RSS feedsAt times, regardless of economic circumstances, it can feel very secure being on the board of a large global company. This mighty aircraft carrier beneath your feet ploughing ever onwards, dealing with short-term issues around its empire; launching swift strikes to lift a flagging share price here, dealing with an under-performing director of a subsidiary there; reinforcing internal financial systems. The strength of the structure reassures. The market provides respect for your position. What could go wrong?
Well, there are the usual surprises that come out of nowhere, but these could happen to anyone. Deep within your corporate culture and structure there is the additional security of size and efficiency. But despite the board of directors’ secure position on the bridge of the great corporate ship, just beneath their feet, things are changing.
Were we using a naval metaphor from the days of Nelson we would be talking of rats having come on board at the last port that are now undermining the structure by guzzling the stores and spreading pestilence and disease. But today’s board of directors has the same threat at hand. The old certainties are vanishing and they may not have noticed.
But anyone in Mansion House, at the heart of the City of London, in early July would know what we are talking about. Ira Millstein, senior partner at Weil, Gotshal & Manges, sounded a serious warning that the deck beneath the feet of senior board directors was being eaten away and was not likely to provide much support for them in the future.
Millstein has long been a bellwether type. The audit profession never forgave him for his warnings at the turn of the millennium that they were the weak link in the functioning of the global capital markets. At a conference of the International Federation of Accountants in Edinburgh, he told them fairly and squarely that no one could rely on their audited figures in the far-flung chunks of the global markets, and that they were a disgrace.
At Mansion House, he was looking at change in the corporate governance field. What he was focusing on was what he sees as deep causes for concern in corporate governance. The changing nature of the owners of companies, he said, was really worrying. He talked of “the advent of the capital-market explosion of organisations such as hedge funds, private equity funds, state-owned enterprises, sovereign wealth funds, pension and mutual funds of all varieties and combinations of them all”. He doesn’t much care for them; you could tell that from the language he used to describe them. “This array,” he said, “has created for corporations and their boards a ‘zoo’ of owners with different stripes, teeth, sensors, claws, vision, strength, will and attitudes.”
But “this array” is the new breed of shareholders and a board of directors must legally treat them all equally fairly. That was the nub of Millstein’s argument. “Today. the board of directors, sitting amid this complex landscape combined with extensive financial engineering, must seek to steer the corporation in a coherent direction, somehow considering the values of its owners and being responsive to those values,” he said.
Once upon a time, this was fine. You had a spread of institutional shareholders, mostly with common long-term objectives. It was, by comparison to what Millstein sees as happening in the future, an absolute breeze.
Now the capital markets are much more complex. Shareholders, aided by the same sort of tools of technological complexity that laid the path to the credit crunch via gullibility and a widespread false sense of security, are pushing everything to the limits. “For instance,” Millstein points out, “due to a combination of one or various investment techniques, such as short-selling, share lending, hedging, or swap agreements, there is often a decoupling between an investor’s share title and its economic interest in a corporation.” These are not the shareholders who were traditionally a director’s legal concern. There used to only be a few of them, dipping in and out of the stock. Now there are many. And the lawyers, always eager for a lucrative action against directors who have not held the interests of such shareholders paramount, have noticed.
It is this shifting in the decks of the corporate structure that has changed everything. “Although all the new organisations may indeed be technically defined as shareholders, what does each of them value?” asks Millstein. “What is shareholder value between one investor who will profit from driving the share price down, another who wants to take the company private, another looking for instant cash and one more who is thinking about long-term growth?”
So what happens next? How does a board of directors deal with Millstein’s disparate and wild zoo of furiously active shareholders, each pulling in a different direction? The truth, despite overtures to the contrary, is that no one knows. But the worrying point for directors is that they are probably now less savvy than their shareholders. Millstein’s closing words in his lecture were: “Quite exciting, I think.” No kidding.
