Shareholder activism is vital for a properly functioning City

Allister Heath
OWNERS of publicly listed companies need to behave as proprietors. They shouldn’t micromanage firms in which they invest – that is their executives’ jobs – but they should ratify some key decisions, including the pay of their top staff. In his 1970 polemic Exit, Voice and Loyalty, Albert O Hirschman explained that members of any organisation – including a firm or a country – can respond to an issue in two ways: they can either exit (sell their shares or emigrate) or use their voice (vote or protest).

Both approaches have their uses. In democracies, exit is under-rated as a mechanism to effect change – politicians are forced to respond to brain drains, for example. The pendulum in firms has swung too far in favour of exit (with unhappy institutions selling their shares) rather than voice (shareholders trying to change policy or voting against management).

So this is my message to shareholders: If you don’t like how a company is managed or if you think top execs are paid too much, make your voice heard. If nobody is listening during your private communications, then vote no at AGMs. It’s your company, not the management’s or the staff or anybody else’s. The government’s only role is to reform the system to make it easier for owners to exercise control and make their voice heard.

Investors who slapped down Citigroup’s recent pay proposal (by 55 per cent to 45 per cent) for its CEO Vikram Pandit were not merely in their rights to do so – they were also morally responsible to ensure the best possible stewardship of their company. Companies should always strive to pre-emptively listen to shareholders; any substantial vote against the management is always a sign of failure. Most large companies need to spend more time interacting with their owners. Shareholder activism is an essential part of a properly functioning capitalism, a key self-regulating mechanism at the heart of the City.

We shall see what shareholders think of Barclays’ revised offer today, which comes as the UK giant managed to increase its return on equity to 12.2 per cent in the first quarter, higher than its cost of equity, a development which is bound to go some way towards assuaging at least some institutions. One thing is clear, however: its chairman Marcus Agius will rightly be apologising later today for mismanaging the bank’s relationship with its UK shareholders. They may no longer control that much of the bank, compared with their overseas counterparts; but they still matter.


CHINA is the world’s factory. But that may not remain true for too much longer. Its advantage was based on cost; that is now eroding, according to new research from Deloitte, which predicts the end of the era of “Cheap China”. Domestic Chinese wages are rising, reducing the cost advantage for foreign companies seeking cheap factories; even Chinese firms are being hit, as better living conditions in China’s hinterland are discouraging workers from moving and looking for work in the wealthier urban coastal provinces. With Chinese production moving up the value chain, and workers understandably demanding higher wages, better working conditions, and added benefits, costs are rising. The last piece of the puzzle is the increasing upwards pressure on China’s exchange rate, which has long been artificially under-valued. So who will take over China’s role as a purveyor of cheap goods? India and other Asia Pacific nations – and also Sub-Saharan Africa and the Middle East. It will take a while longer but eventually the world’s economic geography will shift again.
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