The danger of unholy alliances at the expense of companies is growing. We therefore need new guidelines for professional investors – and stronger supervisory boards.
As you know, we are sceptical about the growing influence of investors on corporate governance. Not all readers are happy about this. We were recently told that we were “lumping all investors together”. So let’s be clear: We are aware that there are a number of professional shareholders who think in the long term and are not looking to make a quick buck.
But there are also the aggressive activists à la Paul Singer, who vehemently push for company sales, high dividends and/or share buybacks (often at the expense of future investments). And at the moment it looks as if they will become more active in 2021: the management consultancy BCG predicts an increase in activist campaigns.
The attackers can hope for support from traditional investors. “Often activists are successful even with small shares, because not infrequently large asset managers join in,” writes Handelsblatt. Indeed, when quick returns are tempting, even fund companies that have made long-term thinking their motto are sometimes tempted.
Honest investors – or shareholder cartels at the expense of honest traders?
In addition, the strategies of activists and financial investors are converging, according to the BCG study. A classic example is the US investment house Cerberus, which recently acted like an activist in the case of Commerzbank.
It is therefore clear to us that despite all the noble promises made by the financial sector, there is a growing danger that unholy alliances will form at the expense of companies. From an economic point of view, this raises the question of when the borderline to an investor cartel is crossed – and how the abuse of market power can be prevented.
Corporate governance expert Michael Kramarsch has just proposed establishing the “model of an honourable investor” (through “externally verifiable guidelines with the greatest possible binding force”). This is a wise and important impulse, but it must not remain the only field of action.
Instead of relying solely on honest investors, we must also discuss how to keep aggressive shareholders out of the supervisory bodies. We therefore advocate, among other things, that supervisory boards should not be allowed to work for shareholders (see the “VARD Agenda for Better Corporate Governance”). That would be a real gamechanger.