Article

The cult of shareholder value

“The past is a foreign country; they do things differently there” - LP Hartley

| 4 min read

After almost 40 years in The City I hope readers will allow me to reflect on some of the developments I have observed in that time. I have no City background. My grandfather was a miner in the South Wales coalfield, my father was a headteacher and my mother was a paediatrician (one of Bevan’s Babes), so to a very great extent I remain an innocent abroad. The first half of my career included spells as a corporate broker and a merchant banker; the second as a private client investment manager. I have worked with the IFC to launch a Thailand country fund and organised an EIS scheme which created a bacon slicing factory in Corby for the wholesalers, Nurdin & Peacock. I recall Sir Ernie Harrison being mocked by analysts for investing in mobile telephones and an institutional fund manager selling a client’s shares because he saw its CEO trying to put sugar in his tea with a fork.

But one development in particular has struck me as I look back. The rise and rise of the ‘cult’ of ‘shareholder value’ has not only been irresistible but, as we can now observe, has also led to some rather unhelpful outcomes at the present time – a lack of resilience being the most noticeable.

What conceivable use are share buy backs when a company’s indebtedness (and a very small virus) renders it incapable of independent existence within a year; what conceivable use is a high (and rising) dividend pay-out ratio which renders a company unable to lay-off staff without the benefit of a Government furloughing scheme; what conceivable use is a special dividend which leaves a company emasculated and unable to invest in its own resilience, be this in working capital, making its own supply chain more robust or repaying bank debt; what conceivable use is a progressive dividend policy if it leaves a company unable to invest in innovation and trying to knock spots off its competition. The four horsemen of the apocalypse then: share buy backs, high pay-out ratios; special dividends and progressive dividend policies.

Goodness, think what a bigger virus might achieve.

The current virus, it could be argued, perhaps marks the high watermark of this ‘cult’ of ‘shareholder value’ and which has been presided over by its high priesthood, analysts (and the firms they work for) who not only promulgate the theory of having an ‘efficient’ balance sheet but also that there is somehow an empirically correct ‘capital allocation’ model, and current shareholders who would rather let sleeping dogs lie and continue to enjoy their great good fortune than accept that companies have an obligation to serve future generations of customers, staff and shareholders too. I recall joining the firm which was credited with introducing the concept of the analyst’s ‘forecast’ and how one analyst was accused by the chairman of Associated Dairies, Sir Noel Stockdale, of looking at his budgets in arriving at his forecast. Now we have ‘consensus’, ‘beats’, ‘misses’, ‘upgrades’ and ‘downgrades’. I also recall a CEO, when asked by an analyst to be more precise about what was meant by the company’s ‘medium term target’, replied: ‘You’ll find that’s somewhere between shorter and longer.’

If I am right – and the Royal Dutch Shell dividend reduction is a promising start – and companies feel compelled to invest in becoming ‘Antifragile’ then investors can expect to receive a lesser proportion of any future returns they might enjoy from ‘Income’ (or the harvesting of ‘shareholder returns’) and a greater proportion from ‘Capital Growth’, something which is much harder to identify let alone harvest.

And this is at the same time as companies are coming under pressure to burnish their ESG and sustainability credentials, something which will also demand and absorb capital.

Shareholder returns, as described above, belong to the past – another country where things are done differently. Being able to have cake and eat it at the same time may no longer be quite the default option it once was. My contention is that investors should reflect on this and, whilst of course holding companies to account, allow them to invest not only in their own resilience but also in their own (and the planet’s) future too.

I’ll leave you with the thought that the UK might then perhaps be able to produce its own Microsoft, Google or Amazon.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

The cult of shareholder value

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