Working Group: Investments and Investors - Summary

As is common after any financial crisis, the search for whom to blame continues to reverberate long after the worst of the crisis has past. One focus of attention has of course been that of institutional shareholders. Could they have done more to avoid the crisis? Was too much faith put in the analysis of third parties such as investment banks and credit rating agencies? The general view of the panel was that while not being directly responsible for the crisis, the investing community could have done a better job in at least flagging up some of the worries about the build up in strains within the financial sector.

The discussion tended towards the view that indeed too much reliance was out on external advice and opinion and that in many cases insufficient due diligence was carried out. It was hard to pin down why this might have occurred, although some participants wondered if this was a common feature of asset price bubbles and herd behaviour. The question of whether investors held realistic rate of return expectations was raised, a subject now being debated as part of the reaction to the crisis. In a similar vein, the problem of short-termism was raised. How to encourage a  longer- term investment horizon was raised, and whether regulation can have any influence upon this. More responsibility on the part of boards was also recognised as a necessary change. This led to a discussion of the best competencies for board members: industry experience or the ability to ask the awkward questions?

It was accepted that a core issue in this crisis was the widespread mispricing of risk. One of the tasks now in the regulatory response is to strike the right balance so that markets behave in a way which is conducive to fostering a stable financial system and to underpinning productive growth in the real economy.

The panel did feel that the investment community had not done enough to make its views heard in the current regulatory debate. More also needed to be done to improve information and education for retail investors, although there was an active discussion how far this could go and what was reasonable to achieve in this respect.