Share Holder's Interests Versus The Board's Interests

It is tempting to think that a powerful share holder could coincidently protect small shareholders while protecting themselves.

This doesn't seem to be the case, for example Mike Ashley and Debenhams or Stelios and FastJet.

The Role Of The Board

In theory the board of a company operates in the best interests of the share holders.

It also ensures that the senior management is operating in accordance with its instructions and not putting their own interests ahead of the company's.

In practice it is sometime hard to see how this is the case and don't expect boards or senior management to do anything differently to what most people would do in their shoes.

I imagine that most people reading this will have had jobs where they do the job, do it as well as they can but have no emotional attachment to the business.

Do Boards Feel Any Obligations To Shareholders?

Investing is about reality not dreams so it is important to look at the boards attitudes and accept the fact that many directors and senior management have no long term commitment to the company that they are working for.

In many cases their basic position seem to be that they believe that "I are worth £200k/£2m a year and that is what I am going to take regardless of whether the company can afford it or not or if I am doing a good job or not".

Taken to the extreme you need to decide if the directors are actually working with this order of priorities.
  1. Acting in the best interests of the directors.
  2. Then the best interest of the large organisations that have lent the company money.
  3. Then any other interests.
  4. Then the best interest of the employees.
  5. Then the interest of the large shareholders.
  6. Finally the interest of the small shareholders.
It is easy to understand why the management acts in its own interest, but why would the lenders interest come so high up?

Some companies may have potential conflicts where the directors are part of an informal closed group circulating around various companies in similar roles. The director knows that in his next job he will be approaching the same lenders for finance.

However there may also be a conflict between the directors' interest in keeping the lenders sweet along with keeping the large shareholders (pension funds) sweet. After all the same pension funds will probably be the main shareholders in the director's next company.

Where you have large shareholders that are sort of private individuals by that I mean businesses that the directors may not need again the future they may be treated like small shareholders, for example Sports Direct's holding in Debehnams. So if you had invested in Debenhams as they were in big trouble expecting to be sheltered by Sports Directs involvement you would have been disappointed.

What are the consequences for the management of ignoring small shareholder interests? Yup, you're right, none.

As a small share holder you will generally have bought the shares second hand knowing the existing management and state of the company. Provided that you have understood the managements' objectives and they are acceptable to you, regardless of what they are, you can buy shares in that company.

However do not complain if you buy shares today (July 2012) in say Hibu, the old Yellow Pages, a company with about £2 billion pounds of debt, and find that the management did a debt for equity swap leaving your shares worthless, that was always on the cards.

Unregulated And Unsupervised Management

Postulating that many directors have no long term interest in the company that they are working for means that we as shareholders should be regulating their behaviour.

The small shareholder is often powerless to do this and even more often too apathetic to do so and the larger shareholders often have a vested interest in not doing so.

Generally the majority of shares in a company are managed by people who are not investing their own money, they are investment funds, pension funds, insurance companies etc.

It is difficult for these investors to regulate company management because any action that they take will reflect on them.

If a fund manager places a cap on executives' salary, he is indirectly placing a cap on his own. He can't say that all the companies he has shares in must cap salaries at say £200K with genuine performance related bonuses and then pay himself £750K regardless of performance.

The same problem exists regarding executives that are not very good, if the fund manager starts putting stringent checks on the abilities of the executives, he will also find such checks applied to himself.

With this cosy arrangement there may be too many executives on a gravy train with a sense of entitlement, however that is no different to a sports stars or indeed the rest of us.

Once someone gets their first £250K position they start to expect it, regardless of whether or not they deserve it.

Although this was at a publicly funded body, this network can easily be seen at work in the situation of the BBC's Director General (Nov 2102); in the job for about 54 days, and look at the end of job package!

Once you accept this, you won't expect people on hundreds of thousands a year to take pay cuts just because the company is making huge losses, even if these pay cuts would allow the business to survive and then prosper.

Expect to see the non executives and the remuneration committee saying the "directors pay is in line with the industry standards for someone with their level of experience" as the company slips further and further in debt and terminal decline.

Some Examples Of Boards Going Against Large Share Holders

Debenhams was taken over by its lenders on the 22nd March 2019 leaving shareholders with nothing, in what looks like a management/lender agreed pre-pack administration.

The share holders included Mike Ashley's Sports Direct which owned almost 30%. Despite much public chest beating from someone who you might have expected to have been quite powerful there have been no changes to the administration effected.

Flybe was sold for 1p per share on the 21 Feb 2019 effectively giving the company to the new owners, despite being valued at around £43 million only a few months before.

Again a powerfulish shareholder investment group Hosking Partners, which owned a 19% stake were unable to stop the board doing what it wanted.

March 2019 saw Interserve go into administration and all assets passed on to their lenders, despite shareholders voting against the deal wiping out a big shareholder the US hedge fund Coltrane.

June/July 2020 saw Richmond Group, a 60%+ share holder lose out to the board because of a non-interference contract and Richmond Group commit to sell their holdings at 1% per day.