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Passivity no longer an option

I am reading more and more stories about listed companies that are taking shareholders for a ride.

Last month the story was ENRC (Eurasian Natural Resources Corporation).

This is a big company with majority owners from Kazakhstan which was listed and immediately admitted to the FTSE 100.

The minute this happens ordinary punters with their tracker funds or just their life insurance policies are dependent on the decisions made by the board.

Now respected independent directors Sir Richard Sykes (who chaired the Tomorrow’s Company restoring Trust inquiry 2003-4) and Ken Olisa have resigned, because they are not happy that the majority owners are treating minority shareholders like you or me fairly.

But we are powerless because the authorities have let them list here without imposing more stringent conditions.

It seems many Chinese companies are bypassing American regulation by doing a reverse takeover – letting themselves be “taken over “ by American companies which are existing “shell companies”.

All this makes it more important than ever that we, as individual investors, start getting more active. Tracker funds are very appealing on the basis that your investment is spread, at low cost, across the whole index. But what if it is becoming too easy, in Europe and the USA, for companies to be admitted to the index.

There are lots of ironies in this situation. One is that it is the much maligned hedge funds that have started “short-selling” the fraudulent companies causing their share price to collapse.

The other is that the very same thing that we need in our stock market – getting larger, concentrated holdings so that shareholders have a long term interest in the company – are also the things that can be abused and threaten us when a solid stake becomes a controlling stake and minority shareholders lose out.

Nothing is simple in stewardship. No form of ownership is perfect. That’s why we have to hold all of them accountable by insisting that the funds in whom we invest our money are going to stand up for stewardship.

We as customers need to start letting the index funds know that we will stop putting our money their way if they are uncritical about who is allowed to be in the index. That should then put pressure on the London Stock Exchange whose index has such obviously weak entrance conditions.

Posted by Mark Goyder, founder-director of Tomorrow's Company.

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