Thursday, 7 July 2011

What is ownership really about?

I've thought for a while that the way that people approach the governance/ownership varies quite dramatically. Even when using the same terms they are thinking in very different ways.

It isn't helped by the fact that the mechanisms of public company governance blur the boundaries somewhat. Think about It, the language is really political in nature, with elections, activism, accountability, 'one share, one vote', 'shareholder democracy', etc. The mechanisms of governance look like they are trying to apply political forms of legitimacy - elected representatives serving terms - to the management of companies. And when those mechanisms are either abused by the representatives, or under used by the electorate, some question the legitimacy of the system.

Yet to others in the same field the language of accountability is not about fulfilling the mandate given, but about the agency problem, about ensuring that the agents are doing what they are paid to do. It's much more about a contractual view of the relationship. Provided that the job is done roughly as expected then governance doesn't matter too much.

You can see these competing conceptions at play regularly. Those more inclined to the political conception often seem like they are concerned with relatively abstract issues (combined chair/chief exec? Hey it's just a job title!) even when the company is doing well. Contractual types are happier to let niggles go - provided that the returns are coming in. There's also a diference in the way issues are raised with companies. Political types seem more happy to go public, perhaps as 'opposition' is conceived, in common with politics, as a necessary part of the process in reaching acceptable decisions. Contractual types seem to believe it is better that concerns are expressed privately, precisely to avoid the appearance of dissension.

The most obvious divergence comes in approach to director elections. Political types seem to view this as a vital form of accountability, and raise concerns about the thumping votes in favour most directors receive. Contractual types seem more inclined to see voting against a director as an extreme move, the nuclear option, and also expect to be able to remove problem directors without a vote.

It's obvious where I sit, but I do genuinely think neither approach is the 'correct' one. There is scope for both, and one will dominate more than another at different time. Particularly if the Stewardship Code etc are intended to use shareholder oversight to achieve public policy goals then inevitably a political conception looms larger. But in practical day to day terms the contractual mindset seems more common amongst many investors. My slight concern is that we mistake one approach for another, or that when the boundaries are blurred we aren't achieving what we think we are. Again in relation to asset managers there's a danger that they will simply re-describe what they do already to appear more in the political mould than they really are.

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