Few ex-fund managers have a pulpit as lofty as that of Lord Myners, the City minister. But the peer’s former peers would not be human if they were not beginning to resent his repeated sermons about their deficiencies.
His latest blast – in a speech on Tuesday to the Association of Investment Companies (which he used to chair) – accuses institutional investors of sometimes acting “like absentee landlords”. Their umbrella group, the Institutional Shareholders’ Committee, has “sunk beneath the surface just when it is needed most”.
The implication is clear: inattentive owners have allowed the tenants to burn down the house and are leaving it to others to oversee the rebuilding work.
How fair is the charge? Certainly, many fund managers encouraged companies to expand and to make their balance sheets “more efficient” as over-exuberance and lax regulation inflated the credit bubble. Once the bubble had burst, institutional investors – often the same people that had egged boards on in the good times – took issue with managers and directors for letting matters get out of hand. No wonder some chief executives (and not a few private investors) are resentful.
But if fund managers know one thing, it is that they will be punished if their funds perform poorly. Index trackers have to stick with companies for the duration (or until FTSE reshuffles its indices), but other institutions can sell their shares whenever they want. They would not expect to be thanked for the sort of “engagement” that involved hanging on and denouncing the chief executive’s strategy even as he drove the company into the ground.
The model could be at fault here. As experts as diverse as Ira Millstein, the US governance guru, and Mark Goyder, the head of Tomorrow’s Company, have pointed out, the increasingly fragmented ownership of listed companies may be muting individual investors’ sense of responsibility. More institutions must be persuaded they will benefit from constructive engagement with boards. That would in turn bind them more closely into long-term active ownership of the company.
As Lord Myners points out, if it were easier for investors to take collective action, that would be a start. The hapless ISC (which is, to be fair to it, working on a paper about the lessons from the crisis due out next month) may not be the correct body to pursue the debate. But the minister is right to stir things up with his hell-raising sermons. A system where it often seems to be in investors’ interests to disengage when the going gets tough is a system that is failing.
Burberry’s City slicker
Slick on the outside (young pouting models, strong design following) and getting slicker on the inside (better inventory control, better supply management). Cue a stock market reaction to Burberry’s results on Tuesday that seemed to owe more to the raptures of a fashion show than the mundane world of trading updates. But the truth is that the retailer on the catwalk on Tuesday was a sight for sore eyes.
First, shoppers are still splashing out on Burberry baubles, especially those shoppers visiting recession-hit London with fistfuls of euros to spend. The trend in comparable store sales was better than expected, vindicating the company’s strategy of pushing harder on retail, as opposed to wholesale, and of increasing its focus on accessories (which are less vulnerable to the vagaries of fashion).
Aside from the crowd-pleasing top-line surprise, however, there was the bonus extracted backstage, where the unsung hard work of retailing gets done. It is normally bad news for gross margins if you get rid of inventory. But the company was able to offset some of the impact of those moves by squeezing out more cost efficiencies. More broadly, Burberry seems to have a far firmer grip on its supply chain than it used to. One of the consequences is that it is now able to supply its wholesale customers, essentially department stores, with a lot more stock, earlier in the season. This is important because it means it increases the chances its goods will be sold at full price.
There were other titbits in Tuesday’s figures that showed the company was in better internal shape. Burberry has cut back the truly unwieldy number of suppliers it was using in Spain, for instance. You have to assume that the same effort is being put in elsewhere.
These improvements mean the company’s balance sheet looks healthy enough to allow it to indulge in an ambitious expansion plan for new stores. That is good news: Burberry should make more, in the long run, from selling its clothes and accessories that way. Now is also the time to snap up good locations – even if it means investors may have to wait a little longer to pocket the benefits of those operational improvements.
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