We can entrust our share ownership to intermediaries, which is a good thing, because most of us don’t have the time or expertise to make investment decisions. And we spread our share ownership across hugely diversified, often international, portfolios, which hedges us in most circumstances against market risk.
But the result of intermediation and diversity has been to turn most shareholders into absentee or transient owners of companies. The decisions about what to own and when are made by fund managers whose incentives may require them to deliver returns on short timeframes, even if they manage pensions for people whose key interest lies in the long term.
For companies, the pressure to deliver short-term share price gains too often has to come before any wider considerations. In fact if CEO remuneration is tied to share price movements, simply raising the share price can become a corporate strategy in itself.
Market analysts may be as likely to be involved in a sophisticated game of predicting the next press release and share price movement as they are in assessing the long-term strength or weaknesses of firms.
This risks rewarding clever readers of the market more than industrial innovation, quality management, or entrepreneurial skill. On the face of it, it does not seem a model good at building companies with the patient but engaged ownership required for low carbon innovation or infrastructure investment or manufacturing on the back of new technologies in Britain.
the open secret of the last two decades is that mergers too often fail to create any long term value at all, except perhaps for the advisors and those who arbitrage the share price of a company in play.
A lot of M&A advisors must be sleeping badly in that knowledge. Or maybe not.
And it seems to me that given that a takeover can have huge implications for workforces and communities as well as investors, this is an area where good governance, and active and responsible shareholding, are absolutely critical. I do believe that there is a strong case for throwing some extra grit in the system.