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The era of investor activism

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We are entering an era of investor activism. There are at least three broad shifts that will compel investors to enter the market as more than merely consumers.

First, the failure of free markets to live up to claims made on their behalf. Milton Friedman and his mentor Freidrich Hayek told us that the market was free and fully rational. It turned out to be neither. The debacles of Russia and Argentina showed the folly of the first claim. Long tails and speculative bubbles put paid to the second.

Second, the growing realisation that central control cannot keep the City in check. Freidman and Hayek were right about this. Regulation, the product of a few bounded rationalities, can never out-perform the multiple mind of the market.

This second point is relevant to the current political situation. As the fall-out from the sub-prime affair continues, we are bound to get more and more calls for regulation. This is not necessarily a bad thing. Some regulation can be beneficial. But we would be kidding ourselves if we believed that regulation was the final answer.

The City is the very crucible of innovation. The men and women there, incentivised to create, will always be one step ahead of the regulators. As Michael Lewis describes in his book Liar’s Poker, mortgages were first packaged up and sold as bonds by a trader at Salomon Brothers, looking to steal a march on his rivals. It was a minor innovation that became a way of doing business. An army of independent watchdogs could not have stopped it.

The third reason for the rise in investor activism I pointed out yesterday. It is the catalogue of mismanagement attributable to that once-storied British institution, the joint stock company.

What does the rise of investor activism mean for companies?

In his recent RSA lecture, marking the launch of our project Tomorrow’s Investor, David Pitt-Watson heralded the arrival of the new regime.

Companies, however, can be excused if they are not so sanguine. They need to distinguish between engaged activist investors, who may tell them uncomfortable truths they don't want to hear but have the long-term interests of the company at heart, and 'drive-by activists', who may whisper seductive tales of optimising shareholder value but whose real interest is in extracting cash from the company now, even if that leaves it debilitated and unable to cope with tough times in the future.

Investor activism can also be tricky ethically. Hugh Fearnley-Whittingstall’s attempt to improve the lives of Tesco chickens, for example, splits people down the middle. We discussed this at the Tomorrow’s Investor deliberative forum; about half the participants supported the “rights” of chickens, half the “right” to cheap food. There are no easy answers on ethical questions.

One way to get around - or at least ameliorate - this issue is to have broad participation from across the population. Then, hopefully, companies will behave in the interest of the many, rather than the few.

This more general citizen activism is what we are currently investigating in our Tomorrow’s Investor project. Check out the web page for more details.

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  • Obama – America’s Reflection of Itself

    Yes, I too was extremely proud to see a “Black Family” poised to move into the “White House” however, after two days, it dawned on me that what was happening was America getting ready to embrace its “lesser-self”.
    What does this mean?

    In light of the election, in light of Obama’s great victory, in light of the media excitement comes the reality that America has recoiled. In the coming age of the BRICS (Brazil, Russia, India, China, South Africa), in the coming age of developing countries and new markets especially in the Middle East, America is no longer the centre rather, it is accepting that it will have to reorganise and reprioritise itself to survive to remain in the New World Order power circle. Already it has become apparent that China will play a big role in its energy and trade outlook. Gordon Brown’s trip to the Middle East has also highlighted the diversification and interesting dynamic position which Obama will be placing America in.

    The acceptance became clear in Obama’s campaign; “Yes we can”. Ok, America you can, you will come out looking strong initially, however, the true nature of your strength will come in the next three years when you will have to face serious questions and make decisions about internal energy diversification (i.e. will it begin to look at the Brazil Model), Nuclear proliferation as the rise of the BRICS continue, international duty militarily.

    What does this mean for the world? Leverage on key world issues is changing. One only has to look at the situation in Sudan for instance to understand that it is the Chinese and not American intervention that will change the course of that region. In the Eastern Block of Europe, Russia is becoming more bullish in its strength as they begin to build on the leverage and relations they have had for years with countries considered less until now. In the Middle East, the money is clearly speaking shouting more loudly than everything else.

    Yes, Obama can inspire, but ultimately he is going to convey and help America confront with its demons of regression. America has decided to step back and look inward once again to begin a process of internal rebuilding of what it represents in the approaching World which will see China and India rise, United Europe economically as a concept gain more attention, Russia taken dead serious and developing countries as viable places to invest in.

    Yes, change has come, transformative leadership is here for America, it is here for them to realise that the head of the world stage is soon going to become a crowded platform! My only worry is that on issues like the environment, aid and international development, trade; is it too late for the new administration in America to begin to influence the emerging powers on their current conduct and outlooks in these matters?

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