DISCUSSION Hard cases make bad law

by Mark Goyder _______10th January 2017

Commenting on the City AM article from 5th January: Calls for better governance at Sports Direct heighten, after Mike Ashley defies the will of the company’s other shareholders

The battle between Mike Ashley, Sports Direct board and the minority shareholders is, in my view, an exceptional case and I would not seek to defend its governance track record. It is hardly logical to jump to the conclusion that the company should be ejected from the FTSE 250 or that rules for majority shareholders should be reviewed.

Companies are created by entrepreneurs. As companies grow and need capital there are many ways they can find capital and going public is just one of them.

By going public they invite external shareholders to put in finance and they take on accountability and transparency obligations in return.

Investment institutions know what they are getting into. Index funds know they cannot sell shares in any index of which they are part and the best use their influence on the management.

Protecting minority shareholders

Interestingly it was the desire to protect smaller shareholders from more dominant ones that drove the Swedes to develop shareholder-led nomination committees. Perhaps there is a case in listed companies where one shareholder or their family  owns more than 50% for requiring the involvement of minority and retail shareholders in the director (and chairman) nomination committee process, but if the majority owner and the minority have diametrically opposite views this alone may not solve the problem.

In these extreme cases the logical outcome is that the company decides it really doesn’t want to continue to be a public company. It wouldn’t surprise me if this is what happens here.

And let’s not conclude that concentrated shareholding in our listed companies is the biggest problem we face. The opposite is the case. The biggest problem is the stewardship deficit that can be created by dispersed shareholding, combined with the short term focus of those asset managers whose time horizons and reward systems undermine long term value creation. How do we create the conditions where we have more concentrated and committed long term shareholders? That’s where the hard thinking needs to be done and that is one of the things Tomorrow’s Company will be saying in response to the government’s green paper.