DISCUSSION Unilever case: a market failure that government must address

by Mark Goyder _______30th March 2017

After the last financial crisis I remember two conversations with remorseful business leaders. One was a company chairman. The other was CEO of a different listed company. The chairman had survived. The CEO hadn’t. Both regretted that they had gone against their own stewardship instincts and given in to shareholder pressure to repay large sums to shareholders and increase leverage with disastrous results for the company and for shareholders.

Now we see the same pressure being applied to Unilever (Unilever investors favoured talks with Kraft Heinz – 16 March) – more borrowing, share buybacks, and other devices to increase the share price.

As the industry insider that the FT quoted recently (17 February) puts it:

“It’s ironic because it’s like saying someone is too healthy. The fact is that if you have a strong balance sheet today, that makes you vulnerable to 3G. So you need to make yourself a bit sick — but not too much.”

This is perverse. The evidence from research is that the companies which create most shareholder value over decades are those which are financially prudent, build long term relationships with stakeholders, and have a purpose beyond profit.

We have a market failure. It would be in the interests of most of us as pension fund beneficiaries and customers of asset management if asset managers  recognised this logic. Yet, with honourable exceptions,  they ignore this evidence and seek to boost today’s share price regardless of consequences for tomorrow.

There is a role for government here. It is to ensure that the treatment of mergers and acquisitions is consistent with clause 172 of the Companies Act. This  defines the duty of directors as being to promote the success of the company. It defines success not in terms of the current share price, but combining the interests of shareholders today and tomorrow with the interests of other stakeholders.

This mustn’t mean giving boards a free hand to dismiss any bid. But at present the treatment of mergers and acquisitions undermines the intentions of the Companies Act, and leaves listed companies exposed to short-termist and opportunistic bids, and exposes long-term shareholders to the opportunism of short-term asset managers.

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