Tuesday 17 June 2008

Shareholders vs the public

One of my fave non-lefty blogs is the rather ace Going Private. But there's a section in this post that has me shaking my head. It's this bit:

There is a very dangerous modern trend to hold the corporation (usually by tasking the Board of Directors) accountable to the "stakeholders" (which is code for "shareholders plus." Usually, this starts off as "shareholders plus employees" but often progresses to "shareholders plus employees plus community" and eventually to "shareholders plus employees plus general public."

It won’t be a surprise to hear that I disagree with this, but it's the assumptions about 'shareholders' that I'm bothered about. At the bottom of it is the same old question - who are the shareholders? A quick look at the UK's share-ownership (see table on page 9 in this PDF) shows that the biggest class of domestic investors are actually insurance companies and pension funds. Both are in the business of investing other people's money. In other words, there is a rather significant overlap between 'shareholders' and the public.

Incidentally the biggest owners of UK shares are overseas investors (accounting for about 40%). A lot of noise has been made about sovereign wealth funds, but actually when you look down the share register of a UK company the big foreign investors tend to be public sector pension funds, not SWFs. In other words it's a block of another country’s public.

The idea that the public are the shareholders is not new – Peter Drucker spotted the issue over 20 years ago. And it has seen various iterations since, most recently in The New Capitalists, co-authored by almost Labour GS David Pitt Watson. So why do we still see this rather false divide between 'shareholders' and 'the public'?

I can understand some lefties getting it wrong. The desire for a "fat cat" scapegoat means that many conflate shareholders with fund managers, fund managers with the City, and the City with the rich. So attacking "shareholders" is arguably really a way of having a pop at "the rich". And the desire to see things this way is very strong. It presents a simple moral story of the rich squeezing the workers. (But, as I keeping banging on, I think that completely overlooks the opportunities for the Left to be to be far more active in this area).

But what’s the excuse of Righties? They are supposed to understand this financial stuff, surely they must realize who the ultimate shareholders are?

I think there are at least two trends at play. One is the mirror of the Left ideological antipathy towards 'shareholders'. To ideological Righties, 'shareholders' appear to be cool-headed, rational self-maximisers who are shorn of any 'values' besides returning a profit. Hence leaving 'shareholders' in charge of companies must be the right thing to do because they have the self-interested drive to keep them on the right track. It's an elegantly simple idea, but rather messed up by the reality. Hence the identity of shareholders is usually left vague.

On the other hand, I suspect some of the more cunning Righties out there recognise that shareholder 'control' of companies is weak. In effect 'ownership' is delegated down the food chain to the fund managers, who, as agents, don't necessarily have the incentives (or ability) to address governance and social responsibility questions. So by saying 'leave it to shareholders to decide' in policy debates they are really saying 'let management get on with it', and I think this maybe behind Ruth Lea's recent comments.

Personally I think this tendency to kick difficult issues around corporate governance and social responsibility into the long grass by saying 'it’s up to the shareholders' (see Kitty Ussher's comments on exec pay) needs serious revision. The 'real' shareholders – those whose economic interests are tied up with those of the investee company – barely feature. With the shift to defined contribution pension provision, which will dominate the UK in future, individual punters have an even more direct stake in the success of UK PLC. But where are they represented?

It might even be the case that, if they were ever offered a choice, ordinary punters might accept the free-market pitch - we think it's broadly beneficial if you leave it up to companies (and fund managers) to do what they want as you will ultimately benefit, 'invisible hand' style. But at the moment they are barely even acknowledged as having an economic interest, and instead are typically relegated to 'stakeholder' class as in the text above.


Phil said...

I suppose one of the reasons the left tend to get the character of shareholders wrong is because there is no real qualitative difference in the behaviour of firms whose share holding majority are held by pension funds and those who aren't. But I agree with you, the left should be alive to this difference because it can act as a boon for those of us who'd like to see democratic control and accountability in the economy ...

Tom Powdrill said...

Actually there is a bit of evidence from the US that companies with large public sector pension fund investment embark on less M&A activity.


but I basically agree. one of the problems is that most UK pension funds delegate everything to fund managers, who are what most lefties are thinking about when we use the term 'shareholders'.

I also agree it could open up an avenue for discussing control and accountability, but most of the left doesn't want to bite. what interest there is in this area comes primarily from the unions rather than left politicos.

Simulacrum said...

I think you are falling for the same fallacy that many others have succumbed to - that of the "public interest" being represented by the pension funds. For one thing, those pension funds are in fact managed by individuals who have a responsibility (fiduciary and, one might argue, moral)to act in the best interests of their constituents, the pension beneficiaries. As such, rather than rail against the boards of companies, why not take issue with the pension fund managers who do not act in the "public's" supposed interest?

The bigger and more important issue here, which is conveniently overlooked, is that each pension fund is responsible for the best interests of a limited public - not the general public. Let's give a quick example: Citigroup is going to layoff many thousands of workers in New York City. The teachers of California, might have a very different agenda than that of New York Common Fund - both are large pension fund investors. Which way should they vote? Should a californian pension fund vote in the interests of the New York public to the detriment of their own teacher's economic interests? To claim that all pension funds represent the "public" and therefore should consider things on behalf of said "public" is to misunderstand the concept of what shareholding is all about. The true public is highly diversified, and has as many interests as there are options to invest.

By your attempts to co-opt the pension funds into a misguided representation of the "public", you miss the mark. The public is already represented in the shares that are held, both individually and collectively through funds. Just because they do not vote their shares the way you think they should does not give the broader, non-shareholding public a say in the actions of a particular company.