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Changes in the share-ownership of UK companies


It is widely assumed that the share-ownership of UK companies is concentrated in the hands of a relatively small number of institutions predominantly based in the City of London.

However, figures on share-ownership show that the proportion of UK equities held by domestic institutional investors is actually in long-term decline. In contrast overseas investors account for a steadily increasing slice of the ownership of UK companies. In addition the rise of hedge funds and, in combination, stock-lending has also acted to dissipate institutional power.

This short paper provides a brief overview of the recent changes in UK share-ownership and some of the issues this may raise for trade unions.

The rise and eclipse of UK institutional investors

The nature of share-ownership of UK companies has gone through dramatic changes just in the time that information has been collated. The earliest figures provided by the ONS date back to 1963 at which time the majority of shares were still held by individuals, accounting for 54% of the total [1] .

In the subsequent decades UK equities were increasingly sought by institutional investors, primarily pension funds and insurance companies. In 1963 these two groups accounted for 16.4% of the ownership of UK shares, but by the early 1990s between them they held over 50% [2] . Given that the bulk of the money being invested represented the retirement savings of many ordinary Britons this represented a fundamental shift in the ownership of UK business.

This concentration of institutional ownership occurred in other countries with funded pension systems. Its consequences were foreseen by some and even described as a form of socialism. In the US, books from both the Right [3] and the Left [4] argued that the slow build-up of ownership of companies effectively on behalf of working people marked a significant change in the nature of share-ownership.

It is the conventional wisdom in the UK that domestic institutions have amassed a significant degree of ownership of UK businesses and, by extension, power over them. Commentary in the business press in particular often makes reference to the power of a small number of financial institutions to affect a business's strategy or to remove its leadership. Trade bodies such as the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF) are taken to speak on behalf of the owners of UK business.

At the same time Government has sought to enhance the role of shareholders. There is a strong thread linking initiatives such as the July 2000 amendment to the Pensions Act, the Myners Review, the introduction of a shareholder approval vote on executive remuneration policies and the forthcoming Operating and Financial Review. This points to developing a real sense of ownership on the part of large shareholders to encourage them to engage with companies when they fail, both in financial terms or in meeting the expectations of society more widely.

It is at this point, in the UK at least, that much commentary has stopped. Domestic institutional investors are seen as the dominant shareholders. But the reality is that for over a decade the real power of domestic financial institutions, as expressed as a proportion of ownership of UK shares, has actually been on the wane.

For example, according to the most recent figures, share-ownership by pension funds actually hit a peak more than a decade ago in 1992, at which point domestic pension funds held 32.7% of shares of UK companies. Since that point the share of UK equities held by pension funds has declined by more than 50% to stand at 15.7% in 2004 [5] .

During the same period the UK equity holdings of the other major class of institutional investors - insurance companies - have also declined significantly. The proportion of UK equities held by insurance companies peaked in 1997 at 23.5 before declining to hit 17.2% in 2004 [6] .

So overall the combined proportion of shares held by pension funds and insurance companies fell from 49.7% in 1994 to 32.9% in 2004, a reduction of a third.

There are some specific trends at play here. Many pension funds, for example, are moving away from high weightings in UK equities. This is in part an attempt to diversify and many UK pension funds are increasing their exposure to overseas equity markets at the same time as they reduce their exposure to the domestic market.

At the same time there is a general shift away from equities as pension funds seek to match their assets more closely with their liabilities, they are moving instead into Government and corporate debt [7] . Given that many defined benefit pension funds are now closed to new members and hence will become steadily more 'mature' this divestment of UK equities, and equities in general, might be expected to increase. It should be noted that the creation of new defined contribution pension schemes may create new demand, but this will depend on the asset allocation adopted within these funds.

The expansion in overseas investment

The other emerging factor driving the decline in the control of domestic equities by domestic institutions is the steady increase of overseas ownership. In the decade from 1994 to 2004 the proportion of UK shares held by overseas investors doubled from 16.3% to 32.6% [8] .

These broad figures can be broken down further to give an indication of the various constituents that make up the proportion of UK equities held by overseas investors.

Geographical breakdown of overseas equity ownership at end 2004



Offshore UK

North America



Australasia and Oceania

% owned







Source: Share Ownership: a report on ownership of shares as at 31st December 2004, table F

It is clear that at present Europe and North America represent the bulk of overseas ownership of UK equities, and just over 21% of the total market based on ONS figures. Asia represents over a fifth of the overseas ownership of domestic equity, and this may be expected to increase over time if, for example, China seeks to fund its own pension liabilities in part through exposure to overseas equities.

