Please send me your thoughts and comments on these or any other topics.
The reign of the shareholder is over. For the past two years everyone – well, almost everyone – has been bemoaning the plight of shareholders. Depending on who was talking, shareholders have been represented as a neglected, downtrodden group who were taken advantage of by scheming corporations; honest, hardworking intermediaries who are the driving force of the US economy, or – by an ever-growing group of extremists – the saviors of a broken financial system.
Many investors have been suggesting that if they were involved, bard-level companies would be run more efficiently and effectively. I have personally witnessed shareholders – many of them well-educated employees from large sophisticated investment groups – peddle the outrageous idea that if they were better represented on boards, then the financial crisis would never have happened; as if they somehow know better than everyone else, and that their own greed and self-interest had no part in the events of the past two years.
The plight of the shareholder has gained considerable support in the media and, more importantly, on Capitol Hill. It would be easy to believe that the interests of shareholders are more important than anything else. Just look at the number of governance and financial reform bills before both houses at the moment.
But this week members of Congress are showing their true colors: they care about whatever the hottest topic of the day is. After two years of fighting for the rights of shareholders everywhere, they have turned on them almost overnight.
Following the worsening oil spill disaster and the incredible damage and loss of life that has been caused, BP finds itself in a tough spot. They obviously have a serious responsibility to the people affected by the spill (although I would argue that Transocean and Halliburton are equally liable, given their role in the massive failure that led to the spill, but they somehow are escaping blame). The company is spending billions in an attempt to clean up the mess and compensate those impacted, but it will probably only end up going a small distance to repairing the damage.
At the same time, BP also has an obligation to pay dividends to its shareholders, those bastions of economic intelligence and stability. When the company announced its intention to honor those payments, US politicians were outraged. 36 of them - who only days prior were fighting for shareholder protection above all else - wrote formal letters of protest to the oil giant. At least no shareholder group has been stupid enough to publicly suggest that if they had a board seat none of this would have happened. But give it a few weeks. They usually come out of the woodwork after a solution has been found and things are safe.
So it now appears that the message from Congress is ‘Shareholder be damned’. It is a shame that thousands of people, mostly in the UK, rely on BP dividends for income and will suffer significant hardship if they are not paid. But they don’t vote, so who gives a damn about them anyway.
If BP doesn’t pay its dividend, and the stock price plunges, will shareholders be able to bring a suit against those lawmakers who forced BP not to pay?
Elsewhere, the picture of the shareholder as benevolent master of all things good and reasonable took a significant blow from the community’s greatest hero: Warren Buffett. The Sage of Omaha recently testified to Congress about his responsibility as a shareholder in the actions of the rating agency Moody’s.
Despite the myriad arguments suggesting shareholders make good corporate stewards, have a sound understanding of the businesses they invest in, and have the best interests of the entire shareholder group at heart, the most famous investor in the world told Congress the complete opposite.
Speaking before the Financial Crisis Inquiry Commission, Buffett defended the actions of Moody’s, in which he remains a major shareholder despite selling of a bunch of shares recently, and he told the Congressmen that the agency’s inability to detect the housing market bubble and some of its inaccurate ratings did not significantly contribute to the meltdown. He maintains that the company simply ‘made the wrong call.’
He also explained that he did not see it coming either. So this raises an interesting point: if one of the world’s most sophisticated and successful investors was on the board of Moody’s, he would not have provided any help at all in preventing any of this, since he made the same mistakes and assumptions as the rest of management. It is a slap in the face to all those who argue that greater shareholder representation on boards would have mitigated some of the problems.
What I find curious is why Buffett, who is neither a member of Moody’s management team nor its board, was called upon to testify and defend the actions of the firm when he had no control, either directly or otherwise, over the decisions made by management. It seems a little strange and perhaps even a waste of time.
Following his remarks many people claimed Buffett’s reputation had been tarnished and one leading newspaper even suggested that his reputation was so badly damaged ‘he will never live this down’. Don’t be stupid. Of course he will. As soon as the man delivers another healthy profit to his investors, everyone will love him again. Profit is a great way to get people to forgive and forget. And forget they will.