Sunday, 14 December 2008

Ownership issues

A few different thoughts about the shareholder as owner idea(l).

1. One interesting theory that has gained a bit of traction over the past few years is that of the 'universal owner', developed by veteran US governance activist Bob Monks. This suggests that investors like pension funds should pay proper attention to externalities, since they effectively own everything. Hence if Company A pollutes and gets away with it this may still hurt the fund because this impacts on Company B, which is also held by the pension fund. It's an elegant way of getting people to think more broadly about the impact of their investment.

It's also got some obvious flaws. Actually even the largest investors do not own everything, even in their own countries. I did some work around M&S this summer and one of the surprising things was that a fair number of investors didn't hold it. Think also about the impact of private equity. Unless you invest with KKR, a UK pension fund won't have any exposure to Boots. Then there's the whole private company sector. And this is before even considering overseas investment. Many funds won't have any exposure to entire countries.

Therefore I think the reality is that as a concept the universal owner idea could only accurately apply to the largest pension funds, like CalPERS, and even then I'm not sure that it holds. I think it's a useful concept for inspiring people to action, but it can't bear much weight in terms developing a better understanding of how things actually fit together.

2. Isn't it a bid odd that the investors that are most committed to the idea of shareholding as a form of ownership tend to be public sector pension funds? Corporate pension funds just don't come close, despite the fact that if the sponsoring employer is a public company it should (in theory) be run in the interests of shareholders/owners. So why don't corporate pension funds seek to act like owners too? Perhaps employer trustees on private sector schemes recognise that they don't want shareholder hassle themselves, so don't seek to inflict it on other companies in which their fund invests. Maybe it's a reflection of the fact that, when you have dispersed shareholdings, the shareholder as owner doesn't really exist outside the pages of text books.

Notably the SRI movement got here first - asking why companies that commit to CSR don't follow through and apply social and enironmental standards to their pension fund's investmets. But actually I think the question of why they don't assert themselves as owners generally is more fundamental. I'm sure many directors do genuinely think they are accountable to shareholders, yet when they have a shareholder role themselves, as pension fund trustees, they don't seek exactly that same accountability from investee companies. By the by we might also ask why public sector funds do seek to make the shareholder/owner idea work. Perhaps they are populated by politicos who are too keen on theory. Or pehaps, like the universal owner idea, the ownership concept is simply a theoretical fig-leaf to enable them to pursue social and environmental issues?

3. Does the wonky nature of the shareholder as owner idea matter? This might seem like a bizzare question to ask in the current climate, when ownership failure seems to have been a contributory factor in the financial crisis. But I do wonder sometimes whether our attempts to make the shareholder/owner thing work are trying to solve a problem that isn't there. I think company directors want to do a good job, and I think many of them would do a good job without complex incentive schemes, or the the constant pressure to deliver quarterly results. Perhaps by trying to crowbar in this shareholder/owner model of the company, often relying on pretty basic rational economic man type assumptions, we've even made the system worse. If Bobby Pesto is right that we are entering a new capitalist era, I would have thought that our ideas about how companies are run, and for whom, need some revision. And this suggests, to me, looking for better way of conceptualising the company-shareholder relationship than 'ownership'.


Charlie Marks said...

Most interesting thing about "new" capitalism is: which companies have been chosen as "too big to fail" by the government? It's a wonder this list hasn't been leaked. Let's face it, the Madoff scandal shows that there's plenty of bad debt out there.

We're entering a period that of greater protectionism and financial regulation. If this is bad news for British capitalism (lack of access to overseas markets) we're looking at increased investment in the domestic economy (government's anti-recessionary strategy = demand-side). The need to reduce carbon emissions & increased transportation costs could mean greater manufacturing for the domestic market (as well as export - weak pound helping). Now, I hope this perestroika will lead to glasnost on economic matters - the result of the next election being either a minority Labour or minority Tory government, without the strength to impose massive cuts, there's interesting times ahead.

CharlieMcMenamin said...

Fascinating post. it's always good to read empirically based analyses, rather than simply theory driven accounts of what should happen.

My understanding is that much huffing and puffing has gone on around the issue of 'ownership' in the corporate sector, basically to deal with a perceived problem of a split between the interests of shareholders and senior managers. So there are all sorts of weird and wonderful schemes for 'aligning' these interests. But surely not all shareholders will have the same interests with which managers' actions have to be 'aligned'? It seems very plausible to me that public sector pension funds - or funds with a strong and active TU voice - might have a much stronger sense of extra -economic concerns, whilst those pension funds dominated by private market thinking simply trust the managers, if 'correctly' (sic) motivated, to maximise market value. The private sector might even be slightly more prepared to spread their risk by seeking some investments which maximise short term results and some which go for longer term underlying's a dependable return they are surely looking for, as well as a high one, not the wider social good.They are rentiers, not activist owners. That is the problem, surely?.

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