The Prudential's Asian adventure lies in ruins. The plan of the insurer's chief executive, Tidjane Thiam, to buy the Asian arm of the stricken American financial services giant AIG has collapsed. A significant number of Prudential's institutional shareholders protested over the £24bn price being offered for the target. They also, after some timely prompting from the Financial Services Authority, harboured concerns over the stability of the giant new global insurer that would have been created by the merger.
Time will tell whether their caution was justified or not. If the Asian arm of AIG floats and receives a valuation greater than the price Prudential was proposing to pay for the business, Mr Thiam and the rest of the Prudential management team will probably feel aggrieved. Yet whether the judgement of the Prudential's owners turns out to be right or wrong, we should be pleased that a set of institutional shareholders has been prepared to scrutinise a management's expansionary plans in the proper fashion.
Throughout the years of the global economic boom we saw passive shareholders approve many risky mergers and "transformational" expansion plans by company boards. The nadir was perhaps Royal Bank of Scotland's disastrous 2007 acquisition of the Dutch bank ABN Amro under Sir Fred Goodwin – a deal which eventually sank RBS and would have wiped out its shareholders had the British taxpayer not come to the rescue.
Shareholder capitalism works when shareholders do their job. That means reining in hubristic, empire-building managements. It means ignoring the self-interested propaganda of bankers and corporate lawyers, who stand to make large fees from merger activity. It means concentrating ruthlessly on the interests of those whose money they are investing (in other words those of us who invest in ordinary pension funds).
So often in recent years institutional shareholders have unthinkingly swallowed plans that they should have questioned. So often they have thought about short-term gains, rather than long-term value. So often they have accepted the fallacious notion that bigger necessarily means better. If the rejection of the Prudential's Asian expansion means institutional shareholders are finally waking up to their responsibilities, that is something that deserves to be applauded to the rafters.Reuse content