Investment

Shareholder Capitalism Needs New Paradigm

A few weeks ago, Nicholas Wrigley, the chairman of housebuilder Persimmon, resigned. He did so because on his watch a remuneration package was created to pay the chief executive £107m by mid 2018. By most definitions, that’s an excessive amount of money for a manager of a listed company to earn.

In an article in the first Moneyweek edition of 2018, first published in the Financial Times, entitled Shareholder Capitalism needs a reboot, Editor-in-chief Merryn Somerset Webb explains how such atrocities can happen when people entrust their investment decisions to fund managers of one type or another (such as in the case of pension funds), who don’t necessarily see things from the perspective of the small investor.

The article explains that in the 1960s, more than 50% of the listed shares in the UK were held directly by individuals – who received company reports and were able to vote at annual general meetings in what we might call a shareholder or investor democracy. By 1990, that was down to 20%; today it is closer to 10%, when most people hold what equities they have via the fund management business. And even those who do hold individual shares do so via a platform of some kind, which makes it hard for them to claim the usual trappings of share ownership (be they AGM votes or shareholder perks). Whether they intended to or not, they have contracted out all governance functions to an agent.

Other aspects of traditional share ownership have also been opted out of when investment decisions are handled by the big funds, such as decisions involving mergers and acquisitions. For example, according to the article, a fund manager holding, say, an investment that attracts a bid at a 40% premium, will typically vote to take it. That’s great for the performance numbers on which their bonus is based and its contribution to the overall annual fund performance figures. But what about the pensioner who was enjoying the steady growth in the dividend yield from the same investment?

Modern technology, including the deployment of blockchain based systems, has the possibility to change all this, enabling a greater control to be returned to the smaller interested investor where key decisions are involved.

Somerset Webb’s thoughtful conclusion to the article is that “Shareholder capitalism clearly needs to be rebooted for this age. Adding democracy back into it is a good place to start. With auto-enrolment and pension freedom, most adults in the UK have a stake in the listed UK corporate sector. They should know that – and be able to act on it.“

But today there is also an ever growing array of other investing options. Amongst these being various “Social Impact” funds and Peer-to-Peer, including Micro Finance, lending opportunities. And when considering so-called “ethical investments”, transparency is often a key ingredient enabling investors to determine how their money is actually being spent.