It has been interesting watching the protest by Barclays shareholders. It made me think about what is happening here. I wonder if what we are seeing is the start of a new trend, or whether it has been going on for ages but I just never noticed it before. Anyway, a picture paints a thousand words.
Us and Them
Staff in many big companies (mentioning no names, but this is more widespread than it ought to be) will have experienced the feeling that the company thinks of them as a drain on resources. It feels to them that they are continuously made to work harder for less. Temporary staff and contractors may be treated even worse, as disposables even. It is sad because the staff are the ones who do the work, and they ought to be fully rewarded for doing a good job. Government and the tax man are well used to being treated as the enemy, but have big enough guns to fight their corner. Suppliers are well used to having to fight for every penny, but usually can demand a decent return because of their competitive position. Society is a big stakeholder in most companies, as is the environment, but mostly they have to put up with what they are given, with government and regulators supposedly protecting them from the worst abuses.
It has always looked a bit ‘Us and Them’, but the number in the Us camp is falling. Society was the first casualty. Boards realise that they can use globalisation and tax specialists to legally avoid tax, exploiting any holes in the system left by incompetent tax authorities. This problem makes daily news now, with company after company being shamed for hiding away from their tax duties in cracks in the rules. The rest of us have to pay more tax because some of the richest companies avoid paying theirs. Global companies search globally for the biggest cracks and set up there.
Customers, and savers in particular, used to be treated better too. Some banks have started using confusion marketing and other dirty tricks to reduce how much they pay to those who provide the money they need to rent to others. I am a long-standing customer with Barclays and have certainly noticed their policy to do all they can to avoid paying me interest any more. They rely on the fact that most of us won’t care enough to actually bother to move accounts. So at least as far as some big banks are concerned, customers have migrated gradually over decades out of the friends list and are now firmly in the ‘them’ camp.
The shareholder used to be the focus of corporate loyalty. Staff were forced to work harder to generate better shareholder returns. It seems that idea has been trumped in Barclays, but they aren’t the only one. I may only have noticed this new aspect of evolution, but now that I think about it, it is really only the latest extension of a long trend of paying higher and higher executive rewards, which I certainly have noticed. CEOs and directors have been overpaid for quite a while, as I have blogged about previously. A small number are worth what they are paid, the rest could easily be replaced by any number of people just below them with no noticeable loss to the company. But for boards to treat shareholders as competition for rewards seems new to me.
If a big company has previously been owned by a family, the small number of major shareholders are often board members themselves, or at least have good representation, so there is no problem. When a company has been listed for a long time, shareholders can be spread over a large population, so it is hard for them to defend their interests. The web makes it easier for them to organise protests, but it is still very difficult to mobilise enough to actually change anything. A few large pension funds or other investors may have some clout, but they may have a very hands off approach and may not be very interested in intervening. It is then that directors can start to manipulate the company as if it were their own. As directors often have directorships in a number of companies, they can act for their common interests, advising on high rewards for each other, until they end up taking the lion’s share of rewards for themselves and their friends, with shareholders pushed into second place. The ‘Us’ camp has been reduced to the board room. Everyone else is competition.
It isn’t quite so simple though, as a few other parties can demand high shares, even if they are not seen as friends. In big banks, the rewards have to be shared with experts, without whom there would simply be no rewards to share. This includes their own traders, tax consultants and a few others. Boards have to pay the going rates for them. They aren’t friends so much as partners. They have to be treated with respect simply because they can demand it.
If this trend were to continue a while longer, shareholders may end up with less and less. The more distributed the shareholder base becomes, the harder it is for them to mobilise their power, so the less effective power they hold. Boards can ignore them more and more easily. Customers will pay more, savers will be paid less, staff will be paid less and worked harder. Taxes will be minimised, risks passed as much as possible onto society and the taxpayer. The maximised profits and minimised risks will be directed as far as possible to the Us people running the company. It could essentially become a not-for profit organisation, with very highly paid board members and other key partners, low profits, and thus little left for dividends and taxes.