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At one end of the scale sits R. Durtnell & Sons, a UK building contractor that can trace its origins back more than 400 years and has been in family ownership for 12 generations. At the other is the confectionery maker Cadbury, which was a publicly listed company before it was bought by Kraft, the US food group, last year with the support of hedge fund investors.
The Durtnell family and Cadbury’s hedge fund shareholders illustrate the range of approaches to company ownership possible in today’s markets. They also offer very different views on how the ownership structure of companies may look in the future. Both seek to maximise their returns; how they do it depends on management, the availability of finance, regulation and the existence of a liquid market for changes in corporate control.
The UK and the US, with strong banking sectors and liquid stock markets, have a deeper tradition of dispersed share ownership, while family-owned businesses have tended to play a greater role in continental Europe. But the globalisation of trade and the increased pace of technological change have put considerable pressures on traditional ownership structures over the past three decades. In addition, the financial crisis and continuing market volatility have prompted a rethink of the way shareholders exercise their responsibilities.
Pension funds have been accused of being “absentee landlords” for their failure to spot excessive risk-taking by banks ahead of the financial crisis. Lord Myners, a former fund manager and City minister under the last Labour government, followed up this criticism by describing them as “ownerless corporations”.
Patient investors, which have traditionally included pension funds and insurance companies alongside families, are increasingly making way for very short-term holders of company shares. Active traders use algorithmic trading programmes that may involve holding shares for just milliseconds to exploit arbitrage opportunities. Ownership becomes ambiguous when hedge funds borrow shares to sell them “short”.
“The world has become much faster moving since the mid-1980s, with market turbulence at record levels,” says Martin Reeves, head of the strategy institute at Boston Consulting Group, the management consultancy. “There has been a move to a stock-market-based, shareholder-value-driven view of the world with impatient capital that holds shares for short periods and for arbitrage. This magnifies instability.”
The publicly quoted, joint stock company may be the preferred model for businesses as they grow. But there are other forms of ownership structure. Small businesses, for example, vastly outnumber their larger counterparts, accounting for up to 85 per cent of all businesses by number. They are mainly established as sole traders or partnerships. The partnership structure also endures in some discrete sectors such as the law, consultancy, accounting and financial services.
But as partnerships grow in size, their consensual management structure and restricted access to funds can become a problem. Accenture, the consultants, and Goldman Sachs, the investment bank, both exchanged their partnership structures for listed company status.
Mutuals, represented mainly by building societies in the UK, were a popular form of ownership in previous years, although their numbers have shrunk dramatically as many societies have demutualised in recent decades. One mutual that is thriving, however, is John Lewis, the owner of the John Lewis chain of department stores as well as Waitrose, the upmarket grocery store. The employee-owned company has been extremely successful in weathering the retail downturn that has affected the rest of the UK high street, and in the process has shown that mutuals do, perhaps, have a place in the future.
Family-owned businesses, too, are likely to have a role to play in the future. “Family ownership is a viable format providing a patient, core shareholder managing family wealth,” says Igor Filatotchev, director of the Centre for Research in Corporate Governance at London’s Cass Business School.
And yet, for all the failings of the listed company model, and the risk associated with disengaged shareholders, it remains the model that appeals most to growing companies. “There is no ideal form, but large businesses drive scale economies,” says Prof Filatotchev. “Their management teams drive big strategies. They need a huge pool of resources and they go out to investors to sustain growth. That type of organisation allows it.”