Number of words: 430

The shareholders are remote licensers. They get a cut of any profits and in return they licence the managers to do as they please with the assets. More: they let managers do what they like (apart from outright theft) with the value of the shares. If the management longs to dilute those famous earnings per share by some over-priced acquisition, the shareholder can seldom kill the deal. And if the management wants to change the entire business of the company, the shareholder is expected to sit tight and watch, clapping loudly.

The tobacco companies, faced with evidence that they were merchants of death, could have taken their profits, remitted the maximum loot to the shareholders for so long as the going was good, and then folded into graceful liquidation. No law ordains that American Brands (née Tobacco) or Imperial Tobacco must be preserved in either aspic or perpetuity. Yet the managers (who would otherwise have liquidated themselves out of a good job) proceeded to act as if in slavish obedience to such a law. At all costs, the corporate entity must be perpetuated. So the Imperial shareholders, like it or not, were swiftly translated from owning a lucrative cigarette manufacturer, with minor diversified interests, to possessing a notably unprofitable food group with major tobacco interests. Disgruntled giants all over the world have found it difficult to resist the sight of food. Along the way the giants’ shareholders have been forced by the managers to pay prices for independent provision merchants which made the latter positively drool.

Management’s liberties are guaranteed by the weakness, apathy and ignorance of shareholders, by their lack of time to harass bad managers and by the shareholder’s perpetual freedom, if disenchanted, to vote with his flat feet by selling out. However, not all shareholders are weak, apathetic and ignorant: at least, they shouldn’t be. The manager’s real masters are the institutions: the mutual funds, insurance companies, pension funds and unit trusts which control the dominating chunks of share capitals; the banks which hand over short-term finance; the investment banks and merchant banks which are pipe- lines to the long-suffering investing public. These solid citizens are not always shareholders – the banks in Britain and the US do not, as in Europe, own industry. But in several respects, the banks’ interests are no different from the shareholders’, individual or institutional: since they want their booty back, the banks – like the shareholders – need to ensure that inefficient management doesn’t drain or dribble the money away.

Excerpted from pages 29-30 of ‘The Naked Manager’ by Robert Heller