A few days ago, there was a press report that really riled one of the regular commenters on this blog, KVD. I won't quote the private comments that he sent to me, but indeed he has reason to be riled.
In a story in The Australian, Bernie Brookes regrets Myer public listing, the CEO of this recently re-listed Australian Department store is reported as complaining about the time spent in briefing investors. Two quotes from the story will give the flavour.
The chief executive ... said life was better when Myer .... was a private company.
Mr Brookes told a business breakfast in Perth today that the management team was now forced to spend "an excessive amount of time" talking to investors and briefing market analysts.
"It's like herding cats, you've got a diversity of shareholders all with different needs." he said.
Then a little later:
"Unfortunately, the structure of the way in which the system works from an equity market’s point of view means that you move from being a retailer to a finance manager and to an equity market manager - and that’s I think quite a pity, particularly to myself who loves to spend most of his time in stores, just walking the stores."
The story raised a number of concerns in KVD's mind. He was annoyed at the apparent assumption that dealing with shareholders was a waste of time; after all, it is their company. He was also annoyed at what he saw as the way that certain occupational classes - those in business or politics or the media - acquired apparent rights associated with their occupation independent of their real responsibilities. They all, my words, become game players; corporate games, political games, reporting games.
KVD has been concerned with problems of management, responsibility and control in the corporate sector for some time: Sunday Essay - Opes Prime provides an earlier example of our evolving conversation.
Mr Brookes' comments obviously reflected a degree of frustration. However, the difficulty I had with them lay in the way he actually mixed so many things together in such a short comment. I thought that I night unpick this a little.
The shareholders own the company. At the end of the day, Mr Brookes is responsible to them. The decision by the previous owners to list as a way of unlocking cash may have complicated Mr Brookes' life, but that's tough.
Mr Brookes reports to and is directly accountable to the Board. In theory, the Board is accountable to the shareholders. In practice this does not properly happen and for three reasons:
- shareholders are often diverse and may have conflicting interests
- some many external obligations have been placed upon Directors that, sometimes, the poor shareholder is really the last thing considered. Consider, for example, the need to keep the market informed via a whole series of reporting obligations. Here, among other things, boards can face a conflict between protecting the position of existing shareholders and informing prospective future shareholders.
- Boards and management join together in playing their own games. As an example, in the Qantas case, the then CEO and certain board members combined to try to sell the company. While justified in terms of "unlocking value for the shareholder", this really had nothing had nothing to do with shareholders.
I accept that the concept of responsibility to the shareholder is a difficult one, especially since so many shares came to be controlled by funds managers who are, in turn, responsible to those investing the funds. This creates practical difficulties of the type referred to by Mr Brookes, including the way shareholder value can be affected by things that actually have very little to do with the value of the company. Still, I would argue that a focus on shareholder needs and ownership remains important.
Certainly, as a sometimes small shareholder, I would argue that the way the system has evolved makes individual share investing far more risky and uncertain than in the past.
We live in a world whose focus on growth and the achievement of short term targets means that the totality of companies cannot achieve target because the total targets are unachievable. This creates instability. Further, targets are set in such a way that they generally reflect relatively narrow metrics. We also live in a world where the combination of regulation with modern corporate management approaches builds in conflict of interest.
When I first began to invest on the stock exchange, things were actually pretty simple. The first question was the likely yield compared with fixed interest. The second question was the extent to which dividends might increase over time, since this would increase return and also the value of the shares. Then, too, there were returns from rights issues and the issue of bonus shares. Bonus shares were important because they allowed cash to be realised, while maintaining an interest in the company. Then, too, there were irregular returns from takeovers.
As today, there was a trade-off between income and capital gain. As today, companies did crash. However, for the ordinary investor, the main thing was the stability and management of the company. So long as the management was okay and the business sound, returns were built in.
In this world, it wasn't hard to beat the index. Here I looked at the returns on my mother and father's portfolio, as well as my own. The reasons were mathematical. Investors placing the greatest emphasis on yield and for perfectly sensible reasons, would invest in companies offering greater cash now. However, these companies tended to offer lower capital gain.
The overall move in the index combined different types of companies. Any reasonable combination of cash now and growth later was likely to beat the index.
How things have changed! The idea of index based funds whose sole purpose was to match long term index trends through a very diverse portfolio would have seemed a bit incomprehensible then. Why bother? In fact, risk averse people then did do something similar by investing in fixed trusts that offered security in combination with a dividend stream and modest capital gains.
To my mind, the dividing line came with the collapse of Australian Fixed Trusts in, from memory, 1987. Unable itself to resist corporate games, AFT went down. As it fell, it wiped out those elements of the family portfolios that, to my father, had seemed most secure when he invested in them all those years before.
I may seem to have come a long way from KVD's original point. I have not. To my mind, Bernie Brookes' comments are symptomatic of the problems that we have built into our corporate systems.