Long-Term Matters - Addicted to dumb ideas
With the UK retailer Sports Direct in the news, it is worth recalling what one large investor said only 12 months ago. The unnamed investor accused the retailer’s critics of having a “fundamental illiteracy of capitalism”, and said that “if you look at those companies that have impeccable corporate governance and have ticked all the boxes, they are also those that are the most cumbersome”.
The investor went on to describe its founder, Mike Ashley, as a “ferociously effective entrepreneur” with strong alignment to the company as a shareholder. “You can chastise Sports Direct for all of its quirks but if you compare the board’s remuneration and its share performance to other listed companies, then Sports Direct’s team is under-remunerated.”
Sadly, I have not been able to find out who this influential investor was and what, if anything, they have learned. But following other “preventable surprises” like Enron, BP, Tepco or VW, it’s a fair bet that the answer is zilch.
And it is unfair of me to pick on this particular investor because the bulk of Sports Direct’s sizeable minority shareholders went along with the impotent board and its over-dominant CEO. In 2015, only 11.5% of independent shareholders voted against Ashley, when 13.5% had voted against in 2014.
As John Kay, the prominent economist asked by the UK government to look into market short-termism, has noted: “Many Sports Direct shareholders have clearly taken the view ‘Ashley may be a bastard but he’s our bastard’…. Many companies are built by brilliant, difficult, autocratic founders.”
Perhaps a better word is narcissistic. Then the only question will be: is that narcissism under control and productive or has it run amok?
The uncomfortable reality is that investors show a remarkable learning disability when it comes to understanding their role in enabling dysfunctional corporate and market behaviour.
After all, they can point to rising share price as news accumulates, they can make use of easy platitudes when the inevitable happens – bad apple, hard to time, others missed it too – and above all, as a result of how short-term relative-return benchmarked pay systems operate, they do not suffer, as the losses are passed on to the end beneficiaries.
Kay says the “furore over Sports Direct” which follows so closely the collapse of British Home Stores, is a marker that the era of ‘shareholder value’ is coming to an end.
But the concept is remarkably resilient. Jack Welch – widely credited with bringing the idea to life along with academic Michael Jensen in the early 1980s – proclaimed in 2009 that it was “the dumbest idea in the world”.
Even now, others who advocated the approach are still clutching at straws. Another prominent academic, Alfred Rappaport – who is no friend of short termism – says the shareholder value idea was fine. It was simply that corporate executives, analysts and the media all misunderstood it.
Are there any silver linings in the cloud? Some investors have been doing the right thing, and not just this year. Legal & General Investment Management voted against the re-election of its chairman for the third year and this year, against all its non-executive directors.
Royal London and Standard Life disclosed their concerns to the public ahead of the 2014 annual general meeting. And even the Investor Forum, in a fourth attempt to co-ordinate investor stewardship activity in the UK, finally got its act together and spoke out in public. Given its resistance to challenging corporations in public and dealing with environmental and social issues, this is no small step. But why is it so far behind its leading members?
Investors seem addicted to ‘dumb ideas’. Until there are major cultural changes, the only thing surprising about crises like Sports Direct is that apparently intelligent investment folk appear so surprised on each occasion.
Dr Raj Thamotheram is CEO of Preventable Surprises and a visiting fellow at the Smith School, Oxford University