Everyone knows public companies have shareholders. What everyone may not know is that through their pension or insurance schemes, they are very often some of the most important shareholders in a quoted company.
Until recently the investments that pension providers and insurance companies made in businesses were of little concern to Joe Public. What mattered was the payout when the pension was due or the insurance claim had to be met.
In that environment, two bad things began to happen. The first was that company managements, while keeping up the pretense in their annual reports that they were always acting in defense of shareholders, in fact acted ever more brazenly for their own interests. This has been seen in the increasingly obscene pay packets that compliant remuneration committees have voted through for top executives, regardless of whether they were successful or not. And if , as all too often they did, they failed, their failures were rewarded with no less obscene termination packages.
The fund managers acting on behalf of institutional investors, most conspicuously the pensions and insurance industries, should long ago have called time on this lousy protection of shareholders’ interests. Except, guess what? The fund managers and the pension and insurance companies were also paying their own executives ever more money and also taking a big chunk of cash in basic fees and performance bonuses, very often regardless of whether or not there were any profits. Thus in answer to the question ‘who guards the guards,” the alarming response was “nobody”.
Shareholder activism shamed a few investment funds into behaving more diligently, but these were generally over easy targets such as pulling investments in tobacco companies or armaments manufacturers. They had no real impact on arrogant corporate managements.
But then came the sovereign wealth funds. Without exception they are not driven by the short-termism that characterizes daily market gyrations. At base, they are looking for long-term strategic investments that will underpin their fundamental commitment as funds for future generations.
With assets of $850 billion, Norway’s sovereign wealth fund has often significant stakes in 9000 companies worldwide. In recent years it has begun to vote down ludicrous corporate pay packets. It has helped force companies link pay to performance by awarding share options. But until now, it has put up with corporate wrongdoing. No more. In the wake of the VW emissions scandal, which has seen the value of VW shares nose-dive, the Norwegian sovereign fund managers want compensation. They are pursuing VW itself in the courts and may be joining VW managers in the action.
VW has already put aside nearly $17 billion to meet the multitude of claims against it. If it is forced to compensate shareholders for its dishonesty, that bill could at least double and then some. One VW executive asked privately last week why the Norwegian Fund would want to take an action which would further reduce the value of its stake in one of the world’s biggest automakers. He obviously has not woken and smelt the coffee. The Norwegians don’t doubt the long-term value of their VW stake and can easily bear a paper loss of a few billions. What they cannot bear is an arrogant management that believes it can lie and cheat its way to success and pay itself huge sums whilst doing so. Other managements should heed the warning.
