This may come across as a rant, but it's something I'm fascinated in mainly from how it has been allowed to evolve. I'm going to make my point with evidence, and would be grateful if those that disagree or wish to extend it provide evidence in the same way.
Facts:
Shareholders own the company.
Directors run it on behalf and for the benefit of the shareholders.
Assumptions: Shareholders care about long term returns. This is the first part of where I disagree. Say I was a long time employee in HP. I loved the company, worked there forever and retired, believed in it and the future and so had bought a good chunk of shares. Not necessarily all my eggs in one basket kind of thing, but still a large amount. I'm retired, and rely on my pension investment to live, (risk averse).
Now some guy who wants to make a name for himself decides to do a move that drops the share price 20% in the short term, for a chance of a longer term gain. Now that really fucks me up. Because my pension isn't likely to be here in the long run he's thinking of, or if it is, it's not much use to me. A huge % of the wealth in this world belongs to the aged generation, so I dont believe my situation presented is an unrealistic one. Don't forget that % of wealth relates to an even higher % of disposable, invested funds.
The people that made the decision, are directors, and while they do have a stake in the company as well, they gain considerably more upside that I do, and less downside (risk seeker). Since if it works for them, they take huge paypacket, and if it fails, one of them quits, and we know how fast the industry forgets about failure (LTCM wherearetheynow).
Since I am risk averse, and the directors are risk seekers, our interests are FUNDAMENTALLY misaligned. I'm not saying all companies out there are run by gamblers, but as the pay packages like those at Reckitt are shown to be available, more and more will take that risk, which hits me, the owner.
Therefore it is very possible that decisions are made that are not in the best interests of the shareholders, which is absurd.
Directors are paid so much to encourage risk, higher risk = higher rewards. That's why you should have a diverse portfolio as a long term shareholder to make sure even if someone fucks up, you still have something
Why should my other share holdings influence the situation?
Since when do Directors run the company? You may have a couple insiders (CEO, CFO, etc.) on the