MIA – U.S. shareholders who care

December 23, 2011

Who knew Swedish finance could be so sexy? The late, great Stieg Larsson’s best-selling The Girl with the Dragon Tattoo — the Hollywood version hit North American theaters this week — was the first to tap into a hitherto undiscovered global fascination with Nordic number crunching.

Following gingerly in his footsteps, I’d like to report on a fascinating discussion at the Securities and Exchange Commission in Washington this month, where the Scandinavian story was center stage.

The conference, where I moderated a panel, was organized by the European Corporate Governance Institute and Columbia Law School. The theme was the involvement of shareholders in the companies they own.

Americans like to think of themselves as the world’s archcapitalists, especially compared to Europeans, whose fondness for a social safety net often earns the label, applied on this side of the Atlantic as an insult, of ”socialist.” That’s why the message from many of the speakers at the SEC discussion, particularly the visitors from Europe, would come as a surprise on Main Street, USA.

The United States, they argued, has created a system of capitalism without capitalists, of private sector companies whose owners have abdicated responsibility for the companies that belong to them.

“In the U.S., you can more or less do whatever you want, without having the support of the owners,” Mats Andersson, the chief executive officer of the Fourth Swedish National Pension Fund and a speaker at the conference, told me in an interview afterwards. “Because of the composition of the boards in Sweden, the company’s big decisions all have to be based on a mandate or the support of the owners.”

”Who is actually responsible for executive remuneration in U.S. companies?” Andersson said. ”If I could decide on my own salary, I would certainly love that system.”

In Andersson’s view, greater shareholder involvement is good both because it is right and because it works. ”If you put your money at risk, you should have influence,” he said. ”Capitalism without owners doesn’t work.”

Andersson’s biggest worry about companies without engaged owners is that they fall victim to the tyranny of short-term stock-market expectations or the self-interest of their executives, rather than building for the future.

”We are long-term investors. The point is to increase our returns, so we need to be active and engaged,” Andersson told me. ”The next quarter is pretty much irrelevant. We are interested in building a good company that will perform long term.”

Andersson isn’t alone. Earlier this year, Dominic Barton, global managing director of McKinsey, the management consultancy, got the business world talking with an essay in the Harvard Business Review titled ‘‘Capitalism for the Long Term.”

Barton’s point was that the current sickness of global capitalism wasn’t some passing infection, caused by the financial crisis and susceptible to a natural cure. Instead, he argued, capitalism, especially in the West, needed a ”deep reform” that would shift it from ”quarterly capitalism” to ”long-term capitalism.” One of the culprits Barton identified was ”the ills stemming from dispersed and disengaged ownership.”

A Canadian who now lives in London, Barton has spent much of his career working in Asia — in fact, he was in India when I reached him on a fuzzy cellphone line this week. He told me that one of the most striking differences he has observed between the rising economies of Asia and of other emerging markets like Brazil compared to the United States is their owner-dominated long- term capitalism, versus the quarterly capitalism of the United States, with its widely held public companies.

”Thinking about where the company should be in 10 or 12 years, these are not the discussions held in many widely held companies,” Barton said.

The irony is that directly engaged owners are the men who made American capitalism great and who remain responsible for its most outstanding companies. In his 1890 masterwork, Principles of Economics, Alfred Marshall, the seminal English economist, bemoaned the feebleness of the staid British joint-stock company, compared to an America dominated by owner-entrepreneurs: ”The area of America is so large and its condition so changeful, that the slow and steady going management of a great joint-stock company on the English plan is at a disadvantage in competition with the vigorous and original scheming, the rapid and resolute force of a small group of wealthy capitalists, who are willing and able to apply their own resources in great undertakings.”

More than a century later, the American companies the world most admires — Google, Amazon, Apple, Facebook — are the creations of that same breed of rapid and resolute founding owners.

Things get more complicated when companies go public and the founder retires or moves up to St. Peter’s boardroom. Many European countries, including Sweden, get around that problem by keeping things in the family, with the founders’ descendants retaining a significant ownership stake and voice in the family firm.

