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Shareholder decision making and information

As I commented on previously, David Cameron wants shareholders to vote on directors’ pay packages. Another problem with this occurs to me.

Right now I can value a company on its past performance and what I think its future performance will be, and part of this evaluation comes from my opinion of the decision-making abilities of the people in charge. If I know who they are, and am confident that they will hire the right people into the right positions, I might value the company more highly.

If shareholders make decisions I have the problem that the performance of the company depends on who the shareholders are, and I do not know who the other shareholders are.

In the specific case where shareholders can vote on directors’ pay, if we assume that the highest pay attracts the best performing directors, then the best performing companies will end up being the ones with the least left-wing shareholders.

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9 comments to Shareholder decision making and information

  • Paul Marks

    The real problem is that most major companies are not owned by individual shareholders.

    When I was born just over half of shares in British companies were owned by indiviudals (although ownership had been in decline for a long time). What is it now – 20%?(if that?).

    In short the hired managers of major companies are “controlled” by other hired managers – who run the pension funds (and so on) that own the shares.

    Why is this?

    Inheritance tax and Capital Gains tax have undermined indivudial share owning (as has endless regulations).

    And what is the government going to do to get rid of these taxes and regulations?

    NOTHING.

    So the farce will continue. With “remuneration committees” (made up of hired managers) deciding the pay (and perks) of other hired managers – who sit on other “remuneration committees” and…..

    People point at Germany – but in Germany individual and family control of many companies is still strong.

    If that vampire Waren Buffet gets his way (and inheritance tax, and so on, starts to really hit the family onwed business enterprises) then telephone number pay packages and “paying for failure” (with hired managers being given millions of Pounds for RUNING COMPANIES INTO THE GROUD) will become the norm in Germany also.

    By the way on “Crony Capitalism”…..

    If Mr Cameron really wanted to get rid of “crony capitalism” the first thing he would do is GET RID OF THE BANK OF ENGLAND.

    What does he think it does?

    It hand out money (money it has created from NOTHING) at a lower rate of interest than people are prepared to lend out their savings (IF those people actually had a free market to lend out those savings – rather than a market swamped by the funny money of the Bank of England).

    Who does this Bank of England money go to?

    It goes to wealthy and connected banks and other such.

    It is the heart of “crony capitalism”.

  • Johnathan Pearce

    There has been a fairly concerted effort, under various governments, to give shareholders more rights of control over their firms, to increase “shareholder activism”, and the like. Up to a point, I see no real problem with this, given that there is a disconnect between the capital owners of a business (shareholders) and the managers of said. The recent banking crisis, and problems at firms such as BP (various environmental disasters) are perhaps evidence of this. There is a lot to be said for trying to align the interests of shareholders, managers and others more coherently.

    But that also gets us back to an issue that comes up in this blog from time to time: statutory limited liability (note the key addition “statutory” – I think LL per se is perfectly acceptable if it involves full consent).

    Under statutory LL, shareholders benefit if a firm does well and if it doesn’t, at most, they lose only their initial capital invested. But they don’t lose anything else, such as from tort claims from injured third parties. There needs to be a reform of this, if not by moving to complete unlimited liability.

    Talking about “empowering shareholders” and bashing rich CEOs gets lots of votes, but if we are genuinely interested in encouraging responsible corporate behaviour and encouraging entrepreneurship and wealth creation, it is not enough just to ask for more powers for shareholders. Ultimately, this should be left to the market.

  • Derek Buxton

    Taking Cameron’s rather idiotic sound bite literally, are we all not shareholders in the UK, we do pay the MPs and a multitude of hangers on, even the ones who are useless. It would therefore seem appropriate that we have a say in their salaries. after all, we are all in this together….. or as someone once said “who this we quimo sabe”.

  • Laird

    I don’t have a problem per se with shareholders voting on directors’ pay packages. Directors are, after all, supposed to be the shareholders’ representatives and the overall stewards of the company, and shareholders should control the terms of their appointment (which includes their compensation). Such pay is already subject to full disclosure (in the US, anyway). The problem I have is, as Paul Marks has already noted, the almost complete disconnect between ownership and control of modern corporations, and the immense rise of the percentage of institutional share ownership. Such institutions almost always vote as management recommends, so in the end this will be merely cosmetic; nothing substantive will change, and no directors will see their compensation or perks reduced as a result.

  • RRS

    @ P M (not the man at Westminister):

    Right on target!

    Hey! What next, involve all the “stakeholders” (remember that concept?) of a business enterprise of whatever legal status?

    Some 15 or so years before the birth of the PM (who, thankfully did not read Law at Oxford) there was in my time at the University of Virginia the topic of Corporate Democracy was being “debated” (see, DICTA, U,Va. Law) by some eminent scholars and practitioners.

    There is, of course, no such thing. There is no “One man one vote” nor of the application of Robert’s Rules of Order.

    Corporations, like all other business and commercial organizations, are civil (non-governmental) instumentalities. Political actions to convert them into institutions are a sign of social decline. But, it does go on. Those that do convert – atrophy.

  • RRS: the penny has finally dropped now on your distinction between ‘institutions’ and ‘instrumentalities’…:-)

  • RRS

    Alisa, etal.

    Whoever may wish to go further on the effects of instumentalities (such as the earlier provisions made in the U S for general education) evolving or being converted into institutions might ought to (as they say down South) read Carroll Quigley, especially his The Evolution of Civilizations as well as some other stuff of his available on the internet.

  • Gareth

    The ultimate shareholder sanction rarely seems to get a look in – take your money elsewhere.

    The Government efforts to play individual shareholders against institutional ones is the kind of game politicians have been playing for decades and they enjoy a great deal of undue authority by positioning themselves as a Godfather figure in society.

    Businesses can do without a heavier regulatory burden and the consumer can certainly do without an even closer stitch up between big businesses and the state.

  • Paul Marks

    Many people attack the idea of the “corporation” itself – I do NOT. In theory there is nothing wrong with the idea of limited liabilty – as long as everyone who does buiness with such an enterprise knows what they are CHOOSING to do business with (in advance), although of course, the old practice of insiting that limited liability enterprises idenitfy themselves as such (by never saying, for example, “Tesco” but alsways “Tesco Limited” (in the United States in would be “Incorporated”) is proberly a good practice (leaving off the “Ltd” and “Inc” off company names is not good).

    However, I am depressed (but not surprised) that most (not all) of the comments above MISS THE POINT.

    Most large companies are NOT owned by individual shareholders – and “institutional shareholders” are not actual; people (they are just hired managers, who OWN NOTHING, concerned with their end of year bonus – and that is about it).

    As for the United States (which is just as bad as Britain) – statute after statute has stripped shareholders (even where they do exist) of their power – and handed over to hired managers (the executive class).

    “These things are best left to the free market”.

    THERE IS NO FREE MARKET.

    There is inheritance tax, capital gains tax, and endless regulations. Plus a credit bubble financial system with endless funny money from the Bank of England and its pets (the commercial banks and so on – the “institutions”).

    Individual shareholders (real OWNERS) have been crucified.

    People who talk about a “free market” in a British or American context are living in a fantasy world.