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Business | Management | Climate

Entrusted by Ong Boon Hwee and Mark Goyder

One of the first things that the chair of a listed company may do upon appointment is to write to the top twenty institutions which hold shares in the company and offer to meet them. A few meetings may follow. Typically, many institutions will reply, saying that they see no need to meet at the present time, but will be in touch if this changes. 

    The board represents the owners and needs to behave like steward leaders. But what if the owners of the shares fail to behave like stewards? For stewardship to work, a critical mass of owners needs to be engaged and responsible. If everyone owns but a minute percentage of a company, there is little capacity or incentive for anyone to be a responsible owner. An engaged institutional investor may well ask: “Why should I do the heavy lifting when the benefits of my efforts are spread across a large group of investors who haven’t lifted a finger to get involved?” 

    In listed companies, the dispersal of shareholding and the passivity of most shareholders have in the past combined to make it easier for irresponsible CEOs to take undue risks or to negotiate unjustified remuneration packages. With honourable exceptions, those investors who sense that the company was on an unsustainable path are likely to sell their holdings rather than work with others to put things right. 

The short-term benefits of wealth creation are vastly outweight by the long-term costs—climatic, polluting and invasive. Can the damage now be repaired? Ong Boon Hwee and Mark Goyder argue that we need a new form of capitalism that respects life instead of exploiting it. Their keyword is “stewardship”, and in their new book they map out a plan for asset managers, investors, shareholders and directors to play a nurturing role

The dispersal of shareholding can undermine stewardship. The more dispersed the shareholding, the harder it is for the shareholders to act as an effective body capable of holding executives and the board to account, and to exercise stewardship. In a recent post, Goethe University’s Professor Katja Langenbucher summarised the difficulties: 

 

Shareholders’ interests vary greatly. We find shareholders betting on a corporation’s stock price going down. We find others prepared to support measures which will lead to stock prices going up for the short-term only. We find shareholders uninterested in the corporation, holding shares only due to an index tracker or investment advice. We find yet others heavily invested in keeping a low-risk investment over a very long time span. Out of the broad spectrum of possible management strategies, each option will cater more to the taste of some than of others.

 

First response—seek out steward shareholders 

The best boards insist that the firm seek out investors who have stewardship intent. They are usually the long-term investors which may include state-owned entities, sovereign wealth funds, pension funds, insurance companies, wealthy family and private group investors like Berkshire Hathaway. The board will want to know whether the company has sought to attract more steward investors so as to create stability of ownership and make stewardship more effective. What is the optimal proportion of the total share register that should be made up of steward investors? How can the board engage the steward investors to help the company think about issues of future appointment of non-executive directors and CEO succession? 

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Second response—involve shareholders in the board nomination process

There has been one particularly effective innovation in Europe which has helped to achieve a more thorough involvement of institutional investors while still respecting the rights of smaller shareholders. This is the Swedish system of nomination committees. 

    The asset managers who hold shares in listed companies on our behalf are busy people. They may hold hundreds or thousands of shares around the world. When time is short, delegation is essential. The key to good delegation is to ensure that the right board is in place so as to be good stewards of the business. But in modern stock markets, one often finds that the largest shareholder holds only 1 or 2 per cent of the shares. In such a scenario, there is no natural sense of stewardship where one can actually gather a significant chunk of owners in the room. What good stewardship needs is disparate shareholders working together. This is difficult. It needs to be made easier, and the larger of those investors need to make it more of a priority, especially in the key issue of director nomination.

    The chairs of some listed companies seem to have the power to nominate directors with all the imperiousness of a Maharajah. They are often heard saying that the decision to appoint new directors must be the chair’s because the chair is responsible for the effective operation of the board. Such a statement flies in the face of the legal position. Under company law, the shareholders elect the directors. 

