Margareta Pagano: Is our shareholder democracy all it's cracked up to be?

The Kraft-Cadbury takeover battle raises questions

Sunday 22 November 2009 01:00
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Corporate Britain has one of the purest forms of shareholder democracy in the world. But strangely, it's not always a fair one. Unlike in the US or Europe, British takeover law means that companies really do have only one defence available in a takeover fight, and that's to fight on price. Company boards are unable to block a deal with poison pills or changing the date of the vote or the structure of the board. They can only stop their shareholders selling out for a quick buck by persuading them that they would be better off staying with the company. The alternative is to recommend an offer.

For decades, this has been accepted by the City as the fairest and best way to conduct our affairs. But the tide seems to be turning, and turning fast. In part, this has been prompted by the rise of short-term investors such as hedge funds selling out in bid situations, but also the huge pressure on even our bigger, more long-term fund managers to sell so they can match the indices.

Lord Myners, the City minister, put it neatly when he said short-term investors were like punters betting on a race with no interest in the health of the horse. His recipe is for a "two-tier" shareholder register which would give greater voting rights to longer-term investors. It's a controversial but interesting idea and Richard Lambert at the CBI has spiced the debate by suggesting that shares would only carry votes if they have been owned for six months.

Sir David Walker, whose review into corporate governance comes out this week, is also said to be looking for other mechanisms by which companies and their investors can achieve a better balance between long- and short-term concerns.

Look at Cadbury, the Crunchie maker being bid for by Kraft and eyed up by chocolatiers such as Hershey and Ferrero. Talk to just about anybody in the market and most will shrug their shoulders, saying that Cadbury is as good as a done deal if the price is right. Cadbury's chairman, Roger Carr, is playing the only game he can – the value one, arguing that Kraft's offer undervalues the company. Most shareholders agree with him, helping push the price up to around 800p. But more than 13 per cent of the shares are now in the hands of arbitrageurs at the hedge funds – still low for this stage of the bid, but nonetheless worrying as they will sell out for the tiniest pip if Kraft ups its price. But is it really in the interests of Cadbury shareholders – say over the next five years – to be gobbled up by Kraft? Carr has laid out a highly credible financial case, future growth looks good while the number of premium chocolate players around the world is small.

Economic purists would say yes, arguing that the UK system is best because it creates an open, transparent and fluid market. Well, in theory. Others would claim the drive for shareholder democracy may create a distorted incentive system because the end-game is decided by the short-term shareholders. As Andrew Ross Sorkin, the author of Too Big To Fail, wrote recently, there is little evidence that shareholder democracy works any better than directors in deal-making, as shareholders don't necessarily know what's good for themselves. But then, democracy is a fragile affair.

Rose takes to the skies, while Bolland takes M&S globetrotting again

I have never seen Sir Stuart Rose quite as jolly. He's always been a party boy but on Wednesday night, just hours after he had announced Marc Bolland was to be his successor as chief executive at Marks & Spencer, he was enjoying being the belle of the ball, too. Just about everybody at the glitzy bash – some of the City's top industrialists and politicians – were queuing up to congratulate the retailer on his smart decision to poach Bolland from Morrisons – smart not just because Bolland is a serious operator, but because Sir Stuart moved quickly, thus avoiding the chaos that has dogged companies such as ITV, which also filled its top job last week.

Not surprisingly, he liked the praise, coming as it did after the hammering he's had over his dual position as both chairman and chief executive, but he's also happy because getting Bolland on board so swiftly means he can get on with his own plans, the first of which is his ambition to fly himself around the world.

Once Bolland has settled, Sir Stuart promises that he won't stay long as a backseat driver and will get away before Christmas 2010, much earlier than his 2011 deadline. Some doubt him, but he sounded to me like a man who knows it's time to move on. He also needs to earn more money as he hasn't had a penny from the M&S pension scheme since he joined after the scheme had closed. Going into private equity seems his favoured option, for now.

After all the fuss over finding a successor, Sir Stuart also said that when it came to it, choosing Bolland was easy as pie because the Dutchman ticked three of the boxes essential to take M&S to the next stage – knowledge of retail, of brands, and most of all his globetrotting Heineken salesman days. M&S hopes its lousy international record will end with its new plans to expand into China and India. A case of Bolland refreshing the parts of the world, others failed to reach?

Mysterious ways God's banker faces shareholder wrath

Lloyd Blankfein, the head of Goldman Sachs, says he's sorry. The banker who claimed, supposedly jokingly, to be doing "God's work" admitted last week in the most extraordinary statement: "We participated in things that were clearly wrong and have reason to regret and we apologise for them." But is his apology enough? Not according to Goldman's big investors including AllianceBernstein, State Street and Wellington among others. For the first time ever, some of these investors are complaining about staff bonuses, telling Blankfein that more of the profit should go back to them. This must be unthinkable for Goldman, which culturally seems still to believe it can be run along the lines of a private partnership, even though it floated years ago. Even more unthinkable, perhaps, are the whispers that Blankfein may not be around much longer to carry out his divine work.

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