Thursday, 24 September 2009

Strategy, pay and shareholders

Another interesting argument that came up Tuesday's seminar was the ability of shareholders to really get to grips with strategic issues facing investee businesses. One company representative made the point that it was very difficult for shareholders to second-guess directors in terms of strategy (one quick aside: given the track record of M&A in terms of delivering for shareholders, maybe they should just be generally sceptical). In many cases the directors knew the industry they worked in very well, and knew a lot more about what would and would not make a sensible acquisition. In contrast shareholders did not have access to the same kind of information, and other factors (portfolio diversification etc) made it unlikely they could exercise sensible challenge even when it might be needed.

On the other hand, he argued, shareholders could say something sensible about pay because they could be more objective about it than directors, because they had knowledge of other companies and (I would add) all the relevant information is in the public domain. Notably this is a complete flip around of the typical views expressed by many shareholders - pay takes up too much of their time and isn't that important, they shouldn't micromanage the detail etc.

It also feeds into the argument I've made before. Fund managers who are opposed to the Government's efforts to get them to act more like owners say that the information asymmetry they face compared to directors makes it very difficult (if not too difficult). Fair enough, but then if that affects your ability to take a view on relatively simple issues like board structure and pay, why shold we have any faith in what's supposed to be your core ability - forecasting the prospects for investee businesses. What is diferent in principle, other than the latter is surely even harder?

Finally this also made me think a bit more about this question of employee involvement in governance and decision-making. This is an idea I am clearly likely to be sympathetic to given my background, but it's one I've never really explored in detail. As Blair argues, employees have a lot tied up in companies compared to shareholders. In public companies with dispersed shareholders they also surely typically have better information about the company than investors. So the more I read and think about this (and others are way ahead of me), the more convinced I am that there are solid reasons for thinking a lot more about how employees are represented in governance, and also how we look at their role in ownership.

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