By Paul Lee
This column is in reply to a previous column by Con Keating (Shareholders and fund management, 8 March 2016), which in turn was a response to Paul’s original article (Where shareholders should figure in the pecking order, 26 February, 2016).
I welcome the fact that Con appreciates that shareholder engagement is a fundamental way that investors can and should be adding value to the companies they invest in. This is a critical area and one in which the investment industry has made progress in recent years, though there is further to travel.
Protecting and enhancing our clients’ investments through intelligent and thoughtful shareholder engagement is a key way for the industry to demonstrate the value it adds for clients, and to the economic system as a whole. This is most effective when engagement activity is closely tied to investment decision-making. Portfolio managers are integral to the process.
We agree on the importance of stakeholders to the long-term success of a company and its business model. Con suggests that other stakeholders are more important because they provide the majority of the financing for companies. They do indeed take priority over shareholders, as they enjoy the protection of contract law. For staff, this comes in the form of employment law.
But this is precisely why shareholder rights are so important, and our role in driving corporate accountability so necessary: the other stakeholders have clearly defined legal rights over the company. Shareholders – who only benefit from the residual value left in the company after these contracts are fulfilled – need to act to protect their own interests. This action to protect shareholder interests, which we call stewardship or engagement, contributes to business success and long-term economic prosperity, to the benefit of all stakeholders, not just the shareholders.
As it happens, however, Con is mistaken: we do not own the money in our bank accounts. It is an asset on the company’s balance sheet that is lent out many times over to generate returns. As account customers, we have – like any stakeholder – a contractual right: the bank is in our debt and obliged to return the money according to the agreed account terms. Northern Rock’s customers queued at its doors because they feared it might renege on that contractual obligation.
As Con says, companies are a legal construct; they represent a bundle of contractual rights. We have granted them legal personality – the capacity to have legal rights and obligations within a legal system – so that they can enter into contractual obligations. Companies can be isolated from their owners if they go bust and business can flourish elsewhere. This legal fiction is a significant reason for the growth in global prosperity over the last 400 years.
But this conceit of legal personality does not mean companies are people. Therefore, to equate the ownership of companies to slavery, as Con does, is nonsensical. Companies are entities because for economic reasons we have legally chosen that they should be so; they are entities with owners, which we have chosen to call shareholders. Those shareholders have rights, but they also have substantial obligations arising from that ownership.
Those obligations include the need to be active and involved stewards. We welcome the growing acceptance that this is a necessary and important element of shareholders’ ownership role.
Paul Lee is head of corporate governance at Aberdeen Asset Management
