Sunday, 22 July 2018

Shareholder primacy and utilities

A theme I think anyone with an interest in corporate governance should keep an eye on is the way that the interests of investors in a firm in relation to others are portrayed in financial media and elsewhere.

Under the 1990s model it was common to see the point made that actually we are all shareholders, so we have an interest in the performance and management of companies. In the policy world a lot of emphasis has been put on enhancing the powers of shareholders as a way of balancing managerial power. At its most optimistic this stream of work sees the public as somehow having control over investee companies. These sorts of ideas have been influential for around 20 years in some markets.

However, increasingly we see recognition that life is more complicated than this, that interests within the firm compete, and that it's not necessarily a good thing that investors come first. The latest version of the UK Corporate Governance Code is a mild tilt towards a more "stakeholder" view of the firm. I would envisage a further shift when Labour gets back into power.

This piece in today's Financial Mail is worth a read in this light (the same story is on the front of tomorrow's Mirror). In common with what we saw with Thames Water, the interests of "shareholders" are counterposed with those of customers/consumers.  
Professor David Hall, a water industry expert at the University of Greenwich, said water companies should pay out less in dividends and instead use the money to cut leaks by improving their infrastructure. 'The money is available,' he said. 'But it's not reaching the right places – which are the leaks. It's reaching the wrong places – which are the pockets of shareholders.'
Invest in solving leaks, or distribute cash to investors. In the above quote these options are characterised as pulling in different directions. To prioritise one is to damage the other. This is a million miles away from the Mckinsey hot air about there being "no inherent tension" between different interests. (Interestingly Ofwat has a section on its website specifically about "Profits and dividends"of water companies, and its chief exec has had a pop at recent decisions by some companies.)

As I've said before, I think we are going to start seeing this kind of argument a lot more often than we have in the recent past. Obviously this comes with a backdrop of renewed discussion of public ownership of utilities. I think the increasing prevalence in the media of the idea that there are competing interests is will make more radical policy options more achievable. 

Of course, these are difficult issues. It is definitely the case that taking utilities back into public ownership is going to sting our pension funds. It's not obvious to me that there is a investor-friendly middle route. For example, we could look at the UK "owning" utilities through our pension funds directly, stripping asset managers out of the deal and thus reducing costs. I don't think our funds have the scale to do this, nor are they currently structured in a way that would stop them thinking like asset managers. And at some point the dividends vs investment question will come up.

Nonetheless the ground does seem to be shifting.

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