MONEY The shareholding worm turns
NICHOLAS DAVENPORT
A curious Private Member's Bill, which has had its first reading but is not likely to reach the statute book, is designed to amend the company law 'so that the agenda of annual general meetings shall include consideration of the appointment of share- holders' committees'. A harmless enough proposition, you may say, but the Bill would give a shareholders' committee the right to appoint a third party to conduct `a management audit' of its company and its board. The idea, I presume, is to give the chairman and managing directors hell if their company affairs go wrong. As most boards of directors are self-satisfied self- perpetuating oligarchies. I am in sympathy with any plan which will keep them on their toes and hard at work outside the golf course. I would therefore congratulate Sir Brandon Rhys Williams, the Conservative sponsor of the Bill, on his fine effort in a good cause. But I think he is going the wrong way about it. And he is not likely to win over Mr Anthony Crosland, Presi- dent of the Board of Trade, who has to administer the company laws. In Tire Con- servative Enemy, which he wrote in 1962, Mr Crosland said: 'In America there is now a nostalgic campaign to revitalise shareholder democracy. This is not only doomed to failure; it is wrong in principle'.
At that time Mr Crosland believed in the managerial revolution and the euthana- sia of the equity shareholder. In his present position of power and responsibility he has realised that the equity share is the all- important legal device which makes the capitalist system work in an advanced in- dustrial economy; that is, it enables the capital spenders—the wealth creators--to obtain their risk capital freely in the open capital market. This is mainly done through the institutional investors. In spite of the fact that Mr Fred Catherwood, director-general of the NEDC, told the Parliamentary-City liaison group that `the [equity] owners could be the most enormous influence for good; they could tip the scale between mediocre performance and top- class performance, between 3 per cent and 6 per cent growth', I do not believe that they could do it by means of Sir Brandon's shareholders' committees conducting what he calls a `management audit'. They would be taking action far too late to stop any rot. According to the Bill they have first to secure the support of 200 shareholders or 10 per cent of the voting rights and win a majority at the annual gen- eral meeting and then wait for a company
`auditor' to investigate and make his report. As the annual general meeting will be six months or more later than the figures it is questioning. the shares of the company, if it is in trouble, will already have tumbled in market value. In fact, the first news of the investigation will probably have made them unmarketable.
It is far more useful for shareholders to watch the behaviour of their shares in the market than to wait for the annual or half- yearly accounts. The market is the baro- meter of management success or failure.
If things are not going well on the factory floor or in the boardroom you may be sure that Insiders' will begin talking and this talk will be reflected by sales in the market. The average shareholders may not have the time or inclination to watch market prices but the professional managers to whom he has entrusted his savings— either through a life or pension fund or through a unit trust--are scanning the markets hour by hour. That is their iob. In fact, they have probably secured the sav- ings of the average man by boasting that they will protect him against the vagaries of the market. Many of their claims are clearly unwarranted. The performance they have put up since the budget in the current bear market has been—to say the least— very disappointing. Most of them have done no better—and many of them worse —than the ri -Actuaries index. They have, in fact, got themselves into the posi- tion where they cannot do better than the index. They are too large and too inter- locked. Each year sees them get bigger and bigger. For example, the largest unit management--Save and Prosper—is now buying up Ebor Securities, a management formed five years ago, and the enlarged group will control over £450 million of funds. This is nearly one-third of the total value of British unit trusts which is about £1,500 million. The total investment in equity shares by the life and pension funds was last reported at £2,755 million. These enormous funds are virtually frozen in the market. Investmentwise the managements . are stuck.
But my suggestion is that these profes- sional investors need not be stuck if they go outside the markets. Their managers should keep in touch with the managers of the companies in which they invest. A sus- picious move in the market price should prompt them to get on the telephone and ask if there is any trouble. The great Prudential Assurance has more than once stepped in and demanded a change in mana- gement. Even if the unit trust management cannot throw its weight about as effectively as the `Pro' it can exercise its rights as a large shareholder to ask for information, which, of course. would have to be given to every shareholder as soon as the board releases it. At the moment, when prices are falling rapidly in the market, these contacts could be invaluable. Last week, for example, the shares of Klinger Manu- facturing fell so sharply that the board had to ask the Stock Exchange to suspend
market dealing pending consideration of the cash position. Could not some of the life and unit trust managements have inter- vened at an earlier stage and, finding that it was a liquidity problem, offered to help solve the cash position? In the current liquidity crisis a closer liaison between in- vestment institutions and company manage- ments would be of enormous value. But Sir Brandon would have to admit that these institutions would have to act long before the annual meeting.
There is no doubt that something will have to be done eventually to improve the structural relations between boards of directors and their owners—the equity shareholders. In Germany the shareholders can elect what is, in fact, a separate super- visory board. In France the workers can elect an employee representative to the board. It is interesting to observe that Mr Crosland in his book The Conservative Enemy wrote: 'Many writers have ela- borated ingenious schemes whereby the State, the workers and the consumers could all be represented on the board of directors. This is the most attractive solu- tion in logic and principle, but one questions whether the real gains would out- weigh the immense practical complications.' I think he exaggerated the complications. It would be easy for Mr Crosland to appoint a committee to suggest an alternative scheme to the German and the French and then promise to bring forward an amendment to the Companies Act in the new Parliament, allowing Sir Brandon gracefully to drop his Bill.
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