Interestingly the overseas ownership of UK companies can be taken down a further level, focusing on preference for particular companies and broad industry sectors. Not surprisingly overseas investors are more heavily weighted to companies in the FTSE100. This is typical for investors looking to gain exposure to an overseas market. Overall overseas investors own 35% of the equity of FTSE100 companies, more than the 32.9% held directly by domestic pension funds and insurance companies. In total 86.3% of overseas investors' allocation to UK equities is concentrated on the FTSE100 [9] .

Looking at investment in particular industry sectors, overseas investors appear to exhibit a bias towards manufacturing companies, having a noticeably higher weighting to this sector than domestic investors.

Ownership of companies by industry

Financial companies

Non-manufacturing companies

Manufacturing companies

Rest of the world




Insurance companies




Pension funds




Source: Share Ownership: a report on ownership of shares as at 31st December 2004, table C

So just in terms of basic investment decisions we can see that overseas investors exhibit some distinct preferences compared to their domestic counterparts.

Even at this level there maybe some cause for concern. The focus on larger companies, which is an inevitable by-product of seeking exposure to a market by following an index, may create problems for small companies which fall outside the index. Given that in the order of a third of UK equities are now held by overseas investors they must have some impact.

A more fundamental issue, however, may be the views and expectations that overseas investors bring with them. There is no reason to expect that overseas investors subscribe to similar views about corporate governance and the wider responsibilities of business that are beginning to emerge in the UK. The following two examples provide an indication of practical issues that may emerge.

BAE Systems, 2003

In the summer of 2003 there were a number of companies whose executive remuneration policies attracted significant shareholder opposition. BAE Systems came very close to joining GlaxoSmithKline in actually seeing its pay policy rejected by the majority of voting shareholders.

Yet there was relatively limited opposition to the remuneration policy from UK shareholders. The TUC's own research established that out of a sample of 17 large UK investors who held BAE Systems stock only four had voted against the policy and two had abstained. The remaining 11 had voted in favour of the proposal [10] .

The closeness of the vote was explained in part by the fact that the leading US proxy voting agency ISS had recommended a vote against the policy. Given that many US investors follow ISS voting recommendations this had resulted in a significant amount of BAE Systems' shares held by overseas being voted against.

The long-term implication of this trend may be that overseas investors become significantly more important in terms of voting at AGMs. In this case US investors took a tougher line than domestic institutions, in other cases the roles may be reversed. In addition overseas investors may feel less compelled to use their voting rights intelligently (or indeed at all). This could result is an increasing amount of shares either not being voted or being voted in favour of management.

Attitudes to socially responsible investment (SRI)

In the UK, with Government encouragement, SRI has become a far more legitimate investment activity and the importance of extra-financial factors (such as environmental standards, human capital management etc) in driving performance is increasingly being recognised by mainstream investment houses. A similar story has emerged in the rest of Europe. In contrast many mainstream American investors appear deeply sceptical about the importance of extra-financial factors.

This transatlantic divide was most recently demonstrated in research on fund managers views produced by Mercer Investment Consulting. It found that globally there was an expectation that SRI would grow, and that techniques employed by SRI funds would be increasing applied by mainstream investors. Almost 90% predicted active ownership would be a mainstream practice within 10 years, 73% believed the incorporation of social or environmental corporate performance indicators would become general practice within 10 years, and 65% said they thought positive or negative screening would enter the mainstream within 10 years [11] .

However, looking solely at the US, over 60% of those surveyed that they did not believe screening and the integration of social and environmental factors would ever be a mainstream investment practice [12] .

Socially responsible investors are beginning to have some impact on investee companies as has been recognised by business leaders [13] . However their power could be reduced if overseas investors are not as concerned with issues of social responsibility. This is a trend that could play out either way, since some European investors, which may account for a significant slice of overseas ownership, are more positive about SRI.

Looking outwards

These are not isolated examples, rather they point up the increasing importance of cross-border investment. It should also be remembered that this is a two-way process. The power and attitudes of UK investors could also potentially have a negative impact on the governance structures of companies in the rest or Europe.

For example, co-determination is seen in the trade union movement as a positive way of governing companies. However for many involved in corporate governance in the UK such a system is an affront to the idea of a unitary board.

These differences in views of governance may begin to move into the arena of shareholder activism. Just as overseas investors are becoming more important players in the UK equity market, so UK investors have increasing leverage in the rest of Europe. It is possible that Anglo-American shareholder views will begin to put greater pressure on co-determination as a system.