That tradition doesn’t sit so well with Americans, whose country was, after all, created in part in rejection of the hereditary principle.

”Why do U.S. families retreat from corporate control? They don’t seem to be very dynastic,” Marco Becht, a professor, the executive director of the European Corporate Governance Institute and one of the organizers of the SEC. conference, mused to me when I called to discuss the issue. ”If people care so much about having owners who care about the company, maybe the U.S. and the U.K. have the wrong type of owners,” he said. ”The logical conclusion is if you want long-term owners who care, you have to bring back the families.”


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No surprises here then … owners being distant from the controls of business means the people making the decisions come to behave like schoolboys in a sweet shop with no teachers around.

Posted by JMarkDodds | Report as abusive

“the rapid and resolute force of a small group of wealthy capitalists, who are willing and able to apply their own resources in great undertakings”

That small group of wealthy capitalists sounds like the “1%ers” to me. If we tax them into the stone age, how can we expect innovation and investment?

Further, if we want families to stay involved then why do we hit them with exorbitant death/inheritance taxes?

To address these issues we need to reform the tax code entirely, not pile a few more layers on top.

Posted by jaham | Report as abusive

But how can an investor with only modest funds get a word in when there are not only thousands of other investors, but many with much more capital invested?

Posted by jwab | Report as abusive

Why is the “question” one of “either or”?

There are clear advantages both ways. Stock options are an obvious way to make sure those running the company have “skin in the game”.

Executive’s goals should be reviewed regularly to see if they are appropriate and if necessary priorities are also apppropriate. Only then is meaningful review of actual progress in the “real world” context possible.

There is an obvious conflict of interest when executives have wield the power to set their own remuneration. When management is overcompensated, it is inevitable that emphasis will be to preserve the “status quo”.

This will likely adversely affect declaration and timely distribution of stockholder dividends. It also eliminates the concept of “comparable performance” wherein objective and independent review of management goals and achievement attempts to reach a fair and equitable figure that is NOT excessive.

Today, with CEOs, etc. routinely receiving more for their services than the President of these United States, there is an alarming tendency for one and all to forget that they are EMPLOYEES of the firms they run presumably accountable to the owners and other employees for the long term viability and success of all.

Posted by OneOfTheSheep | Report as abusive

Well, that opens the door for Estate Tax debate… (I tend to be against family dynasties, but things could have worked out a lot better if the O’Malley family had held on to the Dodgers)

Posted by EPB | Report as abusive

Good luck getting every state’s corporate laws changed to allow greater shareholder control. Most corporations in the US have the attitude that if a shareholder doesn’t like what a company is doing, they should just sell their shares and bug off.

Posted by borisjimbo | Report as abusive

Wonderful! The shrinking importance of family, fewer marriages, fewer children, and high divorce, DIY isolationist entrepreneurialism, and general abdication are killing more than just capitalism, it’s weakening our entire culture.

The belief that you are number 1, i.e. archcapitalists, is then entrance to the road to to failure and ruin.

Posted by GSH10 | Report as abusive

Mr. Becht sees the world from a European perspective. In America, it is the first and founding person who truely “cares” for a company. Companies are not FOUNDED by “families”.

If a company is “held” in modern times by a family, it is at the expense of growth and responsiveness. You can’t raise public cash without selling participatory interest, just as you can’t have your cake and eat it too. It’s not 1900 any more.

A proper Board of Directors should be qualified people with ownership interest, i.e. “skin in the game”. If and when one of the family demonstrates genuine ability do they get to steer an established company, it’s the Board that puts them where they’re needed.

You don’t want people at the top just because they have a name. Look at North Korea and Syria today if you want to know why.

Posted by OneOfTheSheep | Report as abusive

Wondering what role futures, options and derivatives have played in this disruption of the long term hold for US investors? Then my attention focuses on program trading, high frequency traders, individual account trading all with the intent of making 2-3% intraday. Then one could consider the complacency of a high percentage of American kids due to lax parental responsibilites. Americans are suffering in so many ways from “affluenza”. We can still get it back because the US Dollar is still the world’s benchmark currency. I like your reporting Chrystia, keep with it…

Posted by Skeebo | Report as abusive

The Harvard Business School has been a leader in the promotion of ideas that lead to the present sorry state of the U.S. economy and society.They have provided the ideological and business justifications for the greedy , the corrupt and , from the evidence we have, the incompetent to enrich themselves at the expense of their people, their country and even their free-enterprise ideology.Too Late The Phalarope.

