The listed company is one of the great inventions of the 19th century. When James Cash Penney floated his department stores business on the New York Stock Exchange in 1927, he joined a generation of entrepreneurs whose grand visions might never have been realised had the public markets not existed to provide capital on a matching scale. The fortunes of the company he left behind are not all that is at stake in the struggle now unfolding inside its boardroom. It is being seen as a test of whether activist investors, who take stakes in public companies and expect a say in how they are run, can breathe new life into what some say has become a moribund corporate form.
The ills of public companies are well known. Their owners are many. Often, they have only a tiny stake in the performance of the business and know little about how it is run. Some are not aware even that they have an economic interest. In the case of passively managed funds, these holdings are acquired automatically, with no evaluation of the company’s prospects and no dialogue with its managers over how it should be run. Even active funds tend to concentrate on beating the market in the short horizon over which investors evaluate their performance. These battles are more often won and lost by second-guessing quarterly results than by charting a new course for the business. In effect, shareholders have ceded control over the companies they own.
In theory, the managers who exercise real power are lashed to the mast of shareholder value with the silky braid of performance bonuses, stock options and retention plans. But these are slippery bonds. Too often, managers pay themselves handsomely to pursue vanity projects that do little to enrich shareholders. When managers do the bidding of shareholders it is often to flatter short-term results rather than to create lasting value.
New ideas are therefore required if public ownership is to flourish once again as a corporate form. In the UK, the Kay report of 2012 insisted that equity markets could still play a vital role in strengthening the prospects of British business, but that this would require investors and managers to abandon their fixation on short-term results and become stewards of the businesses they control.
Even as he was writing, a new breed of activist investors armed with big cheque books were muscling their way into boardrooms around the world and, once there, unveiling big ideas about how to change the companies in which they had taken stakes. Third Point, the investment vehicle run by Dan Loeb, more than doubled its money by forcing a change of management at Yahoo. Less triumphantly, Bill Ackman has left the board of JC Penney and is now selling his stake after Ron Johnson, the CEO installed at Mr Ackman’s behest, presided over a catastrophic fall in sales.
Activist investors can wield their influence to set a struggling company on a more profitable course. Yet, as Mr Ackman’s debacle at JC Penney shows, such investors are fallible. In any case, there is room for disagreement over the direction that a company should take, even among investors who take a long-term view; managers are ultimately responsible for deciding between these competing visions. The ability of these investors to effect real change remains untested. Mr Loeb realised a large profit from his investment in Yahoo on the back of market expectations, long before the new guard could prove its worth. Equally, the loud voice of professional activists should not distract management teams from their obligations to other shareholders.
Stewardship of public companies cannot remain a profitable niche. It is, as the Kay Report urged, the responsibility of all who own and manage them.