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We should do more to encourage institutional investors to hold stocks for the long term

That Lloyds is encouraging retail investors to be long-term shareholders is great. But it's the institutional investors we really need to convince.

There has been much talk over the years in the UK about how to make shareholders think more long term than they do at the moment.

In his presentation at the MoneyWeek conference a few weeks ago, Terry Smith pointed out that the average fund manager turns over 80% of their portfolio every year, and the average holding time for a share has fallen from seven years in the 1940s to seven months now.

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That's a problem: if most of the people in the market are not investors, but speculative traders, how can we expect responsible capitalism (in which long-term shareholders hold the short termism of management to account) to take hold?

All sorts of suggestions have been put forward to deal with this problem. Some are negative and legislative think the financial transactions tax, which is supposed to put a little grit in the wheels of smooth trading. But some are more positive.

There has, for example, been some support behind the idea of allowing companies to offer stepped dividends depending on investor holding periods so the longer you hold, the higher your annual dividend.

But none of these positive ideas have yet taken off. Why?When I have asked in the past, I have been told that there are regulatory problems with differentiating between shareholders in this way.

Enter TSB. Lloyds Banking Group has just announced that it is to sell 25% of TSB with the offer taking place next month.

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But here's the interesting bit: Lloyds is planning to encourage retail investors to hang on to their shares by offering them one free share for every 20 shares they buy and hold for one year (subject to some terms and conditions that will be in the prospectus we haven't yet seen).

It seems like a good idea in essence (and perhaps those regulatory problems don't exist if the differentiation between shareholders is enshrined in the initial public offering (IPO) prospectus).

But, if the offer excludes as it seems to institutional investors, isn't it also a little discriminatory?

Given that it is the big institutions that we want to be long-term holders (they are the ones with the actual power to demand good corporate governance), why put in place a system that only encourages retail investors to stay in (and presumably dilutes the holdings of the institutional investors along the way)?

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