Guest contribution from Martin Bralsford
Until recently, I was Chief Executive of a small AIM listed company trading in the Channel Islands with an enterprise value of around £450m. The Islands' population is c 150,000 and the Company had about 3,000 shareholders. Although this is tiny in comparison with the capitalisations of leading companies in the global markets, many of the issues remain the same; but one in particular gives me a different perspective from the CEOs of those much bigger publicly owned entities. In most cases, their shareholders will be large institutions or collective investors that invest capital on behalf of many people and they do not have the ultimate beneficial ownership, with its risks and rewards, of the investments made on their behalf. A smaller company, such as the one I was involved in, particularly in the small community of the Channel Islands, has a shareholder base, in large part, of individuals or families that felt a direct ownership link with the company and made their views known by direct communication during the course of the year, and, where answers were not obtained, at lively AGMs. This made me conscious that, as Chief Executive, I had a primary duty to deliver shareholder value, either through dividends or capital growth in line with, or hopefully above, our cost of capital. This is an objective test and outcomes fairly readily measured.
As a substantial part of the business was in retail and hospitality sectors, once again, in a small community, I was made very aware of what our customers felt about the services we provided. Indeed, some were shareholders, illustrating that these are not mutually exclusive.
So, it was with considerable interest I have read the recent public discussion taking place about the primary objective of business over the long-term, juxtaposing maximisation of shareholder value against customer satisfaction. First of all, pragmatically, it is worth a few moments thought as to what different courses of action might be followed by top management if it gives primacy to customer satisfaction over shareholder value. In the long-term, do the strategies and policies really differ that much? Probably not, unless one wants to take fairly extreme sets of circumstances, then strategy and its execution are pretty much the same. So, does it really matter?
However, my concerns are stimulated by the problems I see coming from top management of public companies becoming increasingly distanced from their beneficial owners, which in business literature is sometimes described as the “agency problem”. Management may become driven neither by the objectives of shareholder value nor customer satisfaction but merely their own particular objectives, either as individual greed or status/ego, or, indeed, a strong management culture that is self perpetuating in reproducing its own genetic make-up. I believe this has become a real problem and, looking back over 40 years in business, it is getting worse and at an accelerating rate. The excesses of management incentive schemes, supposedly aligning the interests of management and shareholders, are well documented and the subject of frequent press comment and headlines, today being no exception. The basic problem with aligning top management and shareholders’ interests is that of giving each symmetrical risks and rewards. Shareholders have everything to lose if a business is not run well and in their interests; managements frequently do not, either by massive severance entitlements or by continuing through the various schemes of insolvency now available, sometimes coming out the other side in a substantially enhanced personal financial position. The adverse effects of this are all too evident. In general terms, customers tend to fare far less badly than shareholders in failed businesses, either continuing to trade with the same business under its new ownership or finding a competitor with whom they can get broadly similar services. The competition authorities are specifically tasked to protect customer interests and, around the world, are now particularly skilled and adept in controlling the abuse of dominant market positions using fines and other penalties at their disposal. Consequently, customers interests are well looked after by independent agencies whilst those of shareholders are not. Governments do not see many votes in it as voters cannot recognise themselves as beneficial owners, given the low level of direct share ownership. Boards of companies are continually being urged to take a wide range of stakeholder interests into account in their decision taking, not just those of shareholders.
In theory, it could be said that the managements of investment institutions and their collective investment vehicles could carryout the task effectively on behalf of shareholders but they, themselves, normally suffer from the same agency problems that are evident in their investee companies. So, the ultimate beneficial shareholders’ interests are actually insulated by two or more layers of managers who probably have their own best interests as a primary objective and do not share the same risk and reward profile as the owners of their funds.
I conclude that, if management has the view that the long-term interests of their customers and their capital providers are in conflict, then the Boards should ensure it is the long-term interests of the capital providers that should prevail. If not, some other watchdog is needed, specifically tasked to look after shareholders’ interests and with real and effective powers to force Boards and their managements to act in the shareholders’ best interests. Certainly, the corporate governance arrangements that are generally accepted at the moment seem to do little to achieve this, despite frequent wordy reports on public company Board composition and structure and the hollow assurances of some Boards as to their management’s objectives.
Martin Bralsford
8th April 2010
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