Outlook: Fretting over BSkyB, but aren't investors mainly to blame?

Rail Carousel; Marks & Spencer
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The Independent Online

The huffing, puffing and general climbing on high horses by institutional investors over the appointment of James Murdoch as chief executive at BSkyB was still the story of the moment yesterday, yet there is little chance - now that the appointment has been formalised by the board - of it producing a result.

James' father, Rupert, speaks for 35.4 per cent of the shares through his holding company News Corp. There's easily sufficient silent support for News Corp's position to ensure that any groundswell of opp-osition to James at the forthcoming annual general meeting cannot be any more than a protest vote.

The Sky stand-off again highlights the impotence of investors in attempt-ing to impose their will on a board determined to do something else. Despite Derek Higgs, whose revised proposals on corporate governance reform were adopted as part of the combined code earlier this week, Sky has been able to ignore the wishes of many outside shareholders.

Sky is an unusual situation in that it is one of Britain's largest companies by market capitalisation, making it a core holding for most institutional portfolios, but it is 35 per cent controlled by the Murdochs through News Corp. Few other large companies share the same characteristics. In the case of ITV, with no controlling shareholder to answer to, institutional investors were able to gang together to oust Michael Green much more effectively than they have at Sky.

None the less, the Sky débâcle will only further increase the general sense of disillusionment among executives and investors alike with publicly listed companies, and hasten the trend towards private equity. If he could afford it, Rupert Murdoch would take BSkyB private and be done with his City tormentors for good. He's hardly alone in thinking the growing disciplines of the publicly quoted sector are no longer worth the candle. In ever increasing numbers, the best executive talent is deserting for private equity, where the rewards are potentially much higher, the public scrutiny less intrusive, and the day to day pressures better directed.

Deprived of their say, some shareholders will vote with their feet and sell the stock. Faced with its first big test, Higgs has failed in its purpose of closing the gap between the public owners of a company and its board. These situations don't happen in private equity, where the mismatch of management and ownership purpose that so often rules in publicly listed companies is unknown. In private equity, the owners and managers are, in effect, the same, making for fewer failures in corporate governance.

The fund management industry only has itself to blame for what's occurred. When ownership is diffuse, it's hard for individual investors to make their voices heard. Managers are prone to exploit that lack of acc-ountability for their own purposes. Yet if investors backed their judgment by building up large positions in companies, they would find it easier to demand boardroom representation, and through it they would better be able to protect their interests.

Instead, they have allowed themselves to be ruled by the tyranny of the benchmarks. Strongly rising stock markets throughout most of the 1990s reinforced the trend towards low cost indexation. Active fund managers found it hard to beat the indices, and therefore began progressively to hug the index too. The effect was to reinforce the pre-existing propensity among investors to herd like activity. Phillips & Drew Fund Management, which did build up large positions through which it would attempt to exercise pressure on the management, was widely accused of acting like private equity, as if this were disreputable.

In fact it is the way that fund managers ought to behave. There's been a lot happening in between, of course, but the stock market is now roughly at the same level it was six years ago. If stock markets as a whole are going nowhere, the way to make money out of equity investing is through stock selection, not by passively sitting back and watching the indices dictate performance. Stock selection is in essence what private equity does. The superior rates of return it generates speaks for itself. No amount of Higgsian correctness will improve the performance of fund managers who merely track the index.

The largest shareholder in BSkyB outside News Corp is Legal & General, with just 3 per cent of the stock. The next largest is another index tracker, Barclays Global Investors. Morley Fund Management, so vocal in its criticism yesterday of the James Murdoch appointment, owns just 1.3 per cent. And they expect News Corp, with 35 per cent, to listen? Give us a break.

Rail Carousel

The fat Controller turned the carousel again yesterday and another rail franchise found itself under new ownership. Go-Ahead has been shunted off the Thames Trains line to be replaced by FirstGroup, and not before time, the long suffering commuters of Reading and the Cotswolds may think.

Go-Ahead is no great shakes as a rail operator - ask anyone who is a captive customer of its other two franchises, Thameslink and South Central. But isn't FirstGroup the rail operator which put together such a crumby bid for the Greater Anglia franchise that it was not even allowed onto the short-list?

The merry-go-round of passenger franchising operated by the Strategic Rail Authority's Richard Bowker spins ever faster and the quicker it turns the more blurred becomes the picture. Connex, French owned, has now lost both its franchises. Go-Ahead was deemed the best candidate to inherit South Central, yet it has not proved good enough to hang on to one of its original franchises. Likewise Arriva was forced to say arriverderci to Merseyrail and yet still found itself short-listed to run the trains in the East of England.

If there is method in the SRA's madness, it is in the way that the state's grip on the train operating companies is slowly tightening, just as it has on the running of the rail network itself. A dozen of the 25 passenger franchises sold off by the Conservatives are now being run as management contracts under the control of the SRA, and one is being operated directly by the state, which is hardly what the architects of privatisation had in mind.

But then, as today's report from Transport 2000 underlines, rail privatisation has been an unmitigated disaster. Fares have rocketed and so have public subsidies - from £1.3bn in the final year of British Rail to £3.8bn now. Meanwhile performance has plummeted. To paraphrase BR's old slogan, the railway has most certainly not been getting there, and as the bills mount for so little in return, the Government is becoming ever more desperate for solutions.

What next from the SRA? Yet more micro-management of the train operators, perhaps even the tearing up of the entire franchising process? Mr Bowker promises that will not happen. But that is what the maintenance contractors were told as well.

Marks & Spencer

Interim figures from Marks & Spencer yesterday were not the disaster some had predicted, nor does the outlook for the all important Christmas trading period seem as dire as has been suggested. Yet doubts remain about whether Luc Vandevelde, the chairman, and his chief executive, Roger Holmes, really have achieved the turnaround in M&S's fortunes they pretend. They've stopped the rot, of that there is no doubt. And margins are continuing to improve, delivering some reasonable growth in earnings. But decent top line growth remains elusive.

Given the number of initiatives M&S has launched over the past two years, merely holding market share in clothing doesn't seem a particularly inspired performance. M&S hasn't yet matched more cutting-edge fashion retailers in achieving a very rapid turnover of lines. City hopes for the future of M&S are firmly pinned on ambitious plans for expansion in home furnishings. Let's hope Vittorio Radice, poached from Selfridges for the purpose, can deliver the goods.

jeremy.warner@independent.co.uk

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