The Economist (Keeping Shareholders in Their Place) recently outlined the complaint made by shareholders that, increasingly, they have been stripped of their ability to 'be active'.

I find this stance questionable.

As I pointed out in a letter (Share Options) to the same newspaper, in adopting this stance, active investors have lost sight of the wood for the trees. There is no greater shareholder activity than buying — and selling — shares. By getting trapped in detail, shareholder activists have abandoned their most forceful instrument: the power of the market. My complaint also was heard by Renée Bonorchis of Business Day, who reflects the tone of our conversation in her Ms Management column (Shareholders Should be Seen and Heard).

Although I seldom agree with the stances adopted by 'growth investors', my view on shareholder activity echoes that of the highly successful growth manager, Philip Fisher who wrote in Paths to Wealth through Common Stocks (1960, 141-142):

'Concentrate on outstanding management for this is what produces the results that count. When you have found such management, support it regularly with your proxies whether you favor every single move proposed or not. Do this just as you would go along with the program of any other expert you trusted who, through abnormal skill, was producing unusual results for you. As in the case of your doctor, your lawyer, your plumber, or any other specialist you select, if your opinion of them changes significantly for the worse for any reason whatever, don't get in endless arguments with them, but get rid of them and get someone else who is better.'

In passing, it is worth noting that Warren Buffett - one of the most successful active investors in the history of investment finance - is one of the most well-known followers of Fisher. So, whilst the stance of 'support or sell' can be considered simplistic, it is also powerful, easy to follow and highly effective in the results it produces.

Thomas Gayner, chief investment officer at the valued-based investment firm Markel-Gayner sums the argument up well: 'The fact is, when I feel I have to write a letter and make noise, that almost always means I've made a mistake and the more productive use of my time is to sell and move on.'

Renée Bonorchis' article is reproduced below


CEs who reckon that shareholders who don’t like their actions should just sell their shares really get my goat. 

I’ve come across this attitude a number of times. The starkest example was at a lunch with the head of what is now called Business Connexion. 

It was about five years ago, in the penthouse dining room of Independent News & Media. Then CE Peter Watt did not do himself any favours when he announced loudly that any shareholders who disagreed with him should sell and get out of the company. 

One of the problems with this attitude stems from the fact that directors are employed by the shareholders to run the company and, ideally, if the shareholders don’t like the way the company is being run, they can fire the directors and hire new ones. 

Only it doesn’t work that way anymore, if it ever really did.

At a much more pleasant lunch this week with the chief investment guru of Cannon Asset Managers, Adrian Saville, the point was raised that shareholders are prejudiced by the law and often left with very little power. They are, for instance, not allowed to act in concert (gang up against the company), they are not meant to act in ways that hurt the company and they are rarely allowed to vote on the most important matters facing the business that they own.

In other words, trying to lobby together is wrong, as is speaking out publicly. In addition, AGMs tend to be run like boot-camp get-togethers between the inmates and the instructors. I’m sure you can guess which role the shareholders are forced to play.

With this in mind Saville contends, while referring to economist Philip Fisher of 40 years back, that the best statement a shareholder can make is indeed to sell the share.

At first I felt righteous and outraged. Selling the share, to my mind, does very little to a company. There is pretty much always going to be a buyer, the share price may not fall at all and the shareholder who cared enough to sell will probably just be passing the shares on to someone who is purely in it for the cash. Further, the biggest asset managers in the country can’t just sell. The universe of stocks in SA is limited with around 400 companies listed on the JSE. This means that large money managers with many billions to invest have certain shares they cannot avoid if their portfolios are to function at their optimum capacity.

But if we’re to deal in reality (and it may not be pleasurable but it’s usually helpful) even the largest shareholders seem to have a hell of a time getting big business to do what they want, let alone care about what they want. And given that large public spats are costly, time consuming and often achieve very little, you have to start wondering if selling isn’t the right answer. As Saville says, what an asset manager has is time. If that time is going to be wasted, then rather move on and find a company you do want to invest in and where management is open to discussion.

It may be that the more shareholders sell because of bad corporate governance practices, the more a stock will be avoided and then the share price will falter and management will realise the error of their ways.

I’m not convinced of this.

But if the shareholders that were selling were as large as the likes of the Public Investment Corporation, Old Mutual or Sanlam, then the knock-on effects may be quite dramatic. However, these are the shareholders who are so large that they have little choice but to own significant stakes in the country’s largest companies. Which brings us to a bit of an impasse.

One solution, widely believed, is not to load up a board with shareholders. That’s often going to lead to a conflict of interest. Without naming names, imagine if the shareholders in a particular company wanted to make a fast buck and sell valuable pay-TV assets, but it was not in the long-term best interests of the company. If the shareholders were weighty enough, they’d push the motion through.

So what do you, as a shareholder, do? Saville’s best answer was that asset managers needed to do a lot of homework on how the management of a company operated before buying into it.

But for the big managers, my best answer would be that they need to speak out publicly more often. In the short term this may hurt the share price, but in the long term — and supposedly we’re all in it for the long term — a healthy dose of shareholder activism should lead to a better-run company with a larger market cap.

But before any CEs out there think it’s now safer to pronounce that disbelievers should just sell their stock, that’s not what I mean at all. These kinds of pig-headed assertions are never going to go down well, even if there is a large amount of truth and logic in the statement.