Public companies should work like this: Shareholders appoint directors to represent them. These voted-in representatives, usually with lots of their own skin in the business, are charged with setting strategy and hiring managers to execute it. All shareholders meet at Annual General Meetings where they hear from their representatives – and decide whether to vote them another term in office. Great in theory isn’t it?
In practice, however, this system of apparent checks and balances rarely exist. Most shareholders haven’t a clue who the company’s directors are, and worse, most of them were never co-owners of the company. This happens because very few shareholders bother to exercise their right to vote. Only a handful ever bother to turn up to AGMs. So directors are part of a ruling elite, chosen by and in alliance with management – serving those they should be directing rather than those they represent.
Our investigations editor Martin Welz has turned up an excellent example of how ridiculous it can get in a piece this morning where he explains how the chair of the TWK board’s audit committee, one HJK Ferreira, is the very same “Piet” Ferreira who, for the last 15 years of Steinhoff’s existence, was its head of mergers and acquisitions. Would the farmers who own TWK have knowingly voted him into such a key role at the CTSE-listed company?
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Such shareholder apathy has an even darker result as Warren Buffett’s 65-year-long business partner Charlie Munger explained from the chair at the AGM of another company this week. The flood of money into index funds means that those who administer these pools on behalf of investors have become the real power players of the corporate world.
Because of the structure of these passive funds, investors give up the voting power of co-ownership. So people like Blackrock CEO Larry Fink swing massively disproportionate weight. And these managers are calling the shots on their own pet issues. Charlie calls Fink and Co “a new bunch of emperors.” In cricket parlance, it’s as though a pencil-wielding scorer starts assuming they’re the team’s star player. Turns the stomach, doesn’t it?
More for you to read today:
- Activist Investor Daniel Loeb Sees Roughly $1 Trillion of Untapped Value in Amazon. Says the market is failing to recognize the full value of Amazon’s two disparate businesses: core e-commerce operations and its Amazon Web Services cloud unit
- Google Plans to Curtail Cross-App Tracking on Android Phones. Alphabet unit to continue support of existing approach for at least two years as it follows Apple in challenging Facebook
- Dow Falls More Than 600 Points, Its Worst Day of 2022. Losses are broad-based, with nine of 11 S&P 500 groups notching declines
PS Register for next week’s webinars – on Wednesday at 6pm (not Tuesday as mentioned yesterday) it’s the post National Budget report from Cape Town. After a day in “lockup” I’ll have plenty to share. Register by clicking here.
Then on Thursday at noon I’ll be back at our Bryanston HQ for the monthly portfolio webinar update which will include the purchase of my third and final tranche of our $10 000 BizNews Shyft portfolio. Exclusively for Premium members. Click here to register.
Charlie Munger Expects Index Funds to Change the World – and Not in a Good Way
Warren Buffett’s business partner says passive funds like those run by BlackRock wield too much power.Â
By Orla McCaffrey of The Wall Street JournalÂ
Charlie Munger doesn’t think Larry Fink should be running the world.
Mr. Munger, the billionaire vice chairman of Berkshire Hathaway Inc. and Warren Buffett’s business partner, said the rise of index funds like those run by Mr. Fink’s BlackRock Inc. has resulted in an “enormous transfer” of the power to sway corporate decision making. That shift will “change the world,” he said, and not for the better.
“We have a new bunch of emperors, and they’re the people who vote the shares in the index funds,” Mr. Munger, 98 years old, said at the annual meeting of Daily Journal Corp. , a publishing company he has chaired since the 1970s. “I think the world of Larry Fink, but I’m not sure I want him to be my emperor.”
BlackRock and Vanguard Inc. are two of the biggest managers of passive investment funds, which track indexes instead of trying to beat the market by picking specific stocks.
The funds have become the default investing option for small investors and large pension funds alike, delivering better returns than many active funds during the market’s decadelong rally. The shift has boosted passive funds’ share of the total ownership base—and corresponding voting power—at many public companies.
The surging popularity of index funds has made their managers the biggest investors in most large stocks. The firms, including BlackRock, have sought to wield that power in ways that have at times made corporate executives uncomfortable. Investment managers have had more sway over important company decisions, including takeovers, the fates of executives and plans for long-term sustainability.
Mr. Fink is an advocate of stakeholder capitalism, the idea that companies have societal obligations that extend beyond maximizing value for shareholders.
“Capitalism has the power to shape society and act as a powerful catalyst for change,” Mr. Fink said in his annual letter to shareholders last month.
Mr. Fink has said the company is committed to a future where all investors have the option to vote their shares. BlackRock in October began allowing certain institutional investors to cast votes tied to their holdings.
BlackRock reported assets under management of more than $10 trillion in the fourth quarter of 2021, a record high. Passive funds manage more than two-thirds of those assets.
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