Anthony Hilton: Shareholders can’t hold boards to account from the other side of the world
It’s unusual for economists like Ben Broadbent to admit they’re lost. It’s also unnerving
Saturday 28 September 2013
One of the more serious government initiatives has been the drive to get shareholders to take much more interest in the companies they own and the way they are managed. The idea is that the fund managers challenge chief executives and boards on strategy, hold under-performers to account and, starting in a few weeks’ time, deliver a binding vote on executive pay.
Some shareholders are not too keen on the idea, though most independent observers think it is a good thing. But there is one rather big flaw in the plan, which was highlighted dramatically in data published this week by the Office for National Statistics (ONS). The big institutions that are expected to do this work no longer hold very many UK company shares. So even if they want to call boards to account, they lack the firepower to do so. They just don’t have the votes.
This represents a massive shift over the past three decades. In the 1980s, it was established wisdom that pension funds, insurers and unit trusts between them owned about two thirds of the market by value. This meant they dominated the shareholdings of companies at the top end.
How things have changed as a result of the turbulent markets of the last 10 years. At the end of 2012 insurance firms held 6.2 per cent of UK shares, against 23.6 per cent as recently as 1997. Pension funds, which at their peak in the 1990s held 32 per cent, had fallen back to 4.7 per cent at the end of last year. So even acting with unanimity and in concert, the two most powerful shareholder groups could typically muster only 11% of the votes. And even if the holdings of unit trust managers are added in – a disparate group who almost never speak with one voice – the votes would still barely reach 20 per cent.
It is hard to see boards quaking in their boots if that is the extent of the investors lined up against them.
The shares sold by the British have almost all gone abroad. Indeed what the ONS said this week is that, for the first time, more than half of the UK stock market is foreign owned. Americans hold most with just under half the offshore total. This is almost twice as much as continental Europeans, who in turn own twice the amount held by Asians.
In governance terms, this means the shares and their votes are in effect lost because foreign shareholders are understandably reluctant to be seen to be interfering in the boardroom affairs of another country, for fear of setting off a xenophobic media or political backlash. There are some exceptions, but for the most part they fight shy of governance codes and similar commitments.
The other point is that it shows how far globalisation has advanced and how nations live in each other’s pockets. We have grown used to massive foreign investment in this country by the likes of Tata, Jaguar’s owner, Siemens, which builds our trains, and Toyota. It still comes as a mild shock, though, to learn that half of what we still think of as British – Sainsbury’s, for example, or Rolls-Royce or Barclays – is foreign owned too.
So where do UK pension funds and others invest now that they no longer think British shares attractive enough? Well they in their turn buy some foreign shares but most of their money now goes into government bonds. Indeed the most depressing statistic of the week came on Tuesday when they snapped up £10bn of a new issue of index-linked gilts. The loan will not be repaid for 55 years, which makes it one of the longest-dated loan stocks ever. But the real interest rate they will earn for handing this money to the Government for two generations is a miserly 0.137 per cent. Personally I’d rather take my chance in the stock market.
Does the Bank lack a sense of direction?
My favourite moment of the week came on Monday listening to a speech by Ben Broadbent, formerly chief economist at Goldman Sachs but in more recent times one of the leading lights of the Monetary Policy Committee. He, more than any other, has been trying to understand why unemployment, though high, has been much lower than expected given the severity of the recession. But he is also the first to admit that it remains a puzzle.
This prompted a welcome, but remarkable, moment of candour. The Bank has been under fire for the ambiguity of its forecasts for the economy and interest rates, to which Mr Broadbent said: ”If we don’t really have a good explanation for the way something has behaved in recent years, we should surely be less confident about our ability to forecast the future.”
Economists are inclined to take themselves too seriously. How unusual to find one willing to say: “Don’t follow me; I’m lost.” But how unnerving that he is one of those setting monetary policy.
Not so much a hot seat as an electric chair
It was piquant that the same day Labour leader Ed Miliband unveiled his plan to cap energy prices, the Financial Times carried an advertisement for the post of chief executive at energy regulator Ofgem. The blurb says the winning candidate will be “ an experienced leader and influencer as well as an outstanding strategic thinker, politically astute and used to managing high-level stakeholder relationships.”
The pay is £190,000, but don’t all rush. One suspects that if Labour does win, the new chief will earn every penny.
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