Institutional Ownership - a paradox where long-term goals are promised in theory but short-term act occurs in practice

Abstract

The development of the capital market in Sweden in recent years has transformed the ownership in companies from private owners to large institutional owners with a main focus on investment companies, insurance companies and pension funds. Institutional investors are accused of being passive owners with a strict focus on short-term financial results and of having no interest in developing companies and building long-term relationships. There has though been an increasing trend in the business sphere towards different forms of ownership activity and corporate engagement where an increasing number of institutional investors present themselves as active owners with a sense of responsibility and genuine interest in companies, due to pressure from the society. Owners are however obliged to earn profit and present positive short-term results to shareholders and customers in order to survive in the competition and we believe that it can be difficult to combine both long and short-term goals. The purpose of this study has therefore been to examine whether a paradox exists within institutional ownership where long-term goals are being promised in theory but short-term act occurs in practice. To fulfill our purpose we have conducted interviews with the largest investment company in Sweden, Investor AB and Folksam which is one of the leading insurance and pension companies. We have also thoroughly studied the literature on the subject and followed the public debate regarding institutional ownership. Our study revealed that institutional ownership is a complex matter and although many similarities can be found between theory and practice, we discovered that institutions and their ownership cannot be generalized. Institutional owners have different goals due to differing conditions and activity and engagement is therefore not something that suits all owners and their business concepts. A paradox between long-term promises and short-term acts do exist but not to the same extent that we initially thought. In our discussion we reason about the definition and development of institutions and ownership and come to the final conclusion that maybe there is not such a thing as institutional ownership in reality.