Share Power: a manifesto for giving control back to private investors
A new book by MoneyWeek editor Merryn Somerset Webb argues we can assert agency over companies through truly representative share ownership
Since the banking crisis the rumbling dissatisfaction with capitalism that always contributes to the ambience of our political and economic debates has grown louder than at any time since the 1970s.
There is widespread frustration that we lack agency over the system in which we must make our lives: a sense of a global juggernaut thundering ahead according to its own logics, escaping the influence of elected governments, splintering societies through widening, vertiginous inequalities, ensnaring us in the machinery of social media, and destabilising the planet’s climate through its chronic dependence on fossil fuels. Emboldened political movements on the right and the left seek to ‘take back control’, through populist nationalisms on the one side, or bringing broad swathes of the private sector into public ownership on the other.
In her short, sharp polemic Share Power: How ordinary people can change the way that capitalism works — and make money too, MoneyWeek editor and Financial Times commentator Merryn Somerset Webb argues that capitalism itself offers the resources for giving us a good measure of the control we want, through the mechanism of share ownership. If enough of us own shares in listed companies, and in many countries, notably the UK, we do, we can use our voting rights to shape corporate strategies. We don’t need to re-make our economic system: we can re-engineer the one we have to release the latent power of mass share ownership.
The long road to ‘popular capitalism’
The book’s opening chapters chart initiatives by successive governments over the past few decades to widen share ownership. The Thatcher and Reagan administrations of the 1980s took the first steps, inspired by visions of ‘popular capitalism’ and ‘property-owning democracies’. In the US employees were enrolled in 401(k) pension savings schemes powered by equities. The UK’s privatisation programme encouraged many to acquire share holdings in former public companies such as BT and British Gas, and through the 1980s and 90s the number of UK shareholders rose from three million to nine million people, about 15% of the population. The introduction of ISAs and SIPPs allowing tax-free holdings of stocks and shares was a further step: 11 million people now own stocks and shares ISAs, and two million manage their own pensions through SIPPs.
But for Somerset Webb the breakthrough innovation is the UK’s pension auto-enrolment framework, covering everyone in work earning more than £10,000 and over 22 years olds. When rolled out last year the scheme increased the number of workplace pension holders from 46% to 80%, quietly making nearly all British workers share owners, even if many do not realise it.
More and more do, however: retail investment has surged over the last few years. The pandemic gave people more time, and in many cases savings, to start picking their own stocks and funds. Cryptocurrencies and meme stocks seemed to open opportunities for quick returns. And accessible investment platforms have made the business of trading stocks and shares much easier. Retail activity accounted for 20 to 25% of the market in the first quarter of 2021, more than double the proportion in 2019, and more than all hedge funds combined. The average age of new investors is falling, in Hargreaves Lansdown’s case from 45 to 37. And it seems to be more than a passing fashion: a Barclays poll in July 2021 reported that more than three quarters of UK investors said they intended to stay in the market. Analysis from the Freetrade platform found that seven out of 10 of the top holdings of younger investors were longer term investments in ETFs or index funds.
Delegating our money
For Somerset Webb these shifting dynamics promise to give us the agency we say we want: the power through shareholder resolutions to bring executive pay under control, to distribute corporate rewards more fairly, to ensure wider representation on boards, to secure employee rights, to facilitate clean supply chains, and to oblige companies to set and honour climate change pledges. ‘The transformation of capitalism’, she says, ‘is technically at least — within our gift.’
Technically. Although more of us own shares, the nature of share ownership has changed, making it more difficult to turn ownership into influence. In the past owners tended to hold shares directly in companies. 50 years ago more than half of UK shares were held by individuals, who had opportunities to have their say — through regular communications with executives and attendance at general meetings — that present day holders have lost, or never had. Today only 13.5% of UK shares are individually owned. And we tend to purchase funds rather than individual stocks, holding units in the funds rather than owning shares directly. In effect, we delegate our voting rights to fund managers — in Somerset Webb’s observation ‘a small group of very well-paid, mostly group-thinking men’ — entrusted to represent our concerns to the managers of the companies we own.
Indeed, investors are handing their money to an ever more select band of funds. In 1960 big US institutions owned about a third of the shares on Wall Street. Now it is more like 80%. Some 100 asset managers are entrusted with the oversight of about a third of the world’s invested capital. The ‘Big Three’, BlackRock, Vanguard and State Street, control 80% of all the assets under management in the US, and one third of all assets managed worldwide. Today, we have managerial rather than shareholder capitalism.
There is another intermediary between us and the companies we ostensibly own: the digital investment platforms — like Interactive Investor or Hargreaves Lansdown — through which most of us hold our shares. We may get our dividends and capital gains, but the platforms are the technical owners. That means it is unclear how we should, or whether we can, access the other rights share ownership is supposed to grant, such as the right to participate at AGMs, file resolutions, and vote on them.
All of which leaves us dependent on the willingness — and capacity — of these intermediaries to act on our behalf. And for many in the fund management industry, unsurprisingly, that is just how things should be. In the same way that we entrust policy-making to elected representatives, we select fund managers to steward our financial assets. They, it is argued, have the time and expertise to effectively hold companies to account, and the concentration of power in the biggest institutions gives them the clout necessary to exercise meaningful influence over today’s giant corporations.
For Somerset Webb this paternalism — ‘The fund manager as enforcer and Larry Fink as God’ — is not good enough. True share ownership invests the power and responsibility to hold companies to account in each individuals: ‘Knowledge of ownership leads to engagement. The more we engage, the more we feel like owners.’ The big fund managers have shown themselves to be unwilling and — despite their size — unable to monitor the thousands of companies they hold on our behalf, leaving effective corporate power in the hands of board directors.
