Monday, 19 October 2009

When shareholders’ and company’s interests don’t coincide

What happens when the interests of the shareholders do not coincide with what’s good for the company ? Ordinarily there should not be any conflict – the company should have no interests of its own other than the interests of its shareholders. In the capitalist model, the interests of management or the employees – doesn’t matter; they operate solely to safeguard and promote the interest of the shareholders. But once in a while a situation crops up where its not so clear cut. That’s the position with Carrefour today.

Carrefour is the second largest retailer in the world after Walmart. It is the most international of the retail chains – Walmart for all its successes in the US has not really shone outside. Tesco, another giant retailer is a relative newcomer to the international arena. Carrefour has been the truly successful international retailer – it came to Brazil in 1975 and to China in 1995.

In the peak of the boom, a little while ago, a couple of investors, including some famous names, bought a 13% stake in Carrefour at around Є 50 a share. With the recession, Carrefour’s shares are now at Є 30 a share. They don’t like this , of course, but there’s nothing to suggest that any of this is due to Carrefours’ performance. On the contrary the company is doing OK. Its share price has just been a victim of the global circumstances.

So what do these shareholders want to do ? They want Carrefour to sell off its Latin American and Asian businesses and then pay them a special dividend. They then want Carrefour to withdraw into becoming a European (mainly French) retailer.

Here’s the conflict with the company’s interests. Clearly the strength of Carrefour is its international leadership. In its home markets in Europe, it is plagued by low growth (in France) and poor profitability (most other countries). If it withdraws from Asia and Latin America, then it doesn’t have a real future. In any case, who would want to withdraw from China, if you already have a strong presence there.

There’s an argument to say that however rosy the future may be, if you get a full price for the business, you should sell. In this case, its far from clear how Carrefour would get its full value. The more obvious buyer is Walmart, but its highly unlikely that the Chinese are going to allow this on anti trust grounds. Who’s going to pay the full price ? And is it OK for a bunch of shareholders with an extremely short term motive to cut losses and run, and perhaps harm the company’s future ?

So, is the shareholder always right ? I am not so sure. Perhaps the question should be posed differently. Is it OK for the shareholder to have a sub optimal short term motive, when an alternate long term view is demonstrably superior ? And who should be the judge of this ?


J said...

Very interesting case. Is it really company versus shareholders or is it conflicts of interest among various groups of shareholders - (i)those that bought at 50 versus (ii)those who are buying now at 30 and who want the company to maximize the long run value. Not knowing the details of the case, it is not clear why the select few shareholders believe that selling off the international businesses at something less than the full value is good for them unless they get a disproportional share of the special dividend (dual class shares?). I must read up more on this....

Sandhya Sriram said...

thanks for this thought provoking note.did some reading as suggested by "J". Unlike the economist, certain other sites project this as strategic initiative similar to what carrefour did with Japanese and south korean markets in 2005 - 2006.

As I lack business insight to comment on the same, i am going with your version of short sighted top management.

A strong management accountant can draw up an IRR for any business proposition - whether to expand or converge. Commercials are relevant only upto a point. whether a business grows or sinks is in the insight of the leader. If the leadership has the relevant insights into their business, irrespective of whether they hive off or they expand, they will grow. But if they dont - no way they are going to add value to either their company or their share holders.

It is not making sense. when would i take a short sighted view, only when i a planning a short time exit where i am not bothered about increasing long term share values. so if someone is pushing the management for a short sighted decision, then the intentions are very clear. so why should the management do this for someone who actually is not gonna bear the brunt when they face the consequence of the wrong decision.

Totally confused Ramesh, what is it that i am missing in this entire piece?

mahesh said...

Hi Ramesh,
Blue Capital has been putting a lot of pressure on Carrefour for a long time. Probably corporate raiders? but too small a stake for it - They hold about 12.5% voting rights investing Euro 3.5B.
I am sure if they have to take a vote on this in an EGM they will not succeed due to their small share holding.

Greed of a few shareholders could lead to issue of the company having to cede to their competition and worse it will impact atleast some of the 100,000 employees in LatAm.

Mr Biyani would also be worried for his plans on raising finance as they were in talks with Carrefour to get them to invest in India.

Deepa said...

Haven't really read about this one, but reading your blog reminded me of something I had heard somewhere:

Its unfortunate that sometimes in a democratic arrangement, rational and righteous decisions of a few are kept aside and the irrational ideas of the mobsters are followed, that too for a ridiculous reason that they are more in number!

Ramesh said...

@J - Not sure of the motives exactly, but it may not be purely economic as well as its another French baron who's bought these shares.

@Sandhya - Currently the shareholder holds some 20% of the voting rights and if he musters enough votes, management can do precious little but do what the shareholder says. Irrespective of whether it is long term value creating or not.

@mahesh - they are the single largest shareholder and so cannot be ignored. The man behind this is a big French name, so cannot be ignored either. The Board can argue its case with the other shareholders, but if enough shareholders back Blue Capital's move, there's not much that can be done.
The Indian play is still very small ; I doubt they'll make a big move until FDI is cleared.

@Deepa - We see this many a time in a political democracy ; after all Hitler was a duly elected leader. But in a political system, the Constitution protects some basic stuff. In a corporate there's no such thing - the shareholders can do exactly what they please.

Srivats said...

I guess some systems dont have moral policing and this is one of them. Although i understand your reasons, I am not sure a shareholders part can be as simple as taking money back, ofcourse they would have other reasons, or the wait to see the better future would cost them more. May be this option is inevitable. Even shareholders are here to make money like everyone else, isnt ?

Kiwibloke said...

Gosh! we had SOX and SOX like things come in for reining in managements taking shareholders for a ride (and whether they worked or not is a different story - Ramesh will please post something on that story?). Now do we get any thing to protect mom and pop shareholders from 'activist' shareholders? who is the lamb, who is the lion?

Ramesh said...

@kiwi - not at all sure which animal is which in this jungle - lambs, lions, bulls, bears - and all of them change spots.

Can't write about Sox you know, too close to home ....

Srivats said...

you forgot (me ) I am reading the comments section too :)

Srivats said...

or was it too lame to reply too :) thats possible!

Ramesh said...

@Sri - Sorry Sri - personal apology on its way by e mail.

There is no moral pilicing at all in business, except public opinion. But for public opinion, I am convinced businesses will be no better than robber barons. My problem with this class of shareholders is should short term self interest of the most blatant sort, be allowed to rule unchallenged.

Srivats said...

Ramesh :)

Thats kind of you, thanks!

well the reason I read your reply is quite simple , I no very less about business, actually make it to nothing hehe :) so if I just double check from your replies whether my comment made any sense and that I actually learnt something out of it :)

In fact thanks to you I am reading more business news than before. I just let my financial advisor do the stuff and go by what he says :)

Ramesh said...

Sri - you have a financial advisor ??? Wow, your portfolio must be worth millions and here I am giving gyan :-)

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