Introduction

This article has a simple starting point. The majority of the shares in most of our large companies are owned by pension and life insurance companies which represent millions of people. This means that the 'commanding heights of the economy' are not owned by a small class

But it also presents some policy challenges. For many years the left-ofcentre has tended to think of the owners of business as being the opposition. Business was to be regulated, even nationalised, to ensure that it fulfilled a social purpose. However, if collectively we are the co-owners of the world's largest companies, a different approach is necessary. Business can be channelled to social purpose not principally by being commandeered or regulated, but by being made properly accountable to its citizen owners. But how can we possibly make thousands of companies accountable to millions of owners? How can this be made to work when the casino capitalism of Wall Street and the City seems so influential?

Those are the subjects covered in The New Capitalists (Davis, Lukomnik and Pitt-Watson, 2006). For some, like Robert Peston, the BBC Business editor, the book 'offers hope that global capitalism can be made democratically accountable'. For others, like John Monks, its ideas represent a roadmap, and 'no-one who seeks to influence company behaviour should be without it'.

In this article we will try to summarise some of the arguments made in the book. First, we explore what this new form of ownership, once dubbed 'pension fund socialism', should mean for the way in which companies are run. Second, we try to identify the institutions which can influence company behaviour. Third, we spell out what actions we can take, as individuals, as savers, as trade unionists and as policy-makers, to ensure companies act in a way which is positive, both financially and socially. Finally this article describes how a 'civil economy' might mirror in the economic sphere the 'civil society' which we have built in the political sphere.

Lies, damn lies and statistics

Can it really be true that collective investment schemes own the majority share of our largest companies? Surely the statistics suggest that wealth is much more concentrated. Well yes, 'marketable' wealth is highly concentrated. But pension savings are not 'marketable'. Of course, wealthy people have higher pensions, but most are invested in collective schemes which owe the same duties to all their members. A trustee of a pension fund owes equal duties to the richest and the poorest of its beneficiaries.

The biggest block shareholder in the UK stock market is not the Queen or Richard Branson, it is the British Telecom pension scheme (BTPS), representing hundreds of thousands of workers. And it's not just British investors which own British companies. Investors are diversified across the globe. More than 30 per cent of the shares on the London Stock Exchange are owned by foreign investors--most of them, like BTPS, representing the savings of working families.

Let's not get too carried away. There are many among us who have no savings and no pensions. Typically they have not been in paid employment or, where they have, they did not enjoy union representation capable of securing retirement benefits. Nevertheless it is estimated that about two-thirds of the adult population have direct or indirect savings invested in company shares. Most of us, in other words, are not just citizens, consumers and workers. We are also owners of the capital on which UK plc depends.

A new take on shareholder value

By law, companies should be run in the interests of their shareowners. Now in the past it was fairly easy to work out what the owners wanted. You simply asked them. In fact many of them would have sat on the board to ensure their interests were properly looked after. But if you have the greater part of the adult population as your shareowner, how should a company direct its operations?

Here are some rules. First, a company should be profitable. Why? Because that is the reason we have invested our pension savings in its shares. If there is no profit there will be no pension. Second, it should be long term in its perspective, for the same reason. That in turn suggests a different way of treating workers and suppliers. A company with common owners should not behave in a way which is socially destructive or unsustainable, because if it does so, it will simply be impoverishing the very shareholders it is duty bound to serve. If competitive pressures encourage it to behave badly, it should lobby for regulations to stop this happening.

Most company chief executives will repeat as a mantra that their aim is to create value for their shareholders. Many on the left respond by saying that this is too narrow a goal (though often they offer few practical suggestions for an alternative measurable target). But if we are all shareholders, the grounds of debate are radically altered. We can open a new discussion with business. We can now accept shareholder value as the goal, recognising that this requires companies to take a broader view of who their shareholders are, and hence what duties are entailed by shareholder value.

'The reward', as James Wolfensohn former head of the World Bank has said, 'is nothing less than to make globalisation safe for both profit and social equity'.

But none of this is going to happen unless there are fundamental changes in the behaviour of those to whom we entrust our savings, and who are our agents in ensuring companies behave properly.

No-one ever washed a rented car

The problem with the current way in which companies are made accountable is that we all own a very small slice of literally hundreds of companies, all over the world. Indeed the average pension fund claimant probably won't even know the names of many of the companies in which his or her savings are invested. Each of us can't be the good owner of every company.

But then, each of us can't run every aspect of the government, either. We appoint representatives to do it for us. In much the same way, we delegate our savings to pension funds who, in turn, distribute these assets to fund managers. So it's essential that pension funds demand that fund managers behave as owners. Right now, they don't. In fact the job given to most fund managers is to 'outperform' the average by buying and selling shares. Essentially, the stock exchanges of the world allow people to trade our shares. Our fund managers are not the wise owners of companies, but professionals involved in a sophisticated crap shoot with our money. If they discover something going wrong with a company, they simply sell the shares.

Things don't need to be like that. In fact, if the pension trustees of Britain were to get together they could have an enormous influence. Just look at what individual funds have achieved. The university fund, USS, was responsible for inspiring the United Nations Principles for Responsible Investment. The BT Fund has set up a special unit, now the largest in the world, which has been responsible for helping turn around dozens of companies (and has made rather a lot of money for its pensioners as a result).

Too often the left despairs of how it can influence the investment process. Here is Roy Hattersley quoting Richard Titmuss on the effect of pensions investment. He says, it has resulted in 'power concentrated in relatively few hands working at the apex of a handful of giant bureaucracies ... accountable in practice to no-one'. And pension plans with their immense sums to invest, have, because of their preoccupation with short-term results, adversely affected 'the whole future of industries, cities and communities without being answerable to anyone'.

