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The shareholder value myth - Why Fonterra and the floated SOEs should be wary of shareholders' lust for short term gains and cash

The shareholder value myth - Why Fonterra and the floated SOEs should be wary of shareholders' lust for short term gains and cash

By Bernard Hickey

This week I watched two great debates that were essentially about what type of company structure is the best in the long run for local people.

The first one was over New Zealand's biggest and most influential company.

It truly was a debate over the future of New Zealand Inc.

Fonterra's farmer shareholders debated the Trading Among Farmers (TAF) proposal that would see outside investors buy units in a fund that owns the rights to dividends from Fonterra and any gains or losses in Fonterra's shares. But these units will not give their owners any voting rights or any ability to influence Fonterra's milk price.

Throughout the debate it was clear farmers were concerned that outside investors would do the wrong thing for the long term future of the company if Fonterra became a conventionally demutualised and publicly listed company. Fonterra's board was at pains to say the complicated TAF structure ensured that these outside investors would have no role in deciding the strategy or the structure of Fonterra.

Fonterra's board argued it needed TAF to stabilise its capital base in a way that allowed it to make long term investment decisions, in particular in assets outside of New Zealand that will generate a higher share price and dividends over the long term.

Fonterra's farmers voted over 66% of their shares in favour of the proposal and it will go ahead from November, depending on market conditions. It will essentially be a 'Claytons' public listing - the type of sharemarket float you have when you don't want to allow new investors to have any control of the company. TAF was a testament to the deep ambivalence many feel about the traditional Anglo-Saxon model of publicly listed companies driven by professional managers working to boost shareholder returns, often in the short term.

The second debate happened in Parliament and the result was different. The National-led coalition duly passed the Mixed Ownership Model bill into law this week. It is worshiping at the foot of the theory that companies work best when they are publicly listed and driven to return the best returns for shareholders.

But is that true?

Many experts are asking in the wake of the Global Financial Crisis whether the shareholder value model is actually toxic in the long term for workers, customers, shareholders and economies alike.

Cornell University Law Professor Lynn Stout has written a book titled: 'The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public.'

She writes: "Shareholder value thinking endangers not only investors but the rest of us as well, leading managers to focus myopically on short-term earnings; discouraging investment and innovation; harming employees, customers, and communities; and causing companies to indulge in reckless, sociopathic, and irresponsible behaviors."

Examples of this type of short term sociopathy abound in listed companies, particularly in America where the 'Greed is Good' model is practiced at its most extreme levels. Corporates there have built up mountains of cash while sacking workers, outsourcing production, cutting wages and paying managers enormous bonuses. Investment in innovation that boosts productivity and the economy in the long run have been sacrificed for short term cash returns and bonuses.

So now New Zealand is preparing to introduce four State Owned Enterprises to the publicly listed sphere. Already we hear that directors' salaries are to be doubled. How long before shareholders drive for higher prices and lower investment to increase dividends?

We can only hope the government as 51% shareholder and the directors do the right thing for the long term health and wealth of the country, not necessarily individual shareholders.

Fonterra's shareholders were rightly wary of how a full public listing could damage their own long term interests. New Zealand's voters and politicians should have been just as wary.

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This item was first published in The Herald on Sunday

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5 Comments

I have no doubts...publicly listed companies provide the best return for company directors and managers...who gives a shite about the shareholders!

Tis Sunday, no joke.....a day of Religion.
Let us get serious.
A teeeter totter is the best structure.
Ably funded buy an unwary investor, vested in little interest, but looking for a return.....OF THEIR MONEY....for the love of God.
If you want a little more interest in No Zeal-and investment....you will have to stop scamming the ones who saved, over those who over borrowed, over leveraged, over built and over indulged.
And keep it from the Vested Interests.
The vestments like a Pope's Attire and Palace  is built on numbers...And god help those...who do not Tithe. (Wars have been fought for less)
Like a Destiny Church...tithing is the way to go from now on.
How much have ye got.....hand it over....for the love of god. Our need is greater than your.
And the Banks and the Govt will tilt the teeter totter structures, which ever which way they choose.
And the more they teeter totter, they more they will pay themselves, over those who saved...Twas ever thus..
The GOD...
MAMON.
In the name of Charity......tithe ye wayward peasants. See the error of your ways.
Fore give them...for THEY...will inherit the Earth, and TAX ye and Tithe ye, until ye drop.
AMEN.

The sharemarket is supposedly for people to invest (long-term) in a share of a company's profits.  But the fact that news reporting generally, including on this site, focuses on share price changes from one day to the next, or even within a day's trading, gives the lie to this supposedly long term focus.
It is this short term, get-rich-quickly, speculative focus that is at the heart of many aspects of our problems, including much of the GFC.
If the sharemarket was about long term wealth generation and accumulation, this is what I'd expect to see:

  • news reporting focused on changes in share prices over multi-year periods
  • news reporting focused on dividends paid in combination with share price changes over the longer term
  • technical trading non-existent
  • minimum holding periods and/or higher transactional costs

I know the sharemarket is meant to be about efficient allocation of capital - quickly applying capital to better opportunities.  But technical and speculative trading is not about efficient allocation of capital; it's a form of gaming what should be a long term investment system, but isn't.

Well said mist42nz. I am not sure what Bernard Is suggestiing here public or co-opearative ownership of all large businesses.
I suspect many of his articles are written tongue in check to generate debate surely.

Interesting analysis Bernard. As a Fonterra shareholder, I can say we have been promised the earth as a result of changing our capital structure. The ironic thing is close to $1billion was retained since 2008, and the fair value share structure is what drives redemption, and that (FVS) is in no way a cooperative principle. I'm dismayed that the board have actively supported such a destructive share structure, blaming DIRA or S.I growth, if ever challenged, while all along knowing it was crucial to their agenda of demutualisation.
 
The consistent message is that the redemption risk is stifling strategy, which is sold with only upside. The upside is a starving world, increasing incomes in Asia, particularly China, changing diets, nutritional technological developments, and no doubt others. The TAF capital restructure is a continuum of demutualisation forces acting on the cooperative structure of the industry prior to formation of Fonterra. I think propagators are informed by neo classical economic theory and exist in various sectors of government, business and finance sectors. Given legitimate doubt cast on such theory, more apparent in lieu of 2008 financial crisis, it's disappointing the debate on the future of the NZ dairy industry wasn't open, honest and robust. In selling TAF, the spin laced PR and $24-50 million bill, is a bitter pill for demutualisation.
 
We are also told by directors and industry leaders that we have a duty to share the spoils with the wider NZ public. Such rhetoric seems rich coming from some folk, and I wonder how much better off NZ Inc. will be with hybridisation of dairy industry too investor type structure.
 

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