Are you my mother?
9 November 2009
Sean Russo
IF YOU are a similar vintage to me, or my parents, then you may recall that 1960s children’s book about the little bird that fell out of the nest and wandered around asking various animals and even an earthmover, “Are you my mother?”. “Are you my mother” came to mind twice last week.
The first time was when I heard the story of a mining CEO who was lamenting the fact that his own personal net worth had fallen substantially, with the drop in his company’s share price. He hadn’t hedged production in any significant way when metal prices were high because he believed that’s what his shareholders wanted him to do, and he hadn’t sold any significant number of shares because he thought that would send the wrong message to shareholders. His source of anguish was that in looking at the register recently he realised nearly all those shareholders he was so diligently serving near the metal market highs were long gone or had left near the top and come back near the lows.
The second time was on the weekend when I saw an article in the weekend press about how management and boards are finding it increasingly difficult to know who their shareholders really are.
In our line of work at Noah’s Rule, particularly with the mining sector but increasingly in other areas of business, we hear management teams and boards espouse the view that they have done their job if they have ensured that their shareholders are aware of the market risks inherent in the business. And anyway, they argue if shareholders want to hedge the exposures they can do it themselves. (Note to directors: for most of us the only hedge available is to sell the share).
It’s a matter of perspective of course. From my perspective I hear them saying that it is not their job to actively seek to reduce risk because they believe that risk is what attracted the shareholders in the first place. From their perspective they believe they are saying it is not their job to cap a shareholder’s upside from a favourable market move if a shareholder has actively sought exposure to that potential market move.
To me hedging is reducing risk, avoiding loss, managing cash flow; to them hedging is reducing opportunity, reducing profit. They would tell you that I am concentrating on the hole while they concentrate on the doughnut. I would tell you I am concentrating on the whole.
So here we are, risk advisor/advocate and CEO/board member, having a philosophical conversation about what a shareholder deserves or wants. All well and good, but the shareholder about whom everyone is so concerned doesn’t exist in most cases. The share registry is fluid, it is opaque and its constituents are diverse. Directors often have as much idea who owns their company as that poor bird had of where it came from.
I often ask companies if have they polled shareholders to find out what they truly think about hedging/risk management or any other issues. The answer is always ‘no’. In fact it has never occurred to them to do so. It seems they are often responding to a noisy minority who are constantly in their ear. Generally, a minority who want the share price to be volatile so they can trade the stock. Often they are simply hiding behind the “shareholders” as a convenient way of avoiding making tough decisions or following industry fashion. Interestingly when they do poll shareholders on remuneration (for a topical example), many don’t like the answer and from what I can see nearly all ignore the shareholders' view anyway. Fair enough too, after all, how could mere shareholders understand the true complexities and challenges they face running the business on their behalf!
I worked for NM Rothschild Group, a private family company, for 20 years. Every year the shareholder came out to visit. We knew what his views were, he made them quite clear. We didn’t always agree with him, which isn’t that surprising when you consider he came from half a world away geographically and worlds away in terms of circles he mixed in and the weight of history he was under. He was after all the fifth generation, so they had already survived two generations longer than the commonly accepted odds. I believe the success of his business in Australia over many years was due to the fact that when it all came down to it, management politely told him if he was to continue to receive a dividend it was their view that the business should proceed with the business plan they had laid out for his approval. His ultimate protection was that employees shared in profits, not in equity. While we had no skin in the game (or any upside options), if he made money we got paid well, if he lost money we didn’t get paid much. Certainly not an idea that was ever going to catch on at most publicly listed investment banks. Our shareholder prospered because management, in possession of far more information than the shareholder wanted or wanted to absorb, made the decisions they believed were in the best interest of all stakeholders; him, his family, us, our families, our employees and the clients that depended on us for money and advice.
Stakeholders, not shareholders, are what management and boards need to be considering when they look at all risk management; in particular key financial market risk management. Your employees and customers are generally far more loyal to your business and brand than your shareholders. and are with you much longer. I think it is Richard Branson who is oft quoted as saying, “look after your customers and your staff and the profits will look after themselves”. (And by extension the shareholder benefit will be best served). I believe this to be true, but seldom put into practice in public companies, which seem to be run for the benefit of a cadre of senior staff and the board.
CEOs, if you are genuine in your desire to do the right thing by your shareholders, first do the right thing by your stakeholders. Don’t punt the company on the current fad or market forecast. Design your business to weather any storm. Otherwise, when things go bad for your market(s), you will find yourself wandering around lost like that little bird looking for the shareholders you thought/said you were protecting by doing nothing with your obvious and manageable risks.
“Are You My Mother?” was written in the 1960s. I suggest it’s time for a 2000s update. If a noisy shareholder rings up and tells you how they think you should be running the business and you don’t think it’s in the best interests of all stakeholders politely ask them “What are you, my mother?”!