Except they are now becoming answerable. Each pension fund has its own trustees, of whom, thanks to Labour government legislation, half must be representatives of the beneficiaries. The trade unions usually provide those trustees. So it's simply not the case that the world of investment needs to be unaccountable. If we want to change things, we now have the power to do so, as USS and BTPS have proved.

A similar observation is true of company boards of directors. In the early 1990s the process of boardroom appointment was less exacting than that of a checkout clerk at Tesco. It was ratified by scarcely one in five of the shares. Today, reforms encouraged by the government mean British boards are more rigorously chosen and approved than in most other countries in the world. Typically 60 per cent of shares are voted.

So in theory we, the share owners, can influence companies. But the task is not easy, for a number of reasons. First, because there is an enormous set of vested interests which benefit from keeping things as they are. Currently, they are under little pressure to change. One eminent fund manager declared that he would love to put more resources into ensuring that companies are run to create long term sustainable value, but none of his (pension fund) clients had ever asked him to do so. If we don't ask we won't get.

But there is a second reason that the left, in particular, may feel uncomfortable with this agenda. For a long time it has felt able simply to criticise the conduct of business. The left is rightly the supporter of the weak in society, the workers at the bottom of the pile. When they are disadvantaged, there is a natural tendency to blame it on the economic system, but not to offer much of an alternative. The new era of universal ownership requires a fresh perspective, and modern responsibilities. We need to behave as owners, responsible for business conduct. We need to insist on corporate social responsibility, while at the same time demanding high profitability. If we are to be the trustees of the nation's savings we need to show that we are exercised about poor business practice because it undermines the profits due to pension funds, not just because it damages broader social goals. To argue just for social goals, while ignoring financial ones, is as credible as a trade unionist arguing for health, safety and employment rights while ignoring pay levels. The left needs to be confident in arguing that pensioners' profits are damaged by sloppy management, ill-conceived acquisitions, or unjustified remuneration.

What now?

There is a poster aimed at encouraging people to register for the vote. It says 'No vote, no voice, no excuse'. Those sentiments in the political sphere are equally important in the economic world. If we don't encourage our pension trustees and fund managers to behave as owners, they simply won't do so. So here is one simple suggestion; send an email to your pension trustees asking them how they deal with ownership issues; ask them to keep you informed of what they are up to. Better still, if you belong to a trade union and you're all in the same pension scheme, write a joint letter.

Of course, if we all work and organise together we can be much more influential. Take the Teamsters campaign to stop anti-union practices by US subsidiaries of First Group, a UK company. The union persuaded the funds invested in First Group (who were representing the savings of working people) to ask the board to put in place an even-handed policy. That they have done. But in North America, the trade unions have scores of people devoted to pension scheme activism. In the UK we have scarcely two or three for the whole country.

Or how about a Compass network? Here are some of the issues Compass members might like to take forward:

-- For those worried about executive pay. In the UK all executive pay schemes are subject to an annual shareholder vote. Ask your fund manager how many executive pay schemes they have approved. How many they vote against. Why? What inflation in pay do they think is acceptable?

-- For those worried about the protection of pension savings. Millions have been lost to savers through ill-considered acquisitions. These come in waves, and it appears we are about to hit a new one. Ask your pension trustees and fund managers what they are doing to protect your savings from company boards who seem more interested in empire building than in solid, long term profitability.

-- For environmentalists. In general, UK companies have a good record in promoting appropriate environmental legislation. ExxonMobil does not. You are likely to be a shareholder in Exxon. Ask your fund manager to tell you whether they think Exxon's contributions to groups which reject the science of climate change is in the company's shareholders' interest. If not, what are those fund managers doing about it?

There are a few reflections one might have about this list. First, it could readily be extended. Second, if we worked together we could have a significant impact on the behaviour of the companies we own. But finally, none of the issues above are susceptible to a perfect solution. We simply aren't going to get everyone to agree on levels of pay, or what constitutes a sensible acquisition, or appropriate environmental responsibility.

But that is no different than any issue in politics. We do not expect our government to be perfect. But we do expect that the checks and balances of civil society will keep it in line. That is why we value democracy, rule of law, separation of powers and freedom of speech.

Today we have many of the tools we need to build an economic equivalent of civil society. We call it a 'civil economy'. In it, companies, through their boards of directors, are made accountable to the agents of the 'citizen owner'. In it, the proper information necessary to ensure the integrity of our savings is supplied by independent adjudicators and auditors.

We may not be able to build a utopia, where all economic decisions are the right ones. But we can make capitalism much more accountable, and in doing so make it more efficient and just, and its outputs more sustainable. The money which circulates in the global economy is our money. The companies it owns are our companies. How and whether the civil economy develops is ultimately up to us.

As in politics, so in capital: no vote, no voice, no excuse.

Stephen Davis is president of Davis Global Advisers, Inc., the world's leading adviser on international corporate governance. Jon Lukomnik is the managing partner of Sinclair Capital LLC and former deputy comptroller of New York City, where he managed $80 billion in assets. David Pitt-Watson is the former chief executive of Hermes Focus Asset Management (HFAM), Europe's leading shareholder activist fund manager.

This article reviews some of the radical new ideas in a new book by Stephen Davis, John Lukomnik and David Pitt-Watson, entitled The New Capitalists (2006). Compass has secured an arrangement whereby its members can receive the book at a 35 per cent discount from http://mcgrawhill.co.uk/newcapitalist/.

Reference

Davis, S., Lukomnik, J. and Pitt-Watson, D. (2006), The New Capitalists: how citizen investors are reshaping the corporate agenda, Boston, MA, Harvard Business School Press.