great technology or make their already great services even better. That is what society really benefits from. Give it to the state and it will use it to throw bombs on Syria, harass immigrants or simply let it disappear in its hugely inefficient bureaucracy. All wealth destroying activities. So Merryn got it completely upside down. Free markets are the moral social institution. The state is the immoral institution that corrupts society.