“We remind management. Shareholders are not always uppermost in their mind…. Many investors do not concern themselves with the management or the company. Guidance comes from us.”
Reeves Knyght, investment banker, Wingate House
“Most international boards do not demonstrate that they focus on meeting the needs of shareholders. When you ask, the answer is yes. When you do not ask, the shareholder rarely comes up in conversation.”
Vadim Makhov, head of strategy, Severstal
The two quotes above suggest that shareholder relations are a type of sophisticated window dressing. When management needs to say something to shareholders, presentations and roadshows are quickly mustered, and the message of management is directed one way – let me tell you what we are about.
However, Messrs Knyght and Makhov also point to a wider issue. When making money and the pursuit of ethical business run in parallel, then the investor demands involvement. In other words, two-way shareholder relations really kick in when investors aspire for more than financial gain from transactions.
Was that always the case? Yes. The first shareholders were not pension or private equity funds or individuals looking for the best possible return on their investment. Rather, the world of the shareholder began as a vehicle for social improvement.
The history of the shareholder
Historically, two forms of shareholder evolved side by side: the Anglo-American took on a micro, corporate orientation; and the continental European or Germanic investor adopted a macro, societal perspective; and
For the Anglo-American, winning and holding the trust of the investor has always been of paramount importance. In so doing, particular terms have appeared in the lexicon of management and governance: board members are institutional agents; management are corporate agents. Institutional agents monitor corporate agents in order to both safeguard investors and maximise the value of their investment.
By contrast, in continental Europe, wealth creation and its redistribution across the community is more prominent. It is assumed that, in the long term, the company will perform better and the shareholder will ultimately benefit if all relevant stakeholders are committed to the company. The creation of a supervisory board of independent directors, representatives of the workforce, bankers and lawyers captures the “let’s work together” philosophy through an array of interlocking networks that screen out dissident opinion. To the orthodox Anglo-American, this feels like institutional corruption – things are stitched up and transparency is limited.
Where two come together is that both are dependent on a few dominant owners and protect their owners through formal governance controls. What is different is how the management within these two different systems converse with their owners.
Different forms of shareholder
■ Institutional investors Institutional investors are the most evident, particularly in Anglo-American companies. In these cases, the primary sources of capital are mutual funds (pensions) and hedge funds. Some view the mutuals as traditional and undemanding, and hedge funds as vocal and requiring of quick returns. In any case, with combined financial clout, the prevailing wisdom is that the institutional investor is now powerfully determining the investment decisions of the corporation and corporate governance protocols, particularly with regard to risk and reputation. However, according to research conducted by Cranfield School of Management, the reality is not quite like that. From the late 1990s to the present day, research of outstanding teams, and four separate studies of UK, US, Australian, Irish, Belgian, Dutch, German and Turkish boards, induced no response on the topic of shareholder relations. When asked, “What is your job and what makes for an outstanding CEO, chairman and director?”, no respondent voluntarily offered shareholders, let alone the relationship of the company with its owners.
One director cautiously offered: “Nobody mentions shareholders. Most only think how they justify what they’ve done, and will do next.”
Another confided: “Some of these analysts are ‘kids’. They do not know what it is like to run a business. That is clear when you speak to them. Present a strong case through only selected, trusted directors. Certain directors would never be allowed near shareholders. No ambiguities, no doubts, no questions. That’s shareholder relations.”
■ The owner-manager In many countries, such as Norway, Turkey, Italy, Portugal and Greece, family business dominates. In these cases, the chairman is usually the majority shareholder, leading a tight-knit family team. That was fine in the past, but by the third generation, the extended family begins to push stakeholder sensitivities to the forefront.
“How many board meetings do we have? With our family, we are always in meetings,” commented one Turkish chairman, lamenting his challenge of nurturing a spectrum of family related shareholders. Keeping the business going means keeping the family together.
Ishak Alaton, a leader of Turkish governance reform, considers the owner-manager spectacle as clouding shareholder and professional management relations. Clearer, transparent and more distinct boundaries between shareholder, board and management are necessary.
■ Cross shareholding. This is where one company invests in another and vice versa for their mutual protection. The “friendlies” are given inordinate attention by both chairmen and CEOs. Critiqued for not exposing the enterprise to market disciplines, the advantage of shareholder cosiness is survival. Consider the case of UK retailer, the John Lewis Partnership and its protective stakeholder structure. This intricate system of democratic representation integrated with its operational and strategic decision making bodies has assimilated product quality, service sensitivity, cost discipline and the well being of employees. How many British companies can boast that they have balanced happiness with enviable market performance?
■ Government and community These groups are just as deeply embroiled in the affairs of the enterprise they own. Key appointments such as chairman, CEO and directors, and policy design are top of the shareholder relationship agenda. Whether the agency is the UK’s Atomic Energy Authority or Australia’s Murrumbidgee Irrigation, health, safety, employment continuity, risk assessment and the meeting of community requirements for power and sufficient supplies of clean water, require management to be responsive to the shareholder.
■ Socially conscious entrepreneur “Some of those with private wealth… are motivated by getting a business going, creating jobs, pushing the social factor. The investor is deeply into the firm,” says Wingate House’s Mr Knyght. Compare that with the investor driven by indices and ignorant of the companies in their portfolio.
Our studies have confirmed that investment motivated solely by financial gain is purely transactional. In contrast, investment for shareholder value and social enhancement demands a close relationship between the principal, the guardian and management. In effect, the nature of shareholder relations is determined by the extent of investor stakeholder aspiration. Each relationship takes on an idiosyncratic life of its own.
Looking for transaction efficiency
A broad scan confirms that most shareholders want transaction efficiency. Transparency, good governance, abiding by commitments, some attention to leadership – for example, recent investor scrutiny of BP’s retirement policy and US activism on board director selection – and not-too-zealous optimism in reporting the financial health of the company (particularly the hiding of legacy costs, off balance sheet) remain the principle requirements of shareholder relations.
The transactions proficiency conclusion was put to the test in Mittal Steel’s the recent acquisition of the European steel giant, Arcelor. The Russian, Alexei Mordashov, owner of Severstal and “white knight” for Arcelor, positioned his bid as minority shareholder and non-executive president of the newly proposed entity. “As a team we will be number one,” ran the Mordashov theme. Laudable as that was, Lakshmi Mittal, responded by raising his offer by €8bn. Was there any doubt to whom the shareholders would sell?
The corporate affairs/investor relations department informs often only the heavy hitter investors of company strategy and governance. But the message pushed out is clear. Management are scripted. More than anything, share price fluctuation prompts investor intervention. The transactions efficiency imperative is essential. Social consciousness aside, management and investor seem content with impersonal interaction. And why not? The twin demands of, tell me my investment is safe and that it is increasing in value, was and is all that is needed.
Andrew Kakabadse is professor of international management at the Cranfield School of Management