Rather they “own” least, as residual claimants. Associating “shareholding” with “ownership” thus makes little substantive sense, despite its widespread use in popular discourse. Indeed, it is precisely because shareholders own least, not most, that justifies granting them control rights over management in the first place. By vesting control rights in the stakeholder whose claim is riskiest, the firm is immunised against taking too much risk in the first place. The shareholder model is thus, in principle, incentive-compatible, as it properly aligns risks and rights within a company. 19  10  Research with Peter Richardson and Matthew Willison casts these results in a theoretical model (Haldane, Richardson and Willison (forthcoming). BIS central bankers’ speeches  The problem with this line of argument, as Martin Wolf of the Financial Times has articulated brilliantly, is that it confuses diversifiable and un-diversifiable risk (Wolf (2014)). While shareholders hold the residual risk in a company, this risk can easily be diversified away by holding a broad portfolio of assets. Shareholders are hence likely to be rather risk-insensitive and unlikely to discipline risk-taking by management. Interestingly, the situation is different for other stakeholders in the company – for example, employees, customers and clients. Typically, the company risk they face is not easily diversifiable. They cannot easily invest in a portfolio of jobs, or products or supply lines. So their incentives to restrict excessive risk-taking are likely to be, if anything, sharper and more acute than among shareholders.

Today, that fraction is less than 15%. There has also been a sharp fall in the fraction of shares held directly by individuals, from more than 50% in the 1960s to little more than 10% today. Today, these individual holdings tend to be indirect, operating through investment intermediaries of various types. That means the beneficial owners of shares – individuals – tend to have little direct communication with, involvement in, or indeed knowledge of, the firms in which they are investing. One consequence of a more dispersed and disinterested ownership structure is that it becomes harder to exert influence over management, increasing the risk of sub-optimal decision-making. 17 There is some empirical support for this hypothesis. For example, companies tend to have higher valuations when institutional shareholders are a large share of cashflow, perhaps reflecting their stewardship role in protecting the firm from excessive risk-taking (La Porta et al (2002), Claessens et al (2002)). (c)  Short-termism  A third friction in the manager/shareholder relationship, distinct but related, arises when different classes of shareholder have different rates of time preference. In particular, there have been concerns about the rising share of investors with excessively high discount rates and low holding periods – in other words, about “short-termism” (Kay (2012)). There is clear evidence of the investor scales having rebalanced in this direction over time. Average holding periods of shares have been in secular decline in a large number of countries for a number of decades (Chart 1).