The key to better jobs, more money and a successful economy for all New Zealanders? Investors need to quit thinking like shareholders and start thinking like stakeholders, says Simplicity’s Sam Stubbs.
Let me start by declaring my bias here. I’m a capitalist. I believe that competition and markets are the best way to maximise wealth and get the tax revenues that build the best schools and hospitals. To crib a line from Churchill, “capitalist economies are the worst, except for all the others.”
However, like many things, capitalism in its most unfettered form produces perverse outcomes. Perhaps the best current example is sitting in the White House.
Now that I’m working for a non-profit which invests for the next 50 years my perspective on investing, something I’ve done for 30 years now, has changed. Fretting about where my kids will find jobs in the future has made me readjust my outlook as well.
For many years I was an investment banker and fund manager, and very keen on U.S. style short-term incentives. I was seduced by options, short-term profits, IPOs. And I was right in the thick of it as my employer, Goldman Sachs, listed on the NY Stock Exchange. At the time the waves of money sloshing around washed away any concern about whether it was the right thing to do or not. I was seduced by the money.
At the time I was also lucky enough to work in Europe and Asia, and it was there I became exposed to another form of capitalism, one where long-term shareholders consider themselves more like stakeholders. The distinction between shareholder and stakeholder is simple but very powerful, and it has a massive effect on how companies, and economies, are run. Stakeholders view involvement as long term, while many shareholders tend to think shorter term. Stakeholders accept short-term pain for long term gain, while many shareholders want immediate gratification.
Fletcher Building’s recent losses are a great example of how short-term incentives drive behaviour. The details will come out in the wash, but my best guess is the board of Fletchers approved fixed price contracts because they felt under pressure to deliver ever larger profits in the short term.
They needed to win big contracts to keep momentum going and share options rising. They were managing for increased profits over two to five years, so it made sense to agree to riskier contracts to get those results. Had they been managing for a 20-50 year return, fixed-price contracts may well have been seen as unnecessarily risky.
Large shareholders, most of them KiwiSaver managers, deserve some blame here too. They should have sent Fletchers a clear message that it was okay to pass on overly risky business, okay to see profits drop short-term so they were more sustainable long-term. Instead, they remained largely silent until it was too late, while rushing to shout ‘I told you so’ after the fact.
However, times are changing, and Simplicity intends to lead. As a stakeholder and long-term investor in New Zealand’s largest 50 companies listed on the stock exchange, our KiwiSaver members benefit if these companies thrive. We feel, as a stakeholder, a fiduciary duty to help New Zealand companies do the best they can, make long term profits, and create the jobs of the future. They way we all win.
So what needs to change?
Firstly, there should be stakeholder representation on the board. This is a well understood model in Europe and Asia, where dominant families, governments or pension plans hold a key strategic stake. People scoff at this, but compare the fortunes of US and UK automakers to those of Korea, Japan and Germany over the last 50 years. Neither have been all bad or all good, but you get my point.
A key determinant of many long-term success stories is very long-term stakeholders sitting on the board and moderating short-term animal spirits. And despite the recent Volkswagen emissions crisis seeming to negate that, such bad decision-making is notable for its rarity in German corporate culture.
At Simplicity, we’re not just talking the talk. We’ve recently asked to attend a board meeting of the 50 New Zealand listed companies we’re invested in, to discuss our desires as a stakeholder, their company values and strategy, what they’re doing about diversity, and how KiwiSaver allows them to think and act much more long term. We’ll be fascinated by how they respond, because this request is unusual in a New Zealand context – but not at all unusual internationally.
Secondly, companies need to make long-term incentives truly long-term. At best, management incentives in New Zealand are medium-term. They’re designed to maximise profit during the tenure of a board or management member, and in the process discourage long-term investment and risk taking. The board signs off on them, and they’re designed by consultants who feed the desires of those who hire them: the board and senior management.
Shareholders have very little say, and always after the fact. In the US, they have got to the point of rewarding perverse behaviours like over leveraging a company, buying back shares as opposed to investing long-term, and passing the lens of short-term share price movements over every decision. This short-termism has gone too far, and a key reason is the wrong incentives at senior levels.
If incentive programmes were designed to maximise stakeholder returns I think it’s most likely they would be over a 10-20 year period. Such a long-term outlook would mean the company’s board and chief executive would be highly incentivised to get the culture right, and to invest very long term, because they would be incentivised by the results no matter whom was in charge in 20 years’ time. Most of our KiwiSaver members will be invested for more than 20 years, so it’s reasonable to expect the companies in which they invest to think in those sorts of timeframes too.
Thirdly (and here’s probably the most controversial suggestion), where are the workers’ representatives? Cue Richard Branson. He’s argued for decades that Western-style capitalism ranks shareholders first, customers second and employees third. He reverses that, placing employees first, customers second and shareholders third. To his mind, if employees are happy and motivated they will delight customers, who will be loyal, more productive and more profitable. He has a point.
Taking employees very seriously is key to a thriving company. Many enlightened companies in New Zealand are embracing the reality that technology is just a tool, that capital for good ideas is readily available, and that there are plenty of good ideas overseas that can be copied here. But the only thing that will mix ideas, capital and technology to make a vibrant company, the only thing in truly short supply, is great employees. They are the secret sauce for any company, so why not have an employee representative on the board? Why not make them feel like a stakeholder in a company’s future? Why not dump our old-style adversarial model and embrace more dialogue between management and employees in the crucible of decision making for all, the boardroom?
As a stakeholder in New Zealand’s 50 largest companies, we would welcome companies that had employee and shareholder representation on their board, or at least regular dialogue with the board. And we welcome truly long-term incentives for senior management. Those companies that gave a very clear signal that long term sustainability matters more than short term dividends, and that people, not technology or capital, were key to the future, would get our support when they need to make tough decisions for the long term. It’s those decisions that would see the companies, and New Zealand, thrive.
Welcome to the world of stakeholder activism.
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