A few years ago, a former investment banker called Philip Augur wrote a book titled The Death of Gentlemanly Capitalism. It struck a chord with many in the City who lamented the passing of the civilised old ways of the Square Mile, before the big US banks imposed the new culture of early starts, sandwich lunches and bottled water, and when the motto of the City was “my word is my bond”, rather than “caveat emptor”. There is a whiff of this nostalgia around the City again today – this time directed at activist investors rather than hard-driving US investment banks. The old guard are up in arms, accusing aggressive newcomers of bad manners and a lack of respect.
At one level, it’s hard to disagree. Last week, two of Britain’s biggest firms were ambushed by activists – both were badly bruised by the experience. Vodafone’s bosses deeply resented their treatment at the hands of John Mayo, the former Marconi finance director who has re-invented himself as an activist. Arun Sarin, CEO of the mobile phone group, had offered to meet Mayo, but, on the day of the meeting, was startled to find Mayo’s complaints plastered all over the front page of the FT. At least Atticus, another activist, had the courtesy to turn up to a meeting with bosses at Barclays before going public with its demand that the UK bank drop its bid for ABN Amro. But Barclays complained afterwards that the meeting lasted half an hour and Atticus refused to debate its views.
The same outrage echoed through a newspaper article last week by Anthony Bolton, a respected Fidelity fund manager. Bolton, a veteran of 30 years in the UK markets, was furious at the way Cadbury Schweppes capitulated to US activist Nelson Peltz earlier this year, by agreeing to break itself up just two days after Peltz appeared on the share register. This created a bad precedent in UK shareholder relations, argued Bolton. In the old days, investors gave their opinions behind closed doors first and only went public when a substantial number agreed. Cadbury’s willingness to give in to one investor “could represent a come-on to every corporate raider or activist”.
Do manners matter in business? Yes. This kind of aggression means there’s always a risk activists coarsen corporate life, debasing it in the way Tony Blair and Alastair Campbell debased public life, undermining confidence in the whole system. And while Bolton was wrong on the specifics of Cadbury – the firm was only able to announce the split so quickly because the plans were already well advanced – his wider point still holds: if trust breaks down between shareholders and bosses, business will revert to the law of the jungle, and companies become the playthings of rich men whose only interest is short-term profits.
Even so, much of this outrage smacks of special pleading. The City has never been receptive to newcomers. Its instinct has always been to operate as a club, whose rules are designed to protect the interests of insiders. The City has always been the living proof of Adam Smith’s observation that: “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public”. Long before Augur’s death of gentlemanly capitalism, the City was bewailing “asset-strippers”, such as Hanson and White, or proclaiming the end of civilisation as we know it when Sigmund Warburg pioneered the hostile bid and – horror of horrors – dared to go out and tout for business.
The same is true today. For a very long time, British bosses and institutional investors have enjoyed a comfortable co-existence. Bosses were more or less left alone to run their companies as they liked. And if investors didn’t like what they saw, they could do as Bolton did at Cadbury’s and not buy the shares. If Bolton was right, he would outperform his benchmark, which was all that really mattered. The unwritten rules of the game served both groups well. But whether it was so good for the competitiveness of British business is another matter. Arguably, this system is the reason so many UK companies are now in foreign hands or owned by private equity.
Activists aren’t judged by benchmarks, they’re judged by absolute returns. And the best way to deliver those is to turn bad-performing companies into good ones. Their existence is a daily reproach to the clubby world in which Bolton and the Vodafone and Barclays boards prospered. No wonder the old corporate order is up in arms. We can expect to hear plenty more criticism of their boorish behaviour and their lack of respect. But most of it we can take with a pinch of salt. If history is any guide, today’s activists will eventually be embraced by the City establishment, just as Hanson and White and Warburg before them.
In time, new rules will emerge that will again allow everyone to make a comfortable living. That is, until the next set of outsiders arrive to shake everything up – and then the activists will no doubt be the first to complain.
Simon Nixon is executive editor of Breakingviews.com