The Guardian has reported that:
One of Northern Rock's largest shareholders has challenged the bank's board to a public fight over its future at a meeting of investors scheduled for next week.
RAB Capital, the hedge fund which owns almost 7.6% of the bank, said it would attend the extraordinary shareholder's meeting on January 15 to persuade rank and file shareholders they should prevent the board selling its assets "on the cheap" or succumbing to "political pressure".
Apparently RAB chief executive Philip Richards has said
People seem to have ignored the fact that the company remains owned by its shareholders.
I find this pretty offensive. RAB is working with Monaco based SRM Global. And their aim is simple: to exploit the current crisis at Northern Rock to make money at cost to the government, without whom Northern Rock would be bust.
There's only one consolation in this: they are showing how flawed is the model of share ownership being at the core of corporate governance. When, and in this case I think it will be when and not if, people realise that it is the ordinary tax payer of the UK who is being held to ransom by a bunch or exploitative gamblers questions will increasingly be asked about why board representation and ownership status is reserved for control by only one source of finance and one provider of risk equity in business.
Lenders have rights to.
So too do employees.
And so to do long term business suppliers.
All three of these groups normally have much longer term, more constructive, risker and economically important relationships with our largest companies than do the shareholders (or more accurately, the investment managers who represent shareholders). In which case they too need to be represented on boards. They too need to be recognised as users of financial statements. They too need to have power over key decisions.
So thanks RAB and SRM: you're proving the case for corporate reform.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
I disagree.
Philip Richards is correct, the shareholders own Northern Rock. This is the essential truth upon which the markets function.
Let me also point out that there is very little cost to the government here. The loan of some £30bn is not provided by the treasury and hence not derived from tax revenues. Rather the Bank of England is providing liquidity by essentially “printing” the money. This money did not exist until the BofE magic’d it up, hence it appearing on the BofE’s books and not as a line somewhere on the treasuries books.
So technically speaking the tax payer will be paying the cost in terms of inflation, but quite how big the effect will be remains to be seen… I rather suspect it will go undetected next to the inflationary pressures of rising oil, energy, food and etc. prices.
Let us not also forget that Northern Rock is paying a penal rate. So in actual fact the BofE is profiting from Northern Rock (which is borrowing at around +1% over LIBOR) as it continues to repay its debts which let us also not forget are secured (to a degree which itself is the subject to much debate).
Lenders do of-course have rights. However, lenders lend at risk. The risk is reflected in the rate at which the money is lent. Where the sums are large and or the risk deemed high the lender may require the loan to be secured against some asset over which they have claim upon default.
The Bank of England, which is a state owned company, is a lender. In the Northern Rock case the Lender does not gain any control over the Company unless this was agreed up front. The BofE may demand immediate repayment as is its right which would force the company into immediate administration – this is the major piece of leverage the government has.
However Northern Rock has not been nationalisaed, the government is not a shadow director and does not own any golden share.
The Company is owned by the Shareholders. The Shareholders have the right to defend their interests. The directors of the company are required by law to operate in the best interests of the shareholders.
The issue is: RAB, SRM, the UK Share Holders Association and a very large number of retail investors do not believe that the directors are acting in the best interests of the shareholders but rather are being heavily influenced by the government – which via the BofE is ONLY A CREDITOR.
Employee, Supplier and Lender representation on the board you say? It would never work.
Representation of these groups on the board of directors of a company is normally not compatible with directing a companies operations – as the board must act in the best interests of the company and its shareholders which is often to the detriment of one or all of employees/suppliers/lenders.
There are other mechanisms by which employees may gain representation.
Creditors, both suppliers and lenders, are responsible for the risk in dealing with a company. Creditors must act responsibly. Creditors may ask for security, which could take any form – even stock. If they want a say in the running of the company then that might be a way of achieving it – but its their responsibility.
We must be extremely careful when talking about market reform – getting it wrong would be very bad for the UK Economy.
Gerry
You clearly represent the status quo, and the existing power hierarchy, resisting change wherever possible but seeking to control assets for your own benefit.
You argue that the UK government is not exposed on Northern Rock. It will be if the cash is not repaid, in which case your argument is just wrong.
And to say the BofE is just a creditor is just absurd in this case.
As is your rejection of the involvement of others in management. Why would it never work? If it’s only because the board must act only for the shareholders you simply show that you are failing to recognise that this is a faction: companies can never be managed with this sole objective in mind, and if they were they would in any event almost certainly fail.
So please present argument and justification, not simple rejection for the sake of preserving the position of those who control a particular form of wealth.
Richard
I advocate creating a “Northern Rock Partnership” as a framework for a simple solution to the whole fiasco.
This would have the following members:
(a) a “Custodian” – possibly the Northern Rock Foundation, which already owns 15% of the Plc shares;
(b) an “Investor” – which would essentially be a “Club” of investors;
(c) an “Operator” – which would essentially be the existing Plc.
The Treasury would take over the existing Bank of England loans, and any further loans necessary to mop up any more wholesale or retail deposits who wish to exit, after which opportunity all Treasury guarantees would be withdrawn.
All of the interest charged by the Treasury on these loans would – as with the Bank of England minted money referred to above – constitute “seignorage” which is, in the absence of defaults, profit to the “tax payer” either directly (Treasury credits) or indirectly (Bank of England credits).
My proposal is quite simply for this money to go to the “Custodian” as a provision against defaults, where it would rank after the existing Plc equity. The assets currently nominally held (as pointed out by Richard in his first rate expose) by the Down’s Syndrome Association North East, could also be transferred to this Custodian.
The revenues from mortgage loans would be split proportionally between the “Investor” and the “Operator” in a “Capital Partnership” of which there have been several examples notably a deal by the Hilton group.
Such sharing of gross revenues is normal in Canada, where gross revenues are typically split between listed Companies and listed “Income Trusts” which unitise part of their future revenues. Pension funds love Income Trusts because they get their hands on corporate revenues before managements do: they essentially transcend the “principal/agency proble” of all Companies, whether or not “For profit”.
Shareholders would be offered the chance to exchange their conventional equity in the Plc for proportional “equity shares” consisting of (say) “billionths” of Northern Rock gross revenues.
In this Partnership model, the staff would come to be part owner/stakeholders “Operators” alongside the Investors, and their interests would, for the first time, be aligned, unlike in any company structure.
The existing Plc “Equity” and fragmented Debt could be merged into one single asset “unitised” class of “nth’s” in Northern Rock’s Gross revenues.
The solution is not a million miles away from the way in which a listed accountancy firm – Numerica – ran into trouble from which it extracted itself by “partnerising” using an LLP structure.
Such unconventional use of LLP’s is becoming commonplace: one or two people are waking up to the fact that in creating the LLP the UK government may well have rendered conventional Companies pretty much redundant.
Chris
There are still tax and reporting problems in what you propose – but it’s imaginative and with will, possible.
It’s increasingly apparent that the corporate model we have is not fir for purpose. Keep pioneering the alternatives!
Richard
[…] situation will create a conflict between the interests of shareholders and the taxpayer of the sort we have already witnessed. There is only one way to align these interests, to recognise the true gravity of the situation […]