Shareholder capitalism needs a reboot

A few weeks ago, Nicholas Wrigley, the chairman of housebuilder Persimmon, resigned. He did so because on his watch a remuneration package was created to pay the chief executive £107m by the middle of next year. That’s an insane amount of money for a manager of a listed company to earn.

The company’s shareholders are quite right to be cross, and Wrigley quite right to resign. He was a fool both not to insist on a cap on the bonus structure and also not to grasp the politically charged climate around the executive pay debate even back in 2012 (when the incentive deal was passed). But, that said, there’s a problem with blaming only the board and executive greed for this kind of thing.

You also have to ask how on earth the shareholders let deals such as this go through. The answer is rather more complicated and uncomfortable than it should be. To get to it, we need to look at the ownership structure of shares in listed companies today.

In the 1960s, more than 50% of the listed shares in the UK were held directly by individuals – who received company reports and were able to vote at annual general meetings in what we might call a shareholder or investor democracy. By 1990, that was down to 20%; today it is closer to 10% – most people hold what equities they have via the fund management business. And even those who do hold individual shares do so via a platform of some kind, which makes it hard for them to claim the usual trappings of share ownership (be they AGM votes or shareholder perks). Whether they intended to or not, they have contracted out all governance functions to an agent.

This is all extremely convenient. But it also has several very unhappy side effects. The first is a lack of connection between the final beneficial investor and the corporate world. If you simply hold, for example, funds from Fidelity or BlackRock, as far as you are concerned your relationship is with the fund manager not the company. Most UK investors who hold equities via funds as a result of, for example, pensions auto-enrolment, will not have much sense of how their finances rest on the fortunes of actual companies. They will know they have “a pension” but not which companies they own; therefore, they are unlikely to have much interest in how government policy (from interest rates to minimum wages) will affect those businesses.

If one of the core ideas of shareholder capitalism is that electorates vote for business-friendly policies on the basis that one way or another they get a cut of corporate profits, where does this new lack of connection leave us? Note that trust in chief executives is at an all-time low in the UK.

The second unhappy effect is the one we see in action with nutty pay policies. It is that our agents (fund managers in general) don’t necessarily see things as small shareholders might. If you make a few million a year as an asset gatherer at a huge fund-management firm, a long-term incentive scheme at another company that transfers several tens of millions of pounds from shareholder pockets to managerial ones might not seem unreasonable to you. But it might seem unreasonable to a 68-year-old trying to eke a post-pension-freedom income from a lump sum of £150,000 and the UK’s meagre state offerings.

The same goes for all sorts of things. Take mergers and acquisitions. If you are a fund manager holding an investment that attracts a bid at a 40% premium, you’ll vote to take it. Can’t be bad for the performance numbers on which your bonus is based, can it? But is that what the pensioner, who was enjoying the steady growth in the dividend yield from the same investment, is also likely to do?

Pointing out that short-termism in investment is a problem is not exactly new. But most of the solutions on offer involve haranguing fund managers to change their generally dismal behaviour. It might be better to help them out with their difficulties by bypassing them in the decision-making process. Forty years ago, the beneficial owners of shares – those entitled to the cash from the dividends and on wind-up – were the ones voting at AGMs. Why not change the structure of the investing world and make that happen again?

There is no reason, with the data management abilities that the platforms and the listed companies have, not to allow those who own individual shares to vote directly. And there is also no reason why investors in funds should not get a say, too. Why should voting rights not be considered on a “look through” basis to the final beneficial owner and their votes be reflected at AGMs? Until recently, the argument that this would be far too complicated might have held some water – who could create an accurate, private, fractional database like that? Post blockchain, I’m not sure it does any more.

Shareholder capitalism clearly needs to be rebooted for this age. Adding democracy back into it is a good place to start. With auto-enrolment and pension freedom, most adults in the UK have a stake in the listed UK corporate sector. They should know that – and be able to act on it.

• This article was first published in the Financial Times

  • DLl M

    Let’s not forget that the pay of fund managers and their bankers/brokers is a parallel issue, which also needs addressing. As Merryn points out, the ‘millions’ paid to some fund managers produce the warped perspective that allows them to nod through egregious executive remuneration deals, but those millions also make the direct costs of investment much higher than they should be.

  • Martin Silman

    Wholly agree with all of Merryn’s concerns here – it would be good if Moneyweek produced a pro-forma request that could be forwarded to all of our investment platforms and fund managers requesting a ‘look through’ voting solution.

  • Nick

    Ha ha ha…… capitalism does not need a reboot ….. it needs to be tried….. we have never known capitalism in our lifetimes… can never coexist with modern ‘government’….. I think Frizzers is one of the few who knows this to be true.

  • Peter Curtain

    A really insightful analysis. What’s more, a possible solution. Thank you.

  • Michael Illingworth

    Very good, thought provoking article Merryn which now needs to be acted upon. I like Martin Silman’s suggestion for starters.

  • LabLibCon_decadesofdestruction

    Surely fund managers will up their game otherwise most investors will default to trackers? I would be happy to pay their higher fees if they prove to be working hard on behalf of my interests as a shareholder.

  • OldCodger

    Wholly concur, but while articles might raise awareness (though you are probably preaching to the choir here) action is required, as a start Martin Silman suggestion would be a start!

  • Simon Peacock

    The problem of shareholder apathy is mirrored in society more broadly. The population seems more exercised by Strictly than the general election. The Scottish in-out vote and EU Referendum were the only recent occasions when people actually engaged in debate, much of which was negative and tribal. When choices are binary and directly affect peoples’ existence there is traction, but on other issues interest is lamentable. How can we have faith in an economic system that enables companies to buy back their own shares with cheap money provided courtesy of government’s expansionary policies, funded by never ending debt accumulation, in order to goose market prices (a misnomer if ever there was one) and thereby maximise bonuses agreed by remuneration committees with aligned self-interest? Meanwhile the streets of our cities are crowded with rough sleepers. How can we believe in politicians such as Tony Blair who feather their own nests; a Sunday christian who embarked upon an illegitimate war on the thinnest possible pretext, costing many hundreds of thousands of innocent lives and then took up a role as peace envoy while amassing millions fixing problems for JPMorgan? We get the companies, systems and politicians we deserve. Our indifference has emboldened avaricious cleptocrats who will pursue their interests until it is unsafe to do so. The division of Russia’s wealth under Yeltsin demonstrates how deeply embedded human nature, particularly greed, actually is. Technology does offer a check on the exercise of power legal, political and financial but changes such as net neutrality pose a threat. The power of platforms such as google and facebook represent a further assault on freedom.