Rebellious investors are only doing their job

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Because no rule or code can define the character of a non-executive, even boards compliant with every code and regulation will range from the effective to the useless. Shareholders should keep an eye on excessive remuneration and vainglorious acquisitions, and intervene in issues of management succession when it appears that non-executive directors have become too close to the company to do a proper job.

In the 1990s, corporate executives represented shareholders in much the same way as communist dictators represented the workers of the world. Rhetoric proclaimed their devotion to the interests of the proletariat or shareholders. This was combined with an insistence that it was the interpretation of these interests by their leaders, be they chief executives or general secretaries, which was their true representation. Shareholders were invited to show their approval by demonstrating their unanimous support in uncontested elections.

But the people of eastern Europe finally found their voices, and in the past year many more western capitalists have done the same. Michael Eisner is today besieged inside Walt Disney’s Magic Kingdom by rebellious shareholders. British institutional investors forced Michael Green out of ITV, the media company, and refused to let Sir Ian Prosser through the doors of J. Sainsbury, the retailer. Most spectacularly, French petits actionnaires have succeeded in dismissing the board of Eurotunnel.

In a very British response, leading business people and institutional investors met over dinner in a London club last month to discuss the relationship between companies and shareholders. Even before the asparagus soup arrived, they should have been able to agree that large companies should be run by professional managers, not shareholders. Owners of shares, widely dispersed, lack the ability, interest or information to manage companies themselves, and must back or sack those they have appointed.

So when critics such as Nicolas Miguet, leader of the revolt against Eurotunnel, argued that the company’s tariffs were too low, they were interfering in policy matters that ought to be within the competence of corporate executives. If they were dissatisfied with the results, as the dissidents had both right and reason to be, their recourse was to change the management, as they properly but foolishly did.

That leaves two questions that could reasonably have provided food for thought. Are there specific issues on which managers should seek, and institutions offer, views? And what is the appropriate division of supervisory responsibility between non-executive directors and shareholders?

The first is easy enough to settle over soup. The “back or sack” principle implies that shareholders should be involved in policy only when there are evident conflicts of interest between directors and the company – most commonly over executive pay and big deals. Management greed and personal aggrandisement need to be kept in check.

The second issue is complex enough to occupy the main course. Non-executives must be sufficiently independent of management to challenge its approach and philosophy and if necessary to force changes in the team. But they must also be sufficiently close to management to acquire the knowledge and personal respect needed to fulfil these roles. This is an extremely difficult balance to maintain and few achieve it.

Mostly they err too far in one direction or the other, becoming too close to managers to exercise independent judgment, or too remote from everyday issues to make a useful contribution. Some people, full of ignorance and bonhomie, fail on both counts. They are the preferred choices of weak management and autocratic chief executives.

Because no rule or code can define the character of a non-executive, even boards compliant with every code and regulation will range from the effective to the useless. There can therefore be no general rule about the proper extent of shareholder involvement. Most recent cases of revolt are the result of the perceived failure of boards to perform their functions.

The pineapple and ice-cream is now waiting. But the summing up need not detain our guests for long. Shareholders should keep an eye on excessive remuneration and vainglorious acquisitions, and intervene in issues of management succession when it appears that non-executive directors have become too close to the company to do a proper job. That list corresponds closely to the cases in which shareholders have recently intervened. Nothing in our agreeable dinner should deter them from continuing to do so.

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