Posted by Biscayne | Report as abusive

“That tradition doesn’t sit so well with Americans, whose country was, after all, created in part in rejection of the hereditary principle.”

This is more than ironic given our large public companies have created an aristocracy over the past few decades through out-sized salaries to CEOs and senior managers who, in earlier times, would have had to work decades to earn even 5 or 10 million. Today they only have to work six months. And if you’re CEO of Massey, Don Blankenship, you can cut costs for safety equipment, kill your own employees, and walk away with tens of millions. Apparently 60-70% of the top .1% income earners in the US are CEOs of publicly held US companies, go figure.

And look at the Walton family. They’re barely involved in WalMart yet enjoy massive wealth they didn’t earn, didn’t take risks to create the wealth, and don’t do anything to perpetuate the wealth/company.

Don’t know what the answer is in the US or UK beyond severely restricting the salaries of senior executives to some reasonable multiple of the lowest salary in their companies (so there is, at least, an incentive to raise salaries across the board).

But our corporate executives also need the serious check of a much stronger public sector and public interest. Today, the idea that society has any rights is rarely heard, or enforced. Instead, companies feel free to pay lobbyists to water down regulation they don’t like with no counter force, certainly not in the media (by describing the negative outcomes from eliminating certain regulations).

Finally, it also would help if all companies were in real threat of failure. Perhaps companies would be more reluctant to reward mediocrity (or outright failure, as with Dimon, Blankfein, and the rest) if they new their companies could be nationalized, with senior managers replaced, then worked out to a public sale. That threat made real also might motivate investors to pay attention and punish mediocrity and failure.

Posted by FredFlintstone | Report as abusive

I do not have the extensive business background of the article’s author, but I can relate what I’ve personally seen within some publicly traded companies while working for them.

At one time, persons who purchased a company’s stock were called ‘investors’, because they were investing in the future of the company. Now they are called ‘shareholders’, and that’s all they are. The key focus is on constant growth of the share value, and doing whatever it takes to ensure that growth regardless of the impact is has on the company overall. “Our sales weren’t too good this quarter. Let’s reduce the payroll to keep the share price up.” Do things like that happen in a company with shareholders? Yes. Is is good for the company? The company’s bottom line, yes. The company itself, not always. Then there is the self-interest of executives operating the company, who do whatever it takes to keep their performance bonus, again regardless of how the outcome affects the company’s future over the long term. For a perfect example of such a situation, look to a well-known Canadian-based messaging company who is slowly driving themselves out of business (in my opinion). I’d love to see a return to the days of investors, who mandated good management of their investment (over the next 10 years, not the next quarter) by excellent executives for whom the company (not their careers) was the driving force. And the investors would allow the executives to grow the business while keeping them accountable. Unfortunately, I’m afraid that those days are long gone. Most everyone who is either a shareholder or a corporate executive is in it for themselves. At least, that’s been my experience over the last 25 years. “Owners who care” is now an oxymoron for the most part.

Posted by Febrawn | Report as abusive

If you want long term owners who care, you have to bring back boards of directors with a conscience. Boards who have knowledge of the company they oversee and the markets they serve.

It seems to me that the corporate governors we have today are often just rubber stamps for the whims of all too often self serving corporate officers.

This is why as a retail investor I’ve been out of the market for about two years. I cannot in good conscience invest my money in organizations that just look at the next quarterly statement.

Merry Christmas from Missinginaction

Posted by Missinginaction | Report as abusive

Wow, you are just figuring this out now?

