Britain is the best place in the world to be a shareholder. But sometimes we just don’t know how lucky we are. As investors, our rights are enshrined in codes governing everything from the conduct of takeovers to the composition of boards. Everybody knows the rules and plays by them. As a result, businesses understand that their job is to make money for their owners.
Compare that with the way they do things across the Channel. When Lakshmi Mittal, the London-based steel magnate, first made a bid for Arcelor in February, Guy Dolle, the French steel group’s boss, promised to fight a “value-based defence”. Indeed, he even made a big fuss about Mittal’s weak corporate governance – in particular its dual voting structure, which allowed Mittal’s family to keep control.
How cynical all that looks now. Since then, Mittal has promised to abandon his dual voting structure and bring in new independent directors. Meanwhile, Dolle has treated his shareholders with contempt. First he ringfenced Areclor’s newly-acquired Canadian business, putting it beyond Mittal’s reach even if his bid succeeds. Now he has cooked up a scheme to hand over 40% of Arcelor to a shadowy Russian oligarch in return for various steel assets of uncertain value. And he plans to ram this deal through with a vote that’s been fixed so he has almost no chance of losing.
But while shareholder abuses are common in Europe, we Brits can’t be smug. The concept of shareholder value may be widely accepted now, but that wasn’t always the case. Back in the nineties, it got a bad press, not least because it became associated with the dotcom bubble and corporate disasters such as the Marconi debacle, when many managers focused on the short-term share price rather than long-term value.
But it’s easy to forget how badly many companies were run before the shareholder value revolution. Too often, managers regarded businesses as personal fiefs to be milked for their personal benefit or used to satisfy their lust for empire-building. Boards were stuffed with cronies and bosses were accountable to no one. True, bosses are still paid eye-watering salaries, but these days it is all in the open. Investors can – and often do – vote down excessive pay packages.
Yet even today, with UK companies among the best run in the world, shareholder value still faces opposition from proponents of the woolly left-wing alternative of stakeholder value. They argue that boards should balance the rights of shareholders against those of other “stakeholders” including employees, suppliers, regulators and governments. Mercifully, this idea, which would give huge power back to bosses by allowing them to play different groups off against one another, has not caught on.
But stakeholder value remains seductive for many people. That’s partly because they don’t see that a value-maximising company will always consider its stakeholders. But it’s also because shareholders themselves appear to attach so little value to their rights. Despite the revolution in British boardrooms, UK companies are valued no differently to shareholder-abusing European groups. And there’s no evidence that European companies face a higher cost of capital as a result of weak governance.
The result? British companies are gobbled up by Europeans in a classic display of Gresham’s Law at work: bad money drives out good. Of course, UK investors don’t complain so long as they get full value for their shares in a bid. The immediate losers are continental shareholders who don’t get full value. But longer term, all Europe suffers if weak companies and bad management prevails.
The solution lies in the hands of shareholders. There’s no point waiting until a bid emerges to insist on their rights, as they are now doing with Arcelor. If shareholders really want their rights to be respected, they must first show that they value them.
Why GDP is the route to well-being
David Cameron has stirred things up a bit with his call for governments to focus less on GDP and more on GWB – General Well Being. He thinks we’re too fixated on making money and need to pay more attention to quality of life issues such as the dreaded “work-life balance”. Cameron’s campaign has been greeted with a loud raspberry. For most Britons, the biggest stress-buster would be the chance to get their kids a decent education – something that sadly requires rather a lot of GDP, preferably of the folding sort.
But the one place Cameron may find support for his GWB initiative is the City, which is full of very well-paid people, many of whom are absolutely miserable. That may be due to envy, since even those on a half a million a year can feel hard done by if they sit next to someone getting many times more. Or perhaps they’re simply not getting enough sex. According to David Blanchflower, the controversial new appointment to the Bank of England’s Monetary Policy Committee, there is a link between sexual activity and happiness, but no evidence that greater income buys more sex. Perhaps Cameron should look for ways to encourage Britons to loosen up a bit. But somehow I doubt that is what he has in mind.