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Gary Wright

Gary Wright

Gary Wright - BISS Research

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Use it or Lose it

15 April 2011  |  3259 views  |  3

A recent article in the Evening Standard highlighted Terry Smith, Chief Executive of Tullett Prebon concerns about the Financial Services Industry's ability to provide investors with protection and value for their investments. Smith focused particularly on share buy-backs, this is where a company uses its capital to buy back its shares. This has the effect of artificially inflating earnings per share. Great for the company and advisors but with no dividends paid, what's in it for the shareholders?

Of course shareholders can vote down any board resolution to undertake a share buy-back but this does not appear to happen very often. Why?

I too have been bleating for some time about shareholder democracy and how shareholders seem reluctant or ambivalent to use their votes at AGMs to protect their interests.

Terry Smith has pointed out a very real example of where shareholders seem happy to act like sheep and allow firms to lead them by the nose away from what is in their real interest. Is it lack of knowledge or just a clever sales pitch that is fooling the shareholders?

Why doesn't the Regulator take a closer look to examine and question Corporate Events like share buy-backs to see if they really are in the shareholders best interest?

Comments: (6)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 18 April, 2011, 10:56

Increase in EPS generally boosts share price regardless of whether it came about via share buyback or some other means. More than lack of knowledge or clever sales pitch, this fact could could explain why most shareholders choose the "do nothing" option and let company managements push through motions for share buybacks. 

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A Finextra member
A Finextra member | 18 April, 2011, 11:19

Thanks for the comment. It appears that investors need far more educating by the company and the FS industry on what are their rights. The current situation should not be allowed to persist in a democratic society where corporate can be brought under more control if only investors would

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 18 April, 2011, 12:12

I agree that more investor education will help. However, the key questions are:

  1. How many investors have the time and inclination to undergo such education, especially when many of them - including me! - don't even bother to spare the time to read shareholder announcements or submit proxy votes, let alone attend AGMs in person?
  2. Is the company, or even the FS industry, the right entity to impart such education? Regulators might fit the role better. 

Personally, I believe that investors - including institutional shareholders - should let the company's executives do what's best for customers, employees, suppliers and other stakeholders including shareholders. If they are not satisfied with the results, they can always go to the stockmarkets. Given that executive compensation in most corporates is linked to stock price performance, investors' ability to hammer down a company's stock price bestows them with a good control over corporates.

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A Finextra member
A Finextra member | 18 April, 2011, 12:52

Thanks for your comment

I am not sure regulators know enough or have the desire to educate investors. Its more generic to inform or keep confirming to investors that they have rights and should use them. For example dont moan about Banking remuneration if you dont use your vote at the AGM

There is power in this capital society for the investor but if they not interested in using it than that their own fault. The old saying you can lead the horse to water but cant make it drink suits this scenario

I do however feel that it is in the Corporate Governance area where Companies have a greater responsibility to inform the investor in simple and understanable terms and language what their rights are and what they should do to protect them 

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 18 April, 2011, 13:44

I agree that investors would like corporates to explain things in simple and understandable terms. As to how feasible that is, let me point to this NPR article according to which (1) Jargon is inevitable in contracts, and (2) Contracts would become 2-3X longer by avoiding legalese. Although this article refers specifically to credit card agreements, I don't think it's too far off the ballpark in our current context of investor rights, responsibilities and other elements of corporate governance.   

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A Finextra member
A Finextra member | 18 April, 2011, 14:07

Than you for this

It sounds like we are on the same wave lengthe

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CEO of B.I.S.S. Research, founder of the BISS Independent Accreditation for all systems and services provided to financial services companies internationally. Guest Lecturer at Reading University and...

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