Investment bankers like to present themselves as champions of shareholder rights, fighting for the interests of investors at the heart of the capitalist system. But for the most part, this is bunkum. Shareholders, by and large, don't pay fees. That's left to corporate boards. And where the interests of management and shareholders diverge well, what do you expect? Big houses don't come free.
This was bought home to me by two events in the last fortnight. The first was a conversation with a senior figure at one of the banks advising Arcelor on its defence against a bid from Lakshmi Mittal. It still seemed the Luxembourg steel group would see off the Indian tycoon. But a number of shareholders dubbed the "Dirty Thirty" had protested at the Arcelor board's sneaky attempts to force through a dubious deal with Russian steel group Severstal.
"What did shareholders expect?" my source argued. They knew what Arcelor was like when they bought the shares. Like any essentially French company, it played by a different set of rules. Shareholder rights were always going to be balanced against those of other stakeholders. Besides, Arcelor had not done anything illegal. Caveat emptor, he said. No mention of the idea that the board and by extension its advisers owed its primary duty to shareholders.
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The second event was the launch of the Rosneft initial public offering.
The Russian oil giant must be the most shareholder-toxic company ever to seek a listing on a first-world stock exchange. It falls so short of the usual standards that its promoters needed 33 pages of the prospectus to explain the risks. These included the bald admission that there was no guarantee the Kremlin-controlled Rosneft would act in shareholders' interests and the alarming news that the ownership of its major asset, Yufnetzgas, acquired from Yukos in murky circumstances, is the subject of numerous legal challenges.
Yet Rosneft boasts some of the grandest names in the City advising on its IPO, including Morgan Stanley, Rothschild and ABN Amro. How come? Until quite recently, no respectable bank would have dared bring a company like this to London. The risk to a bank's reputation if the deal backfired was too great. As one banker put it: "If [a banker] makes a public sale and puts his own name at the foot of the prospectus, he has a continuing obligation of the strongest kind to see, so far as he can, that nothing is done which will interfere with the full carrying out by the obligor of the contract with the holder of the security." That was JP Morgan in 1933.
What's changed? It's partly greed. Rosneft is looking to raise $10bn. These sorts of deals don't come along often. The gigantic fees will propel the banks to the top of the league tables. But it's also the fault of the UK regulatory culture. Not only did the Financial Services Authority change the rules a few years ago to make it easier for poor quality companies to get listed. It also introduced a box-ticking culture that obliged bankers to list risks associated with a deal, but left them with no responsibility for the consequences. It means when things go wrong, bankers can simply say: well, you were warned. That may be fine for institutional investors who can look after themselves. But what about retail investors who may be tempted to buy shares in the secondary market? Whatever the risks, are they not entitled to draw comfort from the eminent City names behind the float? Does the sponsoring bank not owe them too a duty of care? No longer, it seems. Bankers no longer feel bound by the rules of the club. And investors should not be fooled that the presence of a grand bank is any guarantee of their rights. Fortunately, Arcelor investors took matters into their own hands and thereby struck a decisive victory for shareholder rights. It would be wonderful if they did so again by giving the Rosneft IPO a very wide berth.
How capitalism leads to philanthropy
People who make serious money rarely get a good press. The one exception is when they give it away. It's as if the act of giving it away is atonement for the evil, capitalist system that allowed such fortunes to be accumulated in the first place. In fact, these are two sides of the same coin, as is clear from Warren Buffett's decision to hand over most of his $44bn fortune to a charitable foundation run by his friend Bill Gates, the Microsoft founder.
Clearly, fortunes on this scale are only possible in a vigorous capitalist system. What's more, it's natural the ambition that drives men like Buffett and Gates to accumulate great fortunes should spur them to leave an enduring legacy. The key is that a society should have the confidence to allow such ambition to flourish. All sorts of reasons are given for the relative lack of philanthropy in the UK, but the real reason, I suspect, was that until recently, Britain had such high taxes and so much regulation it was almost impossible to make serious money. If anyone doubts this, just look at the hedge fund industry: it has made enormous sums in a very short time, attracting all the usual hostile headlines. Yet they are among the most active and generous philanthropists in the country. We should be grateful for them.
