Thursday, 8 April 2010

Superficial ownership

A few things lately have made me ponder this question of ownership (of publicly listed companies) a bit more. First the continued rumblings about the Kraft takeover of Cadbury. The select committee report on this is worth a read. There's nothing particularly novel in there, but it does capture something of the different perspectives on the deal. For a lot of people in the City (and some of the less interesting commentariat on the business pages) it was just a question of Cadbury shareholders getting a good deal. And on one level they were clearly right - Cadbury shareholders made quite a bit of money, and that includes all of us who are members of funded pension schemes.

But the select committee report does point up the way that this transaction in the financial markets doesn't quite mesh with the experience on the ground. Agreeing to sell the shares was a very quick process, but the effects on the company itself, and its employees, are only starting to be felt. Somehow the role of shareholders, though fundamental to the company's future, felt rather superficial. You could see this reflected in the comments about investors with a short-term interest deciding the future of a 185-year-old company. Similarly, in one very real sense the new owners of Cadbury are Kraft shareholders. But do we really think it feels like that to Cadbury workers? For them it will be the Kraft management they perceive as the new owners.

This is interesting in the light of the development of the Stewardship Code for investors. The idea is that investors will be apply 'comply or explain' to the Code. They state compliance or explain why not. And, as currently envisaged, it will be ok for an investor to say they don't think stewardship is important, and are thus non-compliant. So what's strange is that we could have investors in companies who publicly state that they don't think 'ownership' activity is valuable but who nonetheless are granted legal rights to exercise ownership.

It's this kind of contradiction that makes me open to ideas like qualifying periods for voting rights, or some other ways to empower long-term investors who do take such issues seriously. Notably Bob Monks' latest thoughts on these issues are in this territory too. Under such an approach, investors could still trade in stocks as much as they wanted, and as such those who think this would result in prices that tell us something useful about the underlying companies shouldn't have a problem. But only those who identify themselves as being interested in ownership would have formal rights. Controversial stuff, but I'm warming to it.

But are those investors who might be up for playing the ownership role ready to do it? Hmmmm. I was at a meeting where David Pitt Watson spoke on this theme last year, and I what I took from his comments is that actually very little 'ownership' activity actually takes place. Most fund manager meetings with companies are primarily designed to obtain information that could inform trading decisions (from memory I think this is confirmed by some of the research Paul Cox has done). Obviously meetings occur between corp gov and SRI people and companies too, but we all know that these are frequently given lower status by companies than meetings with those that manage money. So both sides of the relationship put more emphasis on the trading-focused meetings.

One might argue that this, then, is where we ought to focus activity. And it's interesting that when Paul Myners highlighted a few of the investors who he thought got the stewardship concept he mentioned the heads of L&G, M&G and Standard Life, rather than those with specialist governance or SRI focus like Hermes and F&C. The three he mentioned are more in the traditional long-only mold, and L&G primarily a passive house, and their voting records aren't great (M&G particularly). That suggests to me he must be thinking more about the style and attitudes of the CIOs combined with the assets to have an influence, but I could be well off the mark. But the general point is that I think we can conclude that the sort of ownership activity many of us would like to see is currently a minority pursuit. In addition some of the activity that is currently taking place under the ownership label is, again, a bit superficial.

Finally I'm attracted to the idea of trying to enfranchise individual shareholders and those who are the ultimate beneficial owners (like pension scheme members). This is the sort of stuff David Pitt Watson et al talked about in The New Capitalists. But once more attempts to do this to date, including by yours truly in respect of member trustees when at the TUC, haven't achieved what was expected. Again, the activity that has taken place doesn't quite feel like real ownership.

Not for the first time, my conclusion is that we are still at a very early stage in this field. I think what we have so far is a variety of superficial versions of ownership that we know aren't quite right.

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