For example, in the summer of 2003 Frank Bsirske of the German union Verdi saw significant shareholder opposition to his continuing membership of the supervisory board at Lufthansa. Dissident shareholders said that Bsirske was conflicted because he had supported industrial action that had taken place at airports, which had cost the company money [14] .

Although the rebellion had no legal power it was significant as more than 50% of shareholders failed to back Bsirske's appointment and it may be a portent of things to come.

International alliances

There are moves towards co-operation on proxy voting recommendations across borders. Since 2003 ISS has entered into a relationship with the NAPF to develop the voting service RREV, which will see ISS subscribers receive RREV's voting recommendations on their UK investments and vice versa [15] . Similarly the European Corporate Governance Service has developed to co-ordinate co-operation across European markets [16] .

Again such developments may not be an inherently good thing. Proxy voting agencies have in the past recommended votes on specific items at company AGMs that have conflicted with the views of trade unions. In the UK there are clear distinctions between the stances taken by different voting agencies. As such it will be important for unions to develop a clear understanding of which national voting agencies, and international alliances of agencies, are closest to their views and to seek to engage those that at present are not co-operative.

Looking further ahead unions should begin to consider the ongoing role of domestic trade bodies in defining the parameters of corporate governance. With NAPF and ABI members controlling a shrinking proportion of the equity of British businesses questions may begin to be asked about how much of a leadership role they should play.

This could represent both a threat and an opportunity. The threat is that UK businesses may feel able to disregard the views of leading UK institutions because they no longer represent the majority view of shareholders. On the other hand it should be recognised that some overseas investors, such as the large US [17] and European [18] public sector pension funds, have a greater commitment to governance and social responsibility than some of the domestic institutions they are replacing.

Once again this points to a need for unions to develop an understanding of, and a relationship with, new emerging players in the UK equity market. New alliances can be created amongst progressive global investors. There is also a need to understand the political situation facing these funds, in the US in particular, and how this might feed through into the UK.

There is a clear backlash against union organisation of capital in the US from both the business community and elements of the political Right. CalPERS is under direct attack from Governor Arnold Schwarzenegger [19] , and some on the Right have gone as far as to suggest that public sector funds should be denied shareholder voting rights [20] . Groups on the Right in the UK may begin to make similar arguments in the future.

Overall these developments point to a need for increasing trade union co-operation internationally, and to influence global grouping such as the International Corporate Governance Network. The CWC [21] pre-meeting ahead of the ICGN annual conference in July 2005 is a useful model for future co-operation. The further development of international relationships between trade unionists involved in capital stewardship is essential.

Domestic erosion of institutional power

It is not just the rise of overseas investors that is affecting the ownership of UK companies. We should also consider the changing nature of share-ownership within the UK. Although it is true that institutional fund managers still wield significant power with companies this is being eaten away to some extent by the rise of hedge funds.

It is almost impossible to speak of hedge funds as a specific asset classic since each hedge fund is different and they can employ very different strategies. However it is probably fair to categorise them as generally seeking to exploit short-term market trends to their advantage to generate returns. As even some fund managers have argued, this short-termism does not sit easily with the sense of shareholders as owners that the Government has been trying to develop.

Hedge funds are undoubtedly growing in importance. For a typical FTSE100 company meetings with hedge funds now account for about 20% of all investors meetings according to some estimates [22] .

In addition one aspect of hedge fund behaviour that has attracted particular concern is the practice of short-selling. This strategy is employed when the hedge fund believes that the shares in a particular company are over-valued and/or likely to fall in value. The hedge fund borrows stock in the company from another investor with the aim of selling it and buying it back at a lower price. Short-selling has been widely criticised during the rise to prominence of hedge funds. In particular concerns have been expressed about the volatility this can cause for companies.

There are implications for governance here too. The ability of hedge funds to short the stock of a particular company is dependent on the availability of the stock. As a result of the demand for stock over limited periods there has been a substantial rise in stock-lending on the part of many large institutions. Many institutions report that they lend more than 10% of their portfolio annually [23] .

The TUC's own research suggests that the majority of institutions do not always recall stock for the purposes of voting. For example, in a significant number of cases fund managers only recall stock when there is a contentious issue to be voted on, or when they feel it would be in a client's best interest [24] . This is confirmed by other studies [25] . In addition the TUC is aware of cases where pension funds have been unable to vote on contentious issues at AGMs because of stock-lending.

Interestingly, although businesses have often in the past been critical of hedge funds, increasingly the relationship seems to be more harmonious. For example a study by corporate governance consultancy Lintstock issued early in 2005 found that many investee companies had a positive view of the business acumen of hedge funds, of their contribution to market liquidity of their 'corrective' influence on complacent management and were relatively unworried by their potential ability to wield significant power. In contrast there was some criticism of some traditional so-called 'long-only' [26] fund managers [27] .

