Mark Goyder, Founder Director, Tomorrow's Company

Something is happening to ownership. Does it matter?  I believe that it does. The way companies behave will shape the health of our society. It is likely – although not inevitable – that the way companies are owned will shape how they behave. Companies are unlikely to get far as a force for good if their owners don’t like the idea!

That is why Tomorrow’s Company is exploring the question “What is happening to ownership?”.

What do you think?

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Recently, I read that investor Robert Tchenguiz had converted his derivatives holding of almost 27% of the pub group M&B into shares, so that he could prevent other traders borrowing the stock and betting on price falls. .

I love the deadpan way the Financial Times reports this stuff.

It makes it sound so normal!

But hold on while we just get our heads around this.

Ownership explained Part One

If I want to have a stake in a company without them knowing it I can go and negotiate something called a contract for difference.

The contract for difference is an option to own the shares of a company.

I then ring up the company and say “I might own 5%  or - In Robert Tchenguiz’s case over 25% - of your shares tomorrow. Now listen carefully. I am about to be one of your most significant owners”.

In the M&B case the company treated the CFDs as if they were a real shareholding and Mr Tchenguiz appointed two non-executive directors to represent his interests. But in other cases the CFD’s might not be exercised and the new “owner” might just walk away.

Part Two

Meanwhile somewhere else in the world, other people have decided that M & B, a pub company, is overvalued. So they are going to make money out of it being overvalued. They do this by selling shares in M&B that they do not own.

How do you sell a share that you do not own? Simple, through your broker you can go to one of the big pension funds and you ask if you can, for a fee,  “borrow” their shares in M&B. . . Having borrowed them, you can then “short” them. You sell them at today’s higher price. You buy them back when they have fallen, you pocket the difference minus brokers’ fees  and you then return the shares you have borrowed to their original owner.

It’s simple really. Just like buying shares in the belief that they will go up…only in reverse. You make a profit on the fall in  price; the big institution makes money because it has “lent” you the stock.

Part Three

So here are two devices that are part of the reality of modern capital markets. CFDs and “Shorting”. CFDs mean that I can take a potential stake in your company and not reveal it. “Shorting” means that I can become a temporary owner of your shares in order to make a profit on betting that they will go down in price.

Imagine what it feels like to be leading M&B through these choppy waters?

The company  experiences a greater volatility in the price of its shares. Instead of dealing with an owner who has been around long enough to approve its strategy, it is dealing with a virtual owner who may or may not become permanent. If they become permanent, a complete change in strategy may be the result. Uncertainty rules.

To someone using a CFD may be betting that your share price will go up, or marshalling forces for a takeover. To your right someone else is shorting the shares.

Meanwhile your job is to run a better pub group, and keep your people motivated and give them the feeling you have the company sailing on a clear course.

Part Four

Does it matter? It depends how you see the question of ownership.

Given the Tomorrow’s Company belief expressed in the Tomorrow’s Global Company report that business is a force for good, it does.  It raises the question: how does a CEO set the company on the kind of sustainable course towards being a force for good in the midst of this uncertainty?

The board of a company , watching this all go on, may choose to remind the CEO of the advice I once heard a veteran Company Chairman give. “Try to run the business as if it had an illiquid (i.e. unable to sell)  majority owner who held 51% of the stock”.

In other words, ignore the noise. Stick to the strategy. Make the right decisions. Pick the right people. The results will justify your consistency and in the end the short sellers will go away.

This is good advice in principle. But it is harder to stick calmly to your strategy when there is so much noise.

Part Five

So far in this discussion ownership of shares has been about the right to trade the shares. But does ownership have other functions – duties even?

Last month an old oak tree fell down in the field at the back of our house. There was a lot of work involved but it did not really feel like an option to say: “I own the land: I am free to do what I like. I can just leave it where it is.” There were practical consequences. What about the sheep who often graze the field? What about the visual impact for our neighbours? It is my responsibility to clear up this mess.”

My own instincts had their roots in the past, in the attitudes of our ancestors. The question is whether this historic view of ownership still applies in the age of global capital flows, instant trading and complex derivatives?

Stewardship has its origins in physical proximity. It means a sense of responsibility for that which you own and handle every day.  It implies that the business should be around for generations, and that the owner is responsible for handing it on to the next generation in better shape than he or she inherited it.

The measure of success that goes naturally with stewardship is going to be a measure of long term health – of shareholder value, certainly but shareholder value grown organically from nurturing the relationships of the business. The result of good stewardship – to use an accounting term – is plenty of goodwill, of intangible value embedded in the reputation and relationships and retained know-how of the business that explain why an acquirer would pay more than the book value of the assets.

With the separation of ownership from control in the modern publicly listed company, stewardship does not disappear but it does erode. In US markets particularly, the CEO is judged by his or her dependability in “hitting the numbers”. There is no room for sentimentality about where the company has come from or whether it will still be around in its current form for the next generation. Numbers are all. If the  accumulated goodwill from the past feeds today’s numbers fine: if it still feeds tomorrow’s better still, but if the business is not performing then change it or sell it to someone who will make it perform.  The change in attitude is revealed in terms like “unlocking shareholder value”. The CEO is less nurturer of the soil, more cranker of the earnings handle.

So is ownership as stewardship a sentimental concept that is rooted in our past, and rendered obsolete by the death of distance and the impersonal operation of global capital markets?  Does the idea of ownership obligations actually get in the way of the efficient allocation of capital in global markets, and hold managers back from making the right decisions for the business? Are concerns about sustainability best met through trying to hang on to the idea that owners have obligations, or will sustainability only be achieved through the imposition of external rules on businesses?

These are some of the questions which we plan to tackle in the new project on “Tomorrow’s owners”

What do you think?

You can see Mark's article on Ethical Corporation here.