Why You Should Feel Sorry for M&S's Shareholders

(MoneyWatch) 
The media has widely reported the shareholders as 'revolting' against executive pay proposals at Tesco. Burberry, British Land and Sainsbury are also predicted to face shareholder objections, although expectations that Marks and Spencer shareholders would refuse Marc Bolland his ?£15m proved unfounded even if they described the new CEO's pay as "obscene".

But how can shareholders revolt when they own the company? They'd be revolting against themselves. Instead of Marx's prediction of workers rising up against capitalists, we have the exploited shareholders rising up in against evil employees -- or at least the top employees -- who seem willing to gouge the company for as much as they can get.

Adam Smith was closer to the truth than Marx. He predicted the problem of large companies and absentee shareholders over 200 years ago:

"The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own .... Negligence and profusion, therefore, must always prevail, more or less in the management of the affairs of such a company."
This is the agency problem: the agents (managers) seize power from the principals (shareholders) where the shareholders are absent. If your pension fund owns shares in Tesco, you are very absent and very powerless compared to the CEO of Tesco.

This problem is getting worse, not better. Banks and most professional services firms are run for the benefit of the top staff first: shareholders get scraps from the table after the bonuses have been handed out.

And the law is adding to the problem: pension funding comes before shareholders' rights by law now. Diageo had to pledge its whiskey stocks to plug its pension deficit. Good for pensioners and existing staff, not so good for shareholders. And that is before we get onto the taxman, who has been raiding pensions as hard as possible.

Does it matter that shareholders are getting screwed? After all, aren't they just rich capitalists? If you have a funded pension, or any savings you should be worried.

In the last 10 years, the stockmarket has declined by nearly 25 percent. That is exceptionally bad. Some of it is down to exceptional circumstances. But there is a lingering suspicion that shareholding has been made into a mug's game.

So what are the options? Saving with your bank (0.5 percent interest, if you are lucky); save through government bonds (anyone for Greek or Icelandic bonds?)

Or perhaps it is time to buy into the gold or property bubbles just before they burst. Maybe it is time for Wat Tyler to return and lead a real shareholders revolt. But if my memory serves me right, both he and the peasants came to a very sticky end.

(Photo: Medmoiselle T, CC2.0)