As shareholders go, Kevin is not the type that you might call an activist. But where the activists lead, he is keen to follow. He manages a moderately-sized fund for a large financial institution. His successes, such as they are, are achieved by spotting companies that are capable of being turned around and hoping that other shareholders will put forward the shareholder resolutions and start the proxy fights which will bring about the desired transformation in fortunes.
I ran across him in the lobby of a hotel where I had been propping up the cocktail bar and he had been attending a presentation by the chairman and chief executive officer of a diversified retailing company. The fact that the chairman and CEO were one and the same person was one of the keys to his interest; he knew that splitting these roles was high on the agenda of anyone interested in corporate governance.
Kevin isn’t actually particularly interested in corporate governance; he is interested in buying shares cheap and selling them at a profit. He might speak the language of long-termism; nevertheless, if the price is right he sells, since the quarterly returns on his fund take precedence over any other sentiments he might feel. ‘
Someone’s got to do something about this lot,’ he said emphatically, tapping the information pack which he had picked up at the presentation.
I knew that the company hadn’t been performing particularly well, but it is undergoing a difficult restructuring which will eventually produce results. The problem is that eventually – two to three years in this particular case – isn’t fast enough for Kevin and his kind. I suppose it could be done quicker but the board – including the much-maligned chairman and CEO – feel a sense of responsibility to their employees and customers as well as to their shareholders. Having worked their way up through the business, they are all too aware of the devastating effect which the closure of one of their stores could have on the community of which it is very much a part.
Kevin trotted out his criticism of this approach. He went into demographic trends, physical distribution, product lines, merchandizing, market segmentation, interactive television and all the rest. Tomorrow it might be oil; the next day telecommunications; the day after that construction machinery. His is a diversified fund and he can display a seductive but superficial expertise in any sector in which he happens to be invested.
He carefully set out his own plan for completely restructuring the company. This consisted largely of doubling the program of store closures which the company is undertaking to include those marginal stores which the management is planning to turn around by judicious investment. When I said something about social responsibility, Kevin told me firmly: ‘This is other people’s money they’re playing with.’
It struck me that Kevin also ‘plays’ with other people’s money and does it with a great deal less accountability than the board of the company of which he was so critical.
When I put this to him, he told me that the investor relations of the publicly-owned institution for which he works is in a different league to those of the people he had just been listening to. He cited the high level of disclosure it practices, the number of analysts’ briefings and shareholder presentations it holds, its openness with the media.
I pointed out that I wasn’t talking about the return to shareholders offered by a diversified institution in the businesses of investment banking and securities trading, among others. I was talking about fund management in general.
‘You have to understand that the fund management side is the one that comes under the closest scrutiny when we meet our shareholders. After all it’s the one they understand best,’ he told me.
I conceded the point but told him that what I was really talking about was the specific fund for which he is responsible. It is, after all, similar in size to many of the mid-cap companies whose shares he holds. Yet there is no forum in which investors can question his strategy, his competence or his remuneration. And, above all, there is no mechanism by which they can replace him with someone whom, they felt, could do a better job.
‘But I am accountable,’ Kevin affirmed. ‘I am accountable to my managers who will drop me tomorrow if I don’t perform. ‘And to my investors, who will get out if I don’t deliver exactly what they want.’
I found this difficult to square with his approach to shareholding. Wouldn’t things be a lot better if his investors could appoint a couple of non-executive directors to oversee the way he looks after their money? Or if they were able to pass hostile resolutions? Or if they could just decide that management would be improved if his role were split in two?
For some reason, I wasn’t particularly surprised that Kevin didn’t agree.
