Are we seeing the twilight of "shareholder democracy" I wonder, and if so what are the implications for shareholders, "stakeholders", corporate governance and for capitalism itself, not to mention financial analysts and even for financial journalism?
These thoughts are prompted by what seems to me to be decreasing interest nowadays among journalists in analysing and investigating individual companies and in acting as "watchdogs" of the public interest (though admittedly with some exceptions where mega-scandals are involved).
The above is from a very interesting article in The Business Times (Singapore) by Anthony Rowley, it is clearly written from a Western perspective.
In Malaysia investigative journalism on financial matters (or actually on any matter) has never been of a high standard. Recently I do see some improvements in that field, although still too little. Too often the opinion of the major shareholder is asked, and is written down, without offering any perspective, without any issue being raised.
In Singapore the situation regarding financial journalism is clearly of a higher standard, despite both countries scoring about the same (low) score on the issue of freedom of press. I have seen very critical issues being raised in the newspapers, even concerning government controlled companies.
The article continues (with some noted by me in red):
"What we might call the concept of "shareholder democracy" gave a new legitimacy to journalists' activities in this area. It dates from the early 1970s when the idea gained ground that wider share ownership was a good thing that would ground capitalism more deeply among the populace at large.
At that time, I was one of the Financial Editor's team at The Times in London where (while learning all about price/earnings ratios, dividend yields and even how to value takeover bids etc.) we came to see ourselves as watchdogs of the public interest rather than as financial analysts.
It was a view not without merit since the 1970s were also seeing the emergence of a class of "asset strippers" or what would later come to be known as "corporate raiders". We felt that we had to protect the proverbial "widows and orphans" from the unwelcome attention of such people.
In Malaysia, asset stripping is comparable to the many delisting exercises, the huge majority is done at a (large) discount to the net asset value. I am sure that after the successful delisting, the company is quickly transformed, to the great benefit of the controlling shareholder(s).
With the advent of the "not fair but reasonable" verdict of independent advisors, this has become painfully obvious to the investing public, at least to those that actively follow what is happening in the market.
The widows and orphans were not entirely a mythical group, or at least in those days there seemed to be a sufficient number of small shareholders willing to go along to company annual meetings and to "raise Cain" if they had been tipped off about any abuse of their interests.
Distancing shareholders
Where the rot set in was when the fund management industry became aggressive in pushing the idea of mutual funds or investment trusts, through which individuals could have a whole portfolio of diversified interest in multiple companies rather than limiting to a few companies.
Rather as in the case of debt "securitisation", where lenders lost touch with individual borrowers through the ability to have stakes in myriad loans securities, the mutual fund concept distanced shareholders from ownership and sounded the death knell of true shareholder democracy.
In Malaysia a very comparable situation occurs. I have often lamented the role of the many (government controlled) funds in shareholder activism. In the past, they have hardly ever spoken out, or taken up an active role, fighting for the rights of the minority investors. In the contrary, they have often been seen voting in favour of the majority shareholder, even when the proposal seemed to be outright bad for the minority shareholder. For funds like EPF, it seemed that establishing the MSWG was enough. Belatedly, these funds are pressured to take a more active role, which hopefully will happen in the near future.
Since then, the "caring" individual shareholder has seen his or her (some of the most astute individual shareholders were indeed widows) rights diluted even further by the advent of highly aggressive private equity groups and predatory hedge funds that channel capital direct to companies.
The idea of an individual having a degree of "ownership" and even pride in a company and some ability, however small, to influence governance has come to be seen nowadays as quaint. So has the idea that shareholders should stick with a company rather than sell out to a takeover bidder.
In Malaysian delisting exercises, the verdict these days is often "not fair but reasonable", almost always accompanied by the advice to accept the offer. And most investors heed the advice, being pressured by the "threat" of holding shares in an unlisted entity.
The end of investigation
This seems regrettable, rather as with the accelerating demise of family-owned companies in many parts of the world. Family-owned companies can still achieve startling international success while still protecting their stakeholders. Japan's Yamazaki machine tool giant is one such case.
Those who have gained most from the resolution are financial practitioners who milk fund management and investment banking for all it's worth, reaping huge fees in the process, which are paid for ultimately by shareholders. Finance has become an even bigger industry than "industry" itself.
I have often warned for the increase of what I call "financial engineering", which seems to increase steadily in Malaysia. Some examples of these activities are: Private Placements, delisting exercises, relisting exercises, difficult alphabet soup constructions, SPAC's, china listed companies, business trusts, high frequency trading, call warrants, etc.
In my opinion, no value is being created in any of the above activities. That happens when people start a real company the old fashioned way (not based on some artificial licenses or the like), continue to improve on their product/service, know how to market/brand their product, expand nationwide (and later regionally), etc. This will take time and may seem boring to some (not to me!), but there is no real shortcut here. Malaysia does have some international success stories, but still much too little. However, to try to increase the number of success stories by financial engineering, and to make the local share market more "sexy", is not the right way, in my humble opinion.
Having effectively disposed of small shareholder capitalism and democracy, financiers are turning their attention now to state capitalism of the kind seen in China and elsewhere which they claim represents unfair competition to "true" Anglo Saxon or Wall Street-style capitalism.
We see examples of this trend for instance in the Trans-Pacific Partnership (TPP) which seeks to impose tighter rules of competition on state-owned enterprises and financial institutions - notwithstanding the fact that some of these operate effectively and in the public interest.
What I would call the fragmentation of financial journalism is something else to be regretted. Some journalists fall by the wayside and become financial analysts (or even public relations officers) but beyond this, too many seem happy becoming bond market specialists and the like.
The investigative urge that goes with a desire to know and to communicate with the public at large is threatened by this specialisation. If journalists cannot any longer claim to act as a watchdogs of individual shareholder rights they certainly do need to continue as guardians of the public interest.
Internet blogs and the like can never substitute for good investigative newspaper journalism, which needs courageous editors to stand behind their reporters and on occasions to be willing to take the legal risk of pursuing miscreants (or prodding public authorities into doing so). It is still a worthwhile "mission".
I wish all Muslim readers "Selamat Hari Raya", all Singaporean readers "Happy National Day", and all readers "Happy Holidays".
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