The principle that shareholders’ interests reign supreme is an immutable law of the public markets. It is the north star in almost every investor presentation, the sub-text to myriad corporate strategies and such is its draw, it also serves as both mission and vision for a swathe of western corporations.
It’s not difficult to understand why given the apparently flawless logic which underpins it: shareholders provide the equity capital for companies to invest, their agents (the directors) invest that capital and in return for putting funds at risk, the investors naturally expect a financial return in the form of dividends or capital growth. Unlike debt, equity is an unsecured risk and as such it’s a good barometer for value and changes in goodwill.
The hegemony of this principle has lain largely unchallenged for decades. Share price performance is considered the undisputed proxy for success in business news; directors are remunerated against ever more complex schemes to align their interests with those of shareholders; acres of corporate governance regulation testify to the importance of protecting shareholder value; and even governments have sought to enhance shareholders’ power by seeking to co-opt them as the lever in battles on issues from pay to gender diversity.
There have been a few but notable apostates to this prevailing orthodoxy. Larry Fink, the CEO of the investment giant BlackRock, caused a minor stir earlier this year when he conceded in his annual letter to shareholders that progressive companies were now increasingly motivated by creating a longer-term value to society. That said, the poster boy for sustainability, Paul Polman the CEO of Unilever, bemoaned his impotence in the face of shareholder interests last week, when he expressed his regret in being bounced into a share buyback in the wake of Kraft Heinz’s unsolicited $143bn takeover approach last year.
The irony is that whilst companies have been required to leap through ever more narrow hoops in order to satisfy the whims and interests of various stakeholders in demonstrating their commitment to societal value, their shareholders bear no such accountability, where indeed they are even identifiable.
The growth of exchange traded funds or quant-driven trading strategies, means a greater and greater amount of capital is not invested deliberately in individual stocks, but rather matched indiscriminately to an index, eroding any sense of meaningful connection between investor and investee. At the other end of the spectrum, activist funds take huge positions on individual stocks and seek to drive short term increases in value before selling down again. How their short-term interests are balanced against the longer-term interests of other shareholders, or indeed other stakeholders, is generally not a debate they are troubled with such is the ineluctable hold of the shareholder value philosophy.
Neither are all shareholders created equal. Derivatives enable hedge funds to buy the total return from a particular stock without the trouble of actually owning the underlying asset. Either that or they can sell certain stocks short, and benefit from the loss suffered by other shareholders.
Perhaps in recognition of the contradictions that have to be squared in the public markets, fewer and fewer companies are choosing this form of financing. The number of publicly quoted companies is in decline, private equity funds are rampant and the remaining companies regularly choose debt financing over equity, not just because of relative costs.
If we are to avoid public markets atrophying and new companies seeking venture capital or crowdfunding where governance and transparency is weaker, the illusion of untrammeled shareholder interest needs to be challenged. The concept of corporate purpose is only half the answer, placing as it does the onus on companies to in effect resolve the on-going stand-off between the providers of capital and society.
For meaningful change to occur, shareholders now need to shoulder more responsibility for where, and in particular how, they allocate funds. As the former General Electric CEO Jack Welch once conceded: ‘strictly speaking, shareholder value is the dumbest idea in the world.’