Jeremy Warner's Outlook: As Forgeard receives the last rites at Airbus, what's the BAE Systems' stake worth now?

Special rewards for long-term investors; Those business gongs revisited
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The Independent Online

Dead man walking. We can only believe Noel Forgeard, co-chief executive of EADS, when he insists he didn't know anything about the prospect of delivery delays in the Airbus A380 superjumbo at the time he sold shares in the holding company last March, yet it is unlikely to save him.

M. Forgeard is damned if he knew and damned if he didn't. Either way, it doesn't make any difference, for if he did know or even half suspected the wiring faults which have now emerged, he's condemned as a knave, and if he didn't then he is equally convicted as an incompetent.

Support for M. Forgeard was fast draining away last night, even from the usually loyal French President, Jacques Chirac. M. Forgeard has hardly helped himself by countermanding a company diktat that nobody give any interviews to the media. Ever since, M. Forgeard has been doling them out right, left and centre, and to make matters worse, in one of them he blamed everyone at Airbus but himself for the fiasco.

The A380 has long been an exceptionally high risk venture, having so far failed even on its own numbers to win half the orders necessary to make the project break even. According to Boeing, Airbus in fact needs to sell far more superjumbos than it admits to make the venture a commercial success. All of which would have made BAE Systems' decision to sell its 20 per cent stake look extraordinarily far sighted had the deal actually been done by now.

Instead, BAE was unable to reach early agreement on price and the two sides are now having to go to arbitration to resolve the issue. One thing seems certain: the valuation will be quite a bit lower than it would have been just a few weeks back. Conspiracy theorists - we are dealing with the defence industry here, after all - will think the profits warning quite deliberate. Unfortunately for BAE, what it has been saying privately in the City for most of the last year - that Airbus's glory years are already behind it and therefore it's time to bale out - looks closer to the truth.

Special rewards for long-term investors

The idea that long-term investors in publicly quoted companies should get special rewards over and above those afforded to other shareholders is not a new one, yet it has never had more resonance than it does today, with the destiny of British companies increasingly determined by cash hungry hedge funds and other asset stripping speculators.

Peter Butler, a former director of Hermes, plans to raise the idea afresh in Washington next month at the International Corporate Governance Network, an organisation which claims membership of investment leaders in 38 countries with around $10 trillion of assets under management.

Is this a good idea whose time has come? Or is it just a worthy but impractical nonsense that would drive a coach and horses through one of the underlying principles of company law - that all shareholders are treated the same?

Despite the scepticism of the Association of British Insurers, which seems to hold the latter view, the concept certainly demands serious consideration for, as things stand, the voice of traditional long investors with an interest in building companies for the future is being shouted out by hedge funds and other speculators with more immediate money making priorities. Their attitude can best be described as "liquidate the company and give us the money".

Philosophically, there may be nothing wrong with this, for the main economic function of the capital markets is to distribute capital efficiently. If assets are being mispriced because of management failure or high levels of volatility, then speculators will always move in to deliver the coup de grâce. Yet the damage done to ordinary lives, long-term corporate health and value in the name of free market forces can be profound.

I doubt very much, for instance, that, Ferrovial's takeover of BAA is going to improve the lot of the international traveller, which one might have thought would be the primary purpose for allowing a takeover of this sort. Rather, what is occurring is that unique corporate assets are being sold at an undervalue to financial alchemists because the markets have failed to reward long-term investors as richly as they need to be to stay loyal.

A point that has gone almost wholly unremarked about in this takeover is that one of the biggest losers is the Exchequer, which because the cost of debt is charged before tax, rather than after it as with dividends, can expect a very substantial reduction in corporation tax returns from BAA.

Much the same point might be made about the takeover of Bhs and Arcadia by Philip Green, whose knighthood for services to retailing was announced last week. The massive dividends he draws from these businesses are paid offshore, which means both that they avoid tax, and because they are financed from borrowings, that the Exchequer receives less corporation tax.

But hey, who's left these days to challenge the principle of let the markets decide? David Cameron, perhaps. The point that Mr Butler makes is that there is also a philosophical case for rewarding long-term shareholders more richly than the short-term speculators, because volatility makes it riskier to hold a particular stock over the long term. Investors should be compensated for taking on that risk.

Whether maintaining differential dividends is the right approach is none the less open to question. The practicalities of such a structure, let alone its potential for abuse, would be legion. Even so, if we are to have an open doors policy to takeovers, something has to be done to bring about a better institutional understanding among UK investors of the nature of long-term value. As things stand, the markets are failing the British national interest.

Those business gongs revisited

I was away last week, so missed the Queen's Birthday Honours list, yet discredited though these titles now are, they cannot be allowed to escape without comment. Philip Green and Stelios Haji-Ioannou no doubt deserve their gongs for services to business. Both of them have had a memorable impact on the UK business scene, even if there are many equally deserving individuals who have not been similarly recognised. All the same, they sit oddly with what a New Labour luvvie once told me, which was that Mr Green would never receive a knighthood as long as he paid little or no UK tax.

Mr Green's assets are owned by his family in Monaco, with the effect that the Green family doesn't have to pay any tax on the massive dividends it takes out of Mr Green's private equity acquisitions. Stelios also pays little or no UK tax, but then he doesn't pay himself a salary either and, in any case, has never been a UK citizen.

When it was elected, Labour promised to do something about the growing number of the world's super rich who earn their living in Britain but pay little or no tax here. Curiously, this commitment has been almost wholly forgotten during the Government's slide into moral decay.

To the contrary, entitlement to a knighthood now seems to rest with those who make the most, boast the most and manage to avoid paying tax on it to boot. If Mr Green had paid UK tax on the £1.2bn he paid himself last year it would have funded countless inner city academies without the Government needing to go looking for handouts from the super rich.

The moral justification for tolerated tax avoidance is that it is better to have wealth creators in the UK economy paying no tax but generating plenty of employment than out of it and thus contributing nothing at all. Yet it is not clear that Middle England fully appreciates the subtlety of this argument as it sees its own, unavoidable tax burden growing ever larger.

Why Philip Green and not Charles Dunstone, who has contributed just as much to the UK retail industry and does pay his taxes? As long as the answer remains a mystery to all, the honours system will fall further into disregard.

j.warner@independent.co.uk

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