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Guest Column: Optimising shareholder value

During the last 23 years I have worked 12 years in mainland Europe, including six in my native Holland and, since 1999, in the UK. What has always intrigued me is the difference in the standing of the finance function in the corporate hierarchy, which appears more influential among British companies than in Europe – probably related to the UK focus on shareholder value.

While working in mainland Europe it became apparent to me that, though the finance function is an important contributor to decision making, it does not have any greater influence than, say, the commercial and manufacturing disciplines. I think this is rooted in the ‘stakeholder’ approach prevalent in mainland Europe, where the aim is to optimise value for all stakeholders, not just the shareholders. The advantage of this approach is that long-term corporate goals can be pursued without the distraction of potential shorter-term shareholder objectives and decisions are more likely to be based on consensus. The disadvantage is that decision-making processes tend to be slow and the decisions reached are often a compromise not always based on sound financial logic.

In contrast, the UK has adopted an approach where the emphasis is on optimising shareholder value. This introduces the need to align decision-making more closely with the owner’s objectives that, in many instances, are financially oriented – necessitating a strong and influential finance function. A potential drawback is that shareholder objectives can be at odds with longer-term corporate objectives, while companies develop a short-term focus on delivering the next set of results in line with expectations.

The business I work for experienced shareholder disquiet in 2008 and the response of the board to address the concerns raised took up a disproportionate amount of its time. Nonetheless, dealing with these concerns did help clarify board mindset as to our strategy looking ahead, the successful execution of wh ich since helped our share price increase by 150 percent. In reaching a decision on the way forward, stakeholder interests were specifically taken into account and, I believe, aligned to shareholder objectives.

When Corus came into existence in 1999, merging British Steel and the Dutch company Hoogovens, it combined ‘stakeholder-oriented’ and ‘shareholder-value oriented’ companies. The decision-making processes differed markedly: the British could not understand why it took so long to reach a decision, and the Dutch got frustrated by the lack of consensus-building. The stakeholder and shareholder approaches clashed spectacularly in 2003 when the Dutch supervisory board of the subsidiary Corus Netherlands did not approve the £543m sale of the aluminium division, citing ‘stakeholder interests’, as it wanted guarantees of future investments in the Netherlands.

Some thought at the time that the real aim was to force a breakup of the company, as the Dutch had lost nearly all its plc board members and the ‘merger of equals’ had become a takeover. Corus Plc subsequently lost the legal case it brought in the Netherlands against the supervisory board, which left Corus near bankruptcy with a share price of 4p.

Fortunately for all concerned, Corus eventually pulled through and was taken over by Tata Group for 608p a share in 2007.

So which approach works best? My own preference would be to work with the shareholder-value approach, as the decision-making process is quicker and generally based on sound financial logic while stakeholder interests are still taken into account.

My experience is that the UK finance function is well equipped for the added responsibility the shareholder-value approach brings.

Pim Vervaat is group FD at RPC, a UK-listed company making plastic packaging for various industries. He was previously divisional FD of the distribution and building systems division of Corus

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