Professor John Kay, one of Britain’s leading economists and author of the government-backed Kay Review of the UK’s financial markets, has said that the ‘era of shareholder value is coming to an end’ on the back of high-profile failures in corporate governance at Sports Direct and British Home Stores (BHS) and investors’ efforts to remedy them.
Kay is highly influential and there have even been similar ‘Kay Reviews’ elsewhere, such as Japan, where the Ito Review is directly modelled on Kay.
The latest comments come as one of Kay’s reccomendations, the Investor Forum, has raised its visibility with a high profile intervention at Sports Direct.
Writing on his personal blog, Kay said that troubles at Britain’s largest sports retailer had raised two important questions of shareholders interested in backing well-run companies.
First, to what extent “brilliant, difficult, autocratic” business leaders should be allowed to extend and exploit their control of a company. Second, how “the social role and political legitimacy” of the world’s largest companies should be defined going forward.
More broadly, wrote Kay, the collapse of BHS and impending doom at Sports Direct signals that “the era of ‘shareholder value’ is coming to an end”, a reference to the phrase ushered in by the then CEO of General Electric, Jack Welch in 1981.
Welch, whose tenure at GE saw the industrial giant’s value rise 4,000%, has since distanced himself from the concept, calling it “the dumbest idea in the world”.
Instead, he argued that an executive’s main constituencies should be employees, customers and products, that share price increases should not be set as an overarching goal and that short-term profits should be used to promote a company’s long-term value.An investigation by the UK government said Sports Direct’s working practices were “closer to that of a Victorian workhouse than that of a modern, reputable high street retailer”.
Into all this has stepped the Investor Forum, in its first high-profile action.
Created in 2014 in the wake of Kay’s review, the group is calling for an independent and comprehensive review of the company’s corporate governance framework to be launched at its AGM on September 7.
Kay currently sits on the Forum’s board, though will leave at the end of 2016 after agreeing to become a member for the first two years of its lifespan. He writes in the blog that “it has engaged in quiet diplomacy to provide change at about a dozen large British companies, judging – correctly in my view – that shareholders can best bring about improvements in strategy and governance by private persuasion rather than through a megaphone”.
Meanwhile, the Investor Forum has announced new plans to develop a framework for collective engagement to boost the influence shareholders can muster against listed companies. The structure will provide a legal agreement that will enable investors based in the UK and overseas to collaborate on engagement activities without having to worry about regulations or disclosure rules in different jurisdictions.
Andy Griffiths, executive director at the Investor Forum, said: “This is an important moment for investors as it will enable them to unite over issues, whether it is poor company performance or the quality of the board. Too often investors are too divided to make an impact.”