Posted by Andrew150 | Report as abusive

I would extend the American sense of “Archcapitalism” to “Archgovernment”. America also believes it runs an exceptional form of government and that its Democracy needs no improvement or refining, instead it takes the view that all problems are political and could not possibly be a result of a dysfunctional democratic system. The result? As you quite rightly mention, “quarterly capitalism” or short-termism in general. The inability of any Western nation to accept short-term pain for any long-term gain has been on full display since 2008.

Posted by K-dub | Report as abusive

I very much agree with you Mrs. Freeland.
Congratulations! You returned my hope that there are people who can think.
I could only add that quarterly capitalism in combination with powerful agencies can really destroys economies, can create crisis, recessions, deprecions since there are driven by people expectations. The most harmful being the short term investors, who really don’t care about the future of the companies they invest in
So there is nothing better than the family driven companies, with great sense of responsibility, even in USA they are the best performers – take Cargil company for example.
Great article indeed!

Teodor Ivanov

Posted by tedi46 | Report as abusive

I think what you are seeing in the US is the end of US capitalism as we know it. When a company has no roots, no long term goals, and no responsibility to support the government and the lower paid workers you will see failure. We are seeing it in the Banking industry where the big greedy banks will fail. We will also see our Congress and Administration fail because they have lost long term focus and really have “Lost Heart”.

Posted by fred5407 | Report as abusive

I think it all comes down to this…

In America, American’s don’t own anything.

Perhaps one has a 401k, IRA or other interest or annuity. However, that doesn’t mean there is much of anything between the investor and the investment.

I put money into a 401k and the Union, the Company or Prudential (whomever) invests my money and the money from millions of others into stocks, bonds or whatever. Do I own Coke? Dell? or Microsoft? Perhaps, perhaps not.

I don’t own the company I own the “instrument.” If my 401k or CD or Annuity goes up or pays out … what do I care? If it doesn’t I pull out of that 401k plan and go into another…perhaps that money gets re-invested in the same place, perhaps not.

And that’s only IF one has a job.

I don’t OWN anything. I own a little nest egg, a little retirement fund…and that’s how it IS for the 99%.

The “OWNERS” are the 1%. The less than 1%. The .0001%.

They own…and they own EVERYTHING!

And OWNERS are fine with the way things are.

The whole system is rotten beyond measure.

It’s the slavery of old but in Matrix form…most are asleep; slaves and they don’t know it (even if they toss and turn in their sleep).

But whats worse is that it’s a feed-back loop. The same people that are hurt by the system are the same people so dependent upon it.

Why do companies need MORE and MORE profit? Why is PROFIT and increasing stock value so important?

Because without increasing quarterly profits the stock falls, investments (401ks) shift and managers are out on their arses.

And this is why things are OUT OF CONTROL.

Posted by FoxxDrake | Report as abusive

Dynasties are handicapped by narrow choices for talent and you do not have to look far to find failures. Some successes like IBM can be argued both ways – it prospered greatly from two generations of Watsons but they did not have a controlling interest, nor even agree on their approach, so it was arguably a meritocratic succession. Many companies with a strong founder end up ejecting them long before retirement as their skills fail to match the needs of a company thet grows beyond them, or times which have changed. Dynastic leadership is unlikely to be useful in making a company good over the long term.

Dynastic shareholding, perhaps. It naturally creates a long term outlook while not constraining the talent with which the company operates. Still, the investors are free to do that today, there are many institutions with a long term investment outlook, and quite successful ones too. The composition of management and board will be a major concern for them. If a company has no attraction as a long term play then its price will not be underpinned by this major market segment.

Take a look at how many companies exist today with good profits and good dividends but low market valuation. The reason is almost always “poor long term outlook” or “lack of vision”. It is simply not true that the stock market reacts only to short term issues.

