Summary:
FSA's new short selling regulation raises questions about the nature of ownership of firms. Is it okay for investors to lend stocks to short-sellers? When shares are no longer an asset to be bought, held or sold, but also a handy device for high-speed financial engineering, it becomes harder for managers to focus on the job in hand. Business may have changed for good. More and more like Chelsea football team, assembly of talent, rarely stays together for long. Nature of ownership changing. Today very fragmented and confusing. How should managers respond? McKinsey advised companies to concentrate on what it called "intrinsic" shareholders, leaving traders and "mechanical" owners to the investor relations department. (Published: 24/06/08)
Notes:
- new FSA regulation
- from now on any investor holding short positions in more than 0.25 per cent of stock in a company conducting a rights issue would have to own up to it
- "no more lurking in the shadows, unloading shares in a cash-strapped business that you planned to buy back soon at a much lower price"
- hedge fund outcry
- FSA reforms have brought bigger questions into focus:
- Why are institutional investors so relaxed about lending stock to the hedge funds to allow this shorting to take place?
- It may be profitable, but is it proper - especially if you have any regard for that company's management and your relationship with them?
- What sort of ownership do shareholders now provide, and how should managers respond?
- owners of any asset can pass on all or any of their rights to someone else ("the rights of transmissibility")
- i.e. stock lending is not illegal, nor wrong in any strict moral sense
- but: when managers get the message that their companies' shares are not merely an asset to be bought, held or sold, but also a handy device for high-speed financial engineering, it becomes harder to focus on the job in hand.
- Building and improving a business takes time. You cannot be judged hour by hour on your performance.
- Richard Sennett (LSE):
- "we need to update our classic view of the way markets, companies and their employees interact."
- "It's not capital versus labour any more, it's the operation of the firm versus the investment in the firm."
- is familiar phenomenon in the world of start-ups and IPOs
- company founders have a business idea, get it up and running, bring in new sources of capital and then, quite frequently, leave
- but then employees no longer feel answerable to the people in the office and managers lose a sense of control.
- "this kind of evolutionary process, writ large, is what we see in public companies today. How can managers get back to being in control of the companies they manage?"
- may be futile question, based on a nostalgic view of what companies should be
- business may have changed for good
- companies are now barely even semi-permanent organisations, with their own ethos and identity
- "we are all financial engineers now"
- Anthony Hilton:
- "Tomorrow's company will be like the Chelsea or Arsenal football teams - an assembly of talent which comes together but rarely stays together for long. Managing businesses like that, and indeed choosing those in which you should invest, will require a range of skills which we have as yet barely begun to appreciate."
- Mark Goyder, director of Tomorrow's Company, a think-tank
- points out that the roots of the word "company" are Latin - con panis - the people you break bread with
- analysing the changing nature of ownership
- argues that today there are perhaps as many as seven different types of owners that businesses may have to reckon with, all of them laying claim to assets in different ways
- fragmented and confusing world
- How should managers respond?
- McKinsey advised companies to concentrate on what it called "intrinsic" shareholders
- leaving traders and "mechanical" owners to the investor relations department
- i.e., do not waste management time on people who do not really understand you and will never make the effort to get to know you properly.