Against stakeholder capitalism
Somerset Webb takes a bold stance against stakeholder capitalism. In a proper shareholding democracy there is no ‘them’ and ‘us’, no division between owners and shareholders: ‘We are all customers, employees or suppliers in one way or another — and we are also mostly owners.’ Going against prevailing opinion she likes the simplicity of Milton Friedman’s seminal 1970 New York Times article, in which he argued that a company’s only formal purpose should be to make profits for its shareholders. For Friedman this simple metric puts shareholders in charge, holding directors’ ‘feet to the fire with one set target that we know benefits all owners and pseudo-owners alike — money’. Businesses need to respect the standards we set to survive. We don’t need to redefine the purpose of corporations, or rely on fund managers to hold them to account. Shareholders can do so perfectly well if they are given the tools they need. Given sufficient power they can secure the objectives desired by advocates of stakeholder capitalism. Close shareholder scrutiny might have helped identify the overreaching that led to banking crisis. It would restrain runaway CEO pay. Commitments to clean supply chains and net zero targets would be enforced. There might also be less short-termist focus on perpetual mergers and takeovers.
Somerset Webb believes new technology can bridge the gap between investors and their shares, making it possible for investment platforms and funds to expose listed companies to their true owners. There are some encouraging signs. Interactive Investor, for example, automatically enrols clients into a system letting them vote on company resolutions. BlackRock now allows asset managers (though not individual shareholders) holding its funds to vote, proof of concept at least that voting rights can be passed down the ownership hierarchy.
But Somerset Webb’s ideal is exemplified by a recent partnership between voter choice software firm Tumelo and fund managers Legal & General Investment Management (LGIM). ‘Using Tumelo’s software,’ she writes, ‘the agreement effectively allows 52,000 investors with LGIM to visit the LGIM site, look at a list of all the companies they hold via their funds and also see what shareholder votes are coming up for those companies. They can see the arguments for both sides and then share how they would like to use their vote … They then get to see how other investors would vote, how LGIM does vote and the final outcome of the vote.’ Again, this is work in progress. The votes cast are advisory, not binding, and, in LGIM’s words, have ‘no direct impact on the vote indications set by LGIM’s stewardship team’. But otherwise this is exactly what Somerset Webb has in mind, a simple framework through which individual investors can view resolutions and cast votes, rendering the companies in which they hold shares accountable. When things are made this easy, she says, shareholders will get involved: LGIM reported that some 6,000 investors voted once and that a good 50% had returned to vote again.
Tech can bring investors and companies closer together in other ways. The pandemic obliged companies to bring their AGMs online, an innovation that has now become established, opening access to meetings to investors who would be otherwise unable to attend. And it is becoming easier for private individuals to participate in IPOs, long dominated by institutional investors, through initiatives like Primary Bid, and app that sends users push notifications when offerings are underway, putting them on a level footing with funds.
Necessary — and sufficient?
Share Power sets out an elegant, concise argument, expressed with the clarity Somerset Webb has honed as an experienced financial journalist. It is eminently pragmatic, going with the grain of the prevailing economic system rather than seeking its radical reform, identifying capitalism’s own resources for addressing our discontent.
She anticipates the principal objections to her case, most obviously, perhaps, the question of whether investors would indeed take up new opportunities to participate in company decision-making. Belief in share power is to some unknown degree a matter faith. She herself notes that only a quarter of Interactive Investor clients have signed up to use the votes the platform is granting them, and only 8% of all customers have voted on anything at all. Once participative technology is more extensive, and better established, investors may indeed take it up. We don’t yet know.
A more profound conundrum, perhaps, is the long term tendency of companies not to list at all. Shareholder capitalism, of course, depends on companies going public in the first place. Today, many promising new starts take advantage of cheap private equity when growing, rather than subject themselves to the onerous process of listing to raise funds, with the obligation thereafter to fulfil the bureaucratic requirements incumbent on a listed company. In 2018 compares raised five times more capital through private equity than going public. Again, Somerset Webb acknowledges the issue, and recounts various ways regulators are working to make the process of going public more attractive. The LSE, for example, is to allow founders to retain special voting rights when bringing their companies to market. And new rules could be introduced to tighten the ease with which companies can take out debt with private equity.
She considers whether companies are evolving to require less capital than in the past, noting John Kay’s observation that modern corporations are increasingly defined by what they do than what they own, their value consisting in ‘problem-solving abilities founded on accumulated knowledge and experience — some codified, some tacit — and embedded in the social relationships that, taken as a whole, define the corporation’. But she thinks that though that may be true of many knowledge-based tech start-ups able to snap together infrastructures through digital components, the world still needs companies grounded in the material world. The energy transition, for example, requires natural resources, and lots of them: ‘[T]hink of the energy, transport and cement required for the green revolution … and the strategic metals companies we need to build the mines to produce the materials we need to run the intangible economy.’
Shareholder power might be considered a necessary though insufficient condition for channeling the market’s wealth generating capacity. Running to just over 200 novella-sized pages Somerset Webb’s book is not designed to explore other ways of asserting public agency over markets. For example, there is much interesting thought today imagining new forms of common and democratic ownership that might make the fast-evolving digital technologies and platforms that increasingly shape our lives work for the collective good, or fresh possibilities for public utilities that might expedite a just and timely energy transition. The state will be critical to shaping the infrastructure of the emerging 21st century sustainable economy, just as it was to the development of railways and road networks, land and natural resources, water and electricity utilities, and banking and postal services in the last century.
But millions of engaged and demanding shareholders also have a role to play. With Share Power Merryn Somerset Webb gives us a blueprint for how that popular energy might break through.
Share Power: How ordinary people can change the way that capitalism works — and make money too is published by Short Books. Photo by Mikel Parera on Unsplash.