Outlook: Mistaken deal

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WHAT SHOULD have the higher priority - shareholder value or local employment and jobs? The answer, of course, depends on where you are coming from, but these days directors of publicly quoted companies are expected religiously to worship the former, whatever the short term human cost. That's not just because their shareholders demand it of them; it is also because prevailing economic orthodoxy tells us that the determined pursuit of shareholder value is in the end the best route to the greatest possible economic benefit for all.

Just occasionally, however, directors find themselves swinging the other way. One such case is the North Eastern brewing and pubs group, Vaux (now renamed Swallow) which has come to symbolise the struggle between these two often opposing principles. Vaux has been in the Nicholson family for generations and the present chairman, Sir Paul Nicholson, is a stalwart of the local Sunderland establishment and business community.

For the brewery that dominates the town to close would be a huge personal blow and embarrassment to Sir Paul. When the company decided to refocus itself on hotels, Sir Paul and his family were therefore desperate to come up with a deal that would save the brewery. That's when he made his big mistake.

What he should have done was to split the company into two, giving shareholders a share in both the hotels group and the remaining brewing activities with their supporting pubs. The brewing company might have survived, it might have been taken over, it might have closed, but whatever happened Sir Paul would have been able to say he did the right thing.

Instead, he allowed his brother to mount a management buyout bid for the brewery which would have tied the rest of the group into a disadvantageous beer supply contract. Sir Paul insists that the transaction was at arms length, and the best possible deal for shareholders out of all the various options considered, including closure and redevelopment. True or not, there is unfortunately always going to be a suspicion of nepotism and favourable treatment in a sale of this sort.

The transaction so outraged the chief executive and finance director that they went behind the board's back to complain to leading shareholders. For their disloyalty, they were sacked, but to the dismay of Sir Paul and his family, the mbo sale has now been terminated anyway.

Sir Paul's position in all this is an understandable one; any closure is a terrible thing, particularly when it is in a business, which though quoted, is run in the nature of a family company. But he must bear some part of the blame. These are the shareholders' assets, not his, and it was a mistake for the family to be involved in trying to buy them.