Ong Boon Hwee is the CEO of Stewardship Asia Centre (SAC), a Singapore-based centre promoting stewardship and governance across Asia. Dedicated to inspiring change, MR Ong directs SAC’s efforts at propagating the concept of responsible wealth creation so that organisations can benefit the wider community and future generations

 

Mark Goyder is the founder and trustee of Tomorrow’s Company (TC), a London-based business think tank which he led until his retirement in 2017. TC works with business leaders, investors, policymakers and other partners to champion the importance of business purpose beyond profit, and to lead businesses to be a force for good

In most companies, there is a board nomination committee whose task is to vet candidates and guide the process, but this remains strictly a board process. Too often, it is a formal endorsement of the wishes of the chair. Even with more independent thinking in the nomination committee, the process is in danger of creating a self-perpetuating oligarchy. Directors decide who their new colleagues should be, and then put their nomination through the formality of the shareholder vote. With shareholding so dispersed and passive, the directors are the ones who propose and the shareholders ‘rubber-stamp’ the choice. 

     In Sweden, however, there is a different approach. The board nomination committee is formed by representatives of the largest investors in the company. The chairman of the company attends but does not chair this nomination committee. The result is that major institutions can come together to work as stewards of a company in ensuring that it has the right board. The Swedes were inspired, ironically, by the report in the UK by Sir Adrian Cadbury in 1992 on the financial aspects of corporate governance. On reviewing their system in light of this report, they moved away from the self-perpetuating oligarchy. They decided that since the formal expectation under company law is that directors are chosen by investors, they should set up an investor-led nomination committee, on which all the major (steward) investors sit.

     In principle, there is nothing to stop any listed company from implementing the arrangements which operate in Sweden. The rules could be framed to ensure that minority shareholders are fairly represented on the nomination committee. Where there are shareholder organisations set up to represent individual shareholders, they could be granted a representative on the nomination committee. In companies and countries where trade unions represent the legitimate voice of employees who have no formal right of representation, they could be offered a place on the nomination committee. Where employees have shares in the company, they too could be offered a place on the nomination committee. 

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In practice, just as the Swedish system evolved in stages, it might make sense for listed companies to experiment first by inviting major (engaged and responsible) shareholders to nominate representatives to serve on their nomination committees. The most important learning point is that the nomination process is a good catalyst for bringing together the major investors to make a shared assessment of the company’s situation, as well as for working together in a more proactive way than is experienced at present.

 

Third response—a planned, progressive shift towards more stable ownership

Many of the most enduring companies have designed their structure to ensure stability of ownership. Tata and Sons is a good example. Over 150 years on from its formation, Tata has survived and thrived by combining stable ownership by family trusts at the group level with individual companies below group level, each of which is a major firm in its own right, with stock market listing but with Tata and Sons holding a significant shareholding. 

     Tata and Sons is the product of a unique vision faithfully pursued over generations. Listed company boards battling conflicting demands of dispersed shareholding might ask themselves how they can solve the problem without Tata’s unique history and constitution. It is important to challenge the assumption that a company’s ownership and business form are unchangeable.

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Handelsbanken is an example of this dynamic approach to business form. Handelsbanken is a prudent bank which survived the global financial crisis without a bailout. In 1973, a particular form of a profit-sharing scheme was introduced. When Handelsbanken met its goal of having a higher return on equity than the average for other listed Swedish banks, a profit share was paid to a foundation named Oktogonen, which kept its fund entirely in Handelsbanken shares. Payment took place only after retirement, which means that all employees were interested in securing the long-term profitability of the bank. The growth in value can only be enjoyed by an employee once he or she reaches the age of sixty. This helps to ensure that employees take a long-term approach as well. Oktogonen is now the largest shareholder in the company. In effect, Handelsbanken has grown its own anchor shareholder!

     Handelsbanken’s story is a reminder to boards and owners that stewardship need not, and must not, be static. It is possible, over time, to change the ownership of the company. It is good stewardship discipline for every board to ask itself once every few years whether the company’s current ownership and business structure is right for its purpose and future plans. The CEO of Tesla, Elon Musk, experienced this in 2018 when he expressed his frustration with his shareholders by suggesting he would take the company private. He very quickly found out that this was prohibitively expensive and impractical. It was an impulsive kick against the constraints of listed status.

     There is another lesson to be learnt from the Handelsbanken example. It is about the importance of thinking about forms of ownership. In order to help companies be better stewarded in the future, new hybrid forms of ownership may be the most appropriate, and in an age where employee engagement is crucial to results, expanding ownership by employees is an important element. There is now a growing tendency for owners of family firms to hand over some of the ownership of the business to employees, often in the form of an employee trust.

Entrusted by Ong Boon Hwee and Mark Goyder