Posted by Tanj | Report as abusive

Excellent article. Yes, while we all still are impressed by the entrepreneurial spirit of closely held (and privately owned US companies) – not least those of the Silicon Valley, something negative seems to happen some years (or decades) after US firms are listed on the stock exchanges. The biggest culprit here seems to be the US proxy system, which for practical purposes undermines the democratic nature of a corporation or joint-stock company (plc). In Scandinavia, where the countries have almost identical companies’ legislation you see few of the limitations of the US proxy system. As a result, shareholders may actually influence on the election of directors. Take the case of banks, for example. As a result, when a bank is in trouble, it is easier (and more natural) but no less fair, to penalize the shareholders (forcing the bank to write down share capital) when banks have huge losses caused by too much risk permitted by its management (and ultimately by its board – and thus its shareholders). Both Norwegian and Swedish banks and their shareholders learned this the hard way, fortunately, in the banking crisis of the early 1990’s (and Iceland did in 2008-09). Maybe this would have been something for US banks too? There, there were no forced write downs of the capital of the largest banks, no “hair-cuts” for the shareholders, although the share price dropped). Maybe understandable since the shareholders hadn’t contributed much to the election of its directors anyway. The boards were primarily composed by the CEO’s themselves. Corporate governance, transparency, accountability and responsibility and “corporate democracy” go together. This also means that e.g. mutual fund managers in Scandinavia often actually (!) vote at annual shareholders meetings, a novelty in US terms. Therefore, I hope that more listed US firms listen more to the likes of leading pension funds like CALPERS, and sovereign wealth funds like the Norwegian Petroleum Fund when it comes to enabling true corporate democracy and transparency amongst US listed firms (not to say that all is bliss in Europe either).

Posted by DaffyP | Report as abusive

Great article. Long term thinking is missing, and the bundling of 401ks and pensions in non-individually voting shares is a problem addressed in the comments. While I do not have answers for this issue, I do think that voting rights that would vest more slowly – say 10% to 20% annually, would insure that votes were given from a longer term perspective. Higher transaction taxes on short term trades would also reduce speculation and encourage investing. Lastly, the people who know what is happening in a company and whose vested interest is the highest should have a heavy vote in what happens in a company – these shares gaining voting power over time as do those of investors – at 10% to 20% annually. Worker involvement will lead to more transparency. I own and run a small eight figure business, and could not currently conceive of turning the good people I work with or the good people who do business with us to ‘corporate America.’ Our capitalist system bears little resemblance to that described by Adam Smith, in which with, with perfect competition, the consumer benefits from the best possible option. Perfect competition has been quite perfectly killed by our corporatocracy – the best government that money can buy – as monopoly and duopoly dominate more parts of our society.

Great article. We need change, and need it soon.

Posted by jfxwsr | Report as abusive

When I first started investing in stocks – a long time ago now – and owned 6 Shell Transport & Trading shares, I used to get an interim report, an annual report, plus an invitation to attend the AGM and vote. They dropped through the letterbox automatically. I also had a share certificate. Now my stocks are held through internet-based nominee accounts, I receive no coomunication and have no contact with the companies I have a stake in. Maybe I could if I wrote to my brokers and went through the hassle of organising this. But it’s been made too hard for me to bother. Also, I feel like a dinosaur owning stocks in individual companies. Shouldn’t I just be investing in those souped-up derivative-based ETF’s where my sole interest is in the index? The small shareholder is still out there, but he/she has been squeezed, marginalized and disenfranchised. If it’s possible to develop internet-based trading systems, surely it’s also possible for companies to communicate with shareholders through these same systems? Regulators, do something useful for the little man for a change!

Posted by FrankfromPrague | Report as abusive

US needs a revamp!!! The non-inheritance policy was fine when you were shying away from colonial systems of the past but things have changed now. So instead of putting the capital to good use over a long-term(from 1 generation to another) the current system is inherently trying to waste it. Occupy wall street is stupid, its looking for another short term fix without addressing any fundamental/core issues. You need less power in the hands of management and less power in hands of money managers who have thr salary linked to next quarter’s performance!!!! You need owners(not necessarily to lead the company) to keep a check and wield power in fragmented shareholding pattern of today.

Posted by JETsr | Report as abusive

Great work, Chrystia, as evidenced by this comments section. A few duds but for the most part this has been an uncommonly rewarding comments section to read. As a writer myself, I understand what an accomplishment that is!

Good point above about the downside of Asian family capitalism. Doesn’t negate the bigger point, but is useful to keep in mind. No system is perfect…

Posted by hackack | Report as abusive