Daily Telegraph (UK): Personal view: Good company owners are hard to find. Here's how to spot the fakes: An example of Shell resembles a government and has no owners. It is hard to imagine that if Shell had been significantly owned by the chairman's family, anyone would have got away with inflating its oil reserves. (ShellNews.net)
By Nicholas Berry (Filed: 25/10/2004)
"The average director can be replaced without loss by a potted plant" - Warren Buffett:
So much for corporate governance.
Outside directors will not protect your investment from the rapacious fat cats, many of whom receive additional rewards in the form of knighthoods. They are not only helping themselves to unjustified sums of money under your nose, but with none of their own capital committed, they have a different timescale and different priorities.
What can an investor do? Here is a simple filtering process to identify the few companies with good owners from the many with bad ones.
Most institutional investors are fake owners: they do not own shares, but "rent" them for short periods. Take a look at the last three annual reports of any quoted company, and then apply my checklist.
Directors of companies with 'fake' owners
have excellent presentational skills
behave as though they were infallible
have never bought a business with their own money
are interested in the share price first, and the business second
welcome corporate governance as though he was a guest for dinner
will do whatever is fashionable
issue shares like confetti
publish a chairman's statement which was written by media consultants
buy in shares, to keep the price up, regardless of fundamental value
never admit the share price is too high
refer to earnings per share, which can be manipulated, rather than operating cash flow per share, which is hard to manipulate
Directors of companies with good owners
discuss problems and opportunities frankly with fellow owners
treat all owners as partners
admit to mistakes
serve the organisation before themselves
point out when the share price is too high
keep a tight grip on the quantity of shares in issue
accepts less today, for more tomorrow.
take salaries worth less than their ownership position
do not produce complicated incentive plans designed to confuse
An example of the latter is Wm Morrison, a good owner-based investment, and of the former Shell, a bad one because it resembles a government and has no owners. It is hard to imagine that if Shell had been significantly owned by the chairman's family, anyone would have got away with inflating its oil reserves.
Of all the errors of the ownerless managers, the issue of vast quantities of shares for a value destroying acquisition is the most costly. Last July, Sir Richard Sykes, architect of the merger between Glaxo and SmithKline Beecham, let the cat out of the bag. It may have all been a mistake, he implied.
As he put it: "I think there were one or two non-execs who had the guts to say: 'I think we're fine as we are and we don't need to go forward with this'. But it is difficult for them when all these bankers come in and produce 400 nice slides on why this should be done. The problem is you've got all these people swilling around driving you to do it."
Here is one of the giants of British industry confessing to the inability of himself and his colleagues to withstand the siren calls of the investment banks. Sir Richard and his potted plants - sorry, non-executive directors - are prisoners of a system organised to please fake, but not real owners.
After all, why should such a well-paid caretaker risk dismissal by behaving like a long-term owner? It is the monthly share price that interests the share renting institutions, not the health of the business. If Sir Richard had owned a third of Glaxo, it would have been impossible to get rid of him for resisting the merger, which as a real owner he probably would never have wanted.
So structure determines behaviour. Two international media conglomerates, Pearson and the Washington Post Company, inhabit the same industry, but their ownership structures are different. Pearson no longer has real owners, and in making a vast issue of shares a few years ago, that shows. The family-owned Washington Post Company has been shrinking its share capital for 20 years. Guess which is the better investment.
True ownership is a long-term business. Why has General Motors been lacklustre for nearly half a century? Because it's that long since the American government forced its owners, Du Pont, to split from it. For the previous half-century Du Pont, a family business, decided the capital allocation policies of GM, and success followed.
There are some British examples: Associated British Foods, Majestic Wine, Clinton's Cards, or Persimmon come to mind. The Chilean owners of Antofagasta have propelled an obscure London left-over company into the FTSE 100 index.
The good ownership theory of finance allows you to short-cut the dreary process of listening to analysts or reading articles glorifying investment managers and assorted pundits. Instead, all you have to do is to park yourself under the umbrella of a good owner, and apply a careful safety margin to the price.
Companies do not have to be run for their managers, but it is no use relying on the army of "independent" directors to protect you from people who care more about their money than yours.
Nicholas Berry is a long-term investor.