Responsible business is all the rage in the City but you wouldn’t necessarily know it: a healthcare company that makes inhalers to treat lung diseases is being sold to big tobacco and Bradford awaits its fate as the homegrown chain Morrisons is circled by US private equity.
To some non-City observers the decisions look wrongheaded and, amid a wave of other takeovers including the sale of the defence contractors Ultra Electronics and Meggitt, suggest that while boards and shareholders talk about their good environmental, social and governance principles, money still talks.
So what is going on? “Generally if you’re a public company, and somebody comes to you with an offer that is a 30% premium [to the share price], it’s really quite tough to tell them just go away,” says Simon Laffin, a veteran City chairman and non-executive director, whose CV includes the Safeway-Morrisons merger, the Northern Rock rescue team and being ousted as the chairman of the pub group Mitchells & Butlers by a shareholder cabal led by the billionaire investor Joe Lewis.
“Ten years ago you’d have said a board was responsible for managing the value for shareholders,” he says. “You always had to take the interests of other stakeholders into account but people didn’t really take it very seriously. Now boards are taking it very seriously but nobody has been specific how you balance these competing interests.”
The board of the inhaler maker Vectura has recommended shareholders accept a £1.1bn offer from the tobacco company Philip Morris International, the maker of Marlboro cigarettes despite objections from health charities, who have asked shareholders to consider the “moral conflict” of the proposed takeover.
At Morrisons, the trustees of its pension schemes warned last week that the proposed £7bn private equity takeover could “materially weaken” its financial position, and it needed extra security over some of the supermarket’s assets.
“When I’ve had takeover approaches the attitude of shareholders has been: ‘If a big offer comes in, I want to have the say on it, not you,’” Laffin says. “What really pisses them off is if a board turns down a big premium without consulting them.
“Institutional shareholders, too, must think about the environmental and social implications, as they, not the board, make the final decision on any takeover. If the board gets a reputable offer the pressure is extremely high to put it to a shareholder vote.
“The problem is that the board can’t just ring a shareholder up and ask: ‘What do you think?’ before any deal is public because that’s inside information and then they couldn’t trade your stock for possibly some time.
“When it is still secret the board is negotiating with the bidder. Once it’s public, it’s the shareholders negotiating, as they are the decision-makers. They don’t need to talk directly to the bidder – they can tell the media that the offer is inadequate.
“It’s as tough for institutional shareholders as it is for the board because in the end they’re not investing their own money, they are investing our money. Would you take a 5% return, instead of a 7% return if the fund manager only voted and invested on a tight ethical and social agenda? You might think: my pension isn’t going to be huge and I’d rather they gave me the extra money, and I can give it to Oxfam if I want to.
“That’s the conundrum institutional shareholders have. If they’re going to take a detailed environmental and social stance on every one of their companies that they invest in – some may hold 1,000 or more stocks – they’d need to employ a lot more people and that would affect their returns.”
The battle for control of Morrisons, which has more than 110,000 employees, has revived concerns about private equity ownership of large companies. Laffin, who has worked for listed companies as well as the buyout firm CVC, suggests that billionaires can make for tricky shareholders. “If you are a billionaire, you don’t care about the next five or 10 million quid,” he says. “You care about people doing what you tell them to do.
“One of the reasons a lot of managers like working for public companies is the shareholders don’t generally interfere,” he says. “In private equity they are always activist. If things go well, they’ll leave management alone but if things go badly they’ll intervene.”
Laffin, whose new guide to the boardroom, Behind Closed Doors, is published on 2 September, says he hopes the book will help would-be directors get a job at a time when women and ethnic minorities are still struggling to reach the top of business.
“Being a board director is a closed door to executives below board level, politicians, and even many regulators,” he says. “Opening it up so that more people understand what happens there is incredibly important for society; it offers the opportunity to understand what boards can and can’t do.
“People criticised the Morrisons board for recommending the initial Fortress offer for 254p as too low but this simply put the company into play. Now the board is described as flip-flopping in switching to recommend the CD&R bid of 285p.
“I imagine that shareholders will be delighted, however, that the board has secured a 60% premium to the share price. The question remains, however, how the other promises being made to employees, suppliers and pensioners can be enforced.”