Down With Delaware!

Comment: Forward to the next quarter-century of stakeholder value

Comments (0) | 14 Dec 2012 | Rating | Print by Ian Williams

Ian Williams calls for a change in IR focus over the next 25 years

As IR Magazine reports on its Q1 (first quarter-century), the profession it covers surely stares redundancy in the face in Q2, becoming more a case of investor relativity than investor relations.

How do you ‘relate’ to a transitory blip on a trading screen churning at near light speed? And at the other end of the velocity spectrum, how do you deal with an index fund that will yawn at whatever you say and only move when you get on or off a list?

During IR Magazine’s quarter-century, the role of investor relations has seen momentous changes – and I’m not just talking about the obsolescence of the fax, even though a little over a decade ago most IROs thought life was inconceivable without it.

There is a shrinking universe of stock held by ‘interested’ shareholders – people who have bought into a company and what it does, as opposed to those who have just taken an option on a trading opportunity.

Interestingly, though, within that diminishing population of stockholders, the proportion of those who take an active proxy interest in companies appears to be growing.

It’s good to talk

The best IROs see themselves as two-way communicators, telling management what the shareholders want while briefing the latter on the state of the company.

The cold reality, however, is that while, technically, shareholders might pay IR departments’ salaries, it is the CFOs and CEOs who sign the checks. Hardly surprising, then, that even the most conscientious IRO’s agenda should reflect that of the executive team.

Which raises an interesting question: will IROs in future be concentrating on votes, trying to head off challenges to ‘their’ executives from the theoretical owners who are getting increasingly uppity with each passing proxy fight?

There should be some inner ethical wrangling there. IROs tend to be well rounded and aware, almost Renaissance figures in the breadth of their knowledge and the scope of their activities.

Could they sleep easily while spending their waking days defending incompetent and overpaid executives against the concerns of the real owners of the company?

A better employment guarantee for the future of IR is to expand its audience to include those who invest their lives in companies. As shareholders march on corporate castles with torches, tumbrels and pitchforks, arguing whether ‘tis better to bury CEOs at the crossroads with stakes through their hearts or to burn them at the stake, the question that arises is, ‘What about the stakeholders?’

Dumbest idea in the world

For example, it would have been an admirable learning experience for Jack Welch to explain to GE employees his ideas of what constituted good management before he axed 100,000 of them.

If he had had to do so, it might not have taken him until 2009 – a full eight years after he had left the company – to argue in an interview with the Financial Times, with characteristic vigor but less-than-charasteristic philosophy: ‘Shareholder value is a result, not a strategy… Your main constituents are your employees, your customers and your products. On the face of it, shareholder value is the dumbest idea in the world.’

It was, of course, Jack ‘the Ripper’ Welch who 30 years ago invented ‘shareholder value’, which acted as a form of plenary indulgence for getting managements out of Purgatory afterwards.

And for too long IR has overemphasized selling management’s fevered visions to the stockholders and raising the stock price while ignoring the main consequence, which is that the CEO’s emoluments increase regardless of how well the company does – in the case of Welch, even after his retirement.

Accompanying this managerial aggrandizement has always been a pious invocation of executive duty to the shareholders as the sole owners with fiduciary interest in the conduct of a company, even though in reality it has usurped stockholder power and looted companies.

The bitter rearguard battles in courts and Congress to stop or dilute say on pay are eloquent testimony to that, not least because they involved using shareholders’ money to subvert shareholders’ rights.

This model has failed companies and destroyed countries, as Welch seems to have realized now he is no longer a beneficiary. As the Harvard Business Review, publisher of the Legatum Prosperity Index, points out: ‘For Americans, the headline is a simple if unwelcome one: the US is a nation in decline. For the first time, the US does not rank among the top 10 countries in the world in terms of overall prosperity.’

A downward spiral

In every measure of satisfaction distributed across a population, the US has been sliding down the scale, as indeed has its close emulator the UK.

The UN Development Programme’s Human Development Index, the World Bank’s index and many others all record the inexorable Anglo-Saxon slide down the rankings. Even on productivity, the US is falling through the ranks.

It is surely no coincidence that all the countries passing the US and the UK in the fast lane share a prejudice that there is more to success than ‘shareholder value’.

The list is interesting. Apart from Canada, Australia and New Zealand, which all have union movements and a social democratic tradition of regulation and worker protection, the other eight countries are European and go beyond that: they provide for employee representation on boards of companies.

This is a far cry from how they do things in Delaware, but it makes sense. These European employees are stakeholders in every sense of the word: their input, investment and interest in the company are far broader than those of a transitory shareholder whose ownership might only be a twitch of electrons in a silicon chip.

Indeed, through pension funds, mutual funds and even direct holdings, many employees are stakeholders in the specific terms that even US corporate law accepts.

It must be true, as Welch told the FT so: ‘The idea that shareholder value is a strategy is insane. It is the product of your combined efforts – from the management to the employees.’

People in IR, the future is at stake! In Q2, there should be no slack for corporate looters!