One might question if businesses prefer interaction with hedge funds because it is typically limited to strategic and financial questions, whereas institutions increasingly engage over governance and social responsibility questions too.

Regardless of the merits or otherwise of pension funds and others investing through hedge funds it is clear that they have acquired power quickly in the UK's capital market. Key funds are taken seriously by the companies they invest in, sometimes at the expense of traditional institutions. The growth in stock-lending both raises issues about the loss of voting rights, and points to a further erosion of traditional institutions' power at given points.

If unions wish to ensure that the companies in which they invest are properly stewarded there will need to be a clear position on stock-lending in particular. Whilst it can generate much needed income for pension funds this should not be allowed to conflict with ownership responsibilities. It will be simplest to state that stock should be recalled for the purposes of voting. This would marry up well with best practice outlined by others.

'...borrowing of shares for the purpose of voting is not appropriate, as it gives a proportion of the vote to an agent which has no relation to the agent's economic stake in the company... It is important that beneficial owners are fully aware of the implications for voting if they agree to their shares being lent. In particular, when a resolution is contentious I start from the position that the lender should automatically recall the related stock, unless there are good economic reasons for doing so. Failure to take such action could be extremely detrimental.' [28]


From this short overview it is clear that there are numerous issues arising from the changing nature of the ownership of UK companies that unions should at least be aware of.

Although domestic institutional investors are still of central importance in the share-ownership of UK companies, their power appears to be in long-term decline. In contrast overseas investors are becoming steadily more important and now own about a third of UK shares with European and North American investors alone accounting for a fifth. In addition in a short space of time hedge funds become increasingly important in their engagement with UK companies. The practice of stock-lending means that at a given point domestic institutional control of companies may be much less than typically expected.

The effects of this change in ownership of UK companies are already beginning to be felt, both in the voting power of overseas investors and the relationship between hedge funds and companies.

These changes present both challenges and opportunities. At the very least unions need to strengthen overseas relationships and share information on service providers, national and international organisations and investing institutions that might be developed as allies. Nationally it would be useful to take a clear position on the issue of stock-lending, namely that stock should be recalled for voting. Not only would this address the question of lost voting rights, it would also put unions at the forefront of best practice.

[1] Share Ownership: a report on ownership of shares as at 31st December 2004, page 9, ONS

[2] ibid 1

[3] The Unseen Revolution: How Pension Fund Socialism Came to America, Peter Drucker

[4] The North Will Rise Again: Pensions, Politics and Power in the 1980s, Jeremy Rifkin and Randy Barber

[5] ibid 1

[6] ibid 1

[7] Pension Funds Move £40bn From Equities To Bonds In 12 Months, IMA, 23 May 2005

[8] ibid 1

[9] ibid 1

[10] TUC Fund Manager Voting Survey 2004, pages 18-19, TUC, May 2004

[11] Mercer Investment Consulting Fearless Forecast 2005

[12] ibid 11

[13] See Sir John Sunderland's Speech to the Investor Relations Society, 21 April 2005

[14] Cromme urges reform of supervisory boards, Financial Times, 27 June 2003

[15] NAPF and ISS to launch groundbreaking global corporate governance venture , NAPF press release, 22 May 2003

[16] 'Governance structures and shareholder rights vary widely in different markets according to law regulation and cultural traditions. Pursuing a consistent proxy voting or corporate governance programme across markets therefore can be challenging for global investors. The ECGS is designed to simplify the process by providing research and advice based on common standards but tailored to local circumstances.'

[17] CalPERS has union representation on its trustee board and has a long history of corporate governance activism and socially responsible investment.

[18] For example the Dutch public sector workers pension fund ABP has specific socially responsible investment mandates.

[19] Will Arnold smash state employees' piggy bank?, Sacramento News & Review, 2 June 2005

[20] Grover Norquist, president of Americans for Tax Reform

[21] ICFTU Committee on Workers' Capital

[22] Hedge fund engagement with UK plcs, page 4, Lintstock, May 2005

[23] ICGN study of share lending vis-à-vis voting, page 3, Lintstock, May 2004

[24] TUC Fund Manager Voting Survey 2005, page 36, TUC, June 2005

[25] ibid 23

[26] Since traditional fund managers do not 'short' stock and over-weight in or 'go long' on stocks they favour they are sometimes described as 'long-only'.

[27] ibid 22

[28] Review of the impediments to voting UK shares: Report by Paul Myners to the Shareholder Voting Working Group, page 20, January 2004

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