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Institutional Activism
10
effective.
However, several things bother me; what
bothers me particularly is that he makes an artificial
distinction between institutional shareholders
and other shareholders, and I don’t actually
see that distinction. The institutional shareholders,
I admit, own, on the whole, more shares per
investor than the private investors. Otherwise, as
far as the perspective of a company manager
goes, there is no distinction between an institutional
investor and a private investor. In fact,
there is a danger in it quite apart from logicality:
there is a danger in it because, by law, company
mangers or company boards are not supposed to
bring, or even to reveal accidentally, information
to one shareholder which they are not giving to
others. So I perceive a very considerable danger
in cosy talks between shareholders (be they institutionalised
or anything else) and company
boards. The same is true, of course, of financial
elders and financial columnists and so forth. I
think this is an important point to watch, and he
seems to have ignored that completely. To me, it
is a slightly dangerous area.
I have no problem with activism as such,
either. Capitalism seems to expose a lot of flanks,
which have been under attack ever since capitalism
started – don’t forget, capitalism was incredibly
unpopular in the United States in the early
19th century. Banks have been unpopular in the
United States throughout the 19th and early 20th
centuries, especially during the recession in the
20th century when several thousand banks suddenly
disappeared and millions of people’s savings
were lost. There is nothing wrong with
activism against corporate malpractice or corporate
stupidity – I have no problem with that at all
and one really has to go back to the origins of the
limited liability company to get the right perspective
on this.
The limited liability company, if I’m not mistaken,
was created in the 19th century when families
ran out of money with which to develop
their businesses and did not have enough cousins
and uncles and others to go to for additional
funds. Instead, they went out to the general public.
The limited liability company was created in
order to protect the company, and protect the
shareholders from the consequences of any stupidities
committed on their behalf by the businesses.
When the public gave its money to corporations
for better or worse, they made some investments
that were bad, others that were not so bad,
and others that were very good: but in all cases,
they handed over a sum of money for a piece of
paper which entitled them to go to an annual
general meeting and vote, and to receive a dividend,
if there was any. They were talking one hell
of a risk and they must have known they were
taking a risk – this is as true now as when the
limited liability company was first born. There is
an essentially fraught relationship between
shareholders and the businesses in which they
invest, because the shareholder is very weak and
the company is very strong. Alastair is quite
rightly proposing to redress the balance a bit
more in favour of the shareholder, but I emphasise
that I don’t believe it is suitable for institutional
or private shareholders to be more
assertive in order to cover the essential weakness
of their position vis à vis the company.
I also have difficulty in becoming as obsessed
with the role of the non-executive director as
some people appear to have done. This is not
wholly irrelevant to this part of the discussion, so
if I may digress for a moment: There appears to
be a feeling that if one works hard enough at it,
one could make all non-executives directors perfect,
and that by making them perfect one could
achieve perfection throughout the companies
which they serve, and there will be no longer be
badly-run companies.
This thought, which underlies much of the
discussion going on today, seems to me like nonsense.
There will always be good and bad nonexecutive
directors, and there will always be good
and bad executive directors. That is one of the
risks which the investor runs, and one of the reasons
why he diversifies his investments: he doesn’t
invest all the money in one company or two
companies because he knows there is this risk.
Training non-executive directors in order to
make them “fit for their job” seems to me to be
very ill-conceived because I cannot actually see a
non-executive director of a large company, for
instance GEC in the old days, mastering the intricacies
of every single part of the business. Why
should he attempt to do something which is
patently impossible He should be what the law
calls a “reasonable man” and he should have reasonable
instincts, and that is about as far as one
could go on the subject of who is and who is not
suitable to be a non-executive director.
As for the function of company boards, I’m
straying slightly outside the strict boundaries of
this discussion, but it is not irrelevant: There
was a reference already that boards work differently
in different countries. We have a big problem
in this country, because we are the only
country (apart from one or two commonwealth
countries) which has unitary boards, and therefore
we have the situation in this country where
the directors of the company are both the monitors
and the practitioners. Directors are the people
who are supposed to run the company, but at
the same time they are supposed to keep an eye
on it… one eye runs into the other and, basically,
it is an impossible situation. This does not happen
in any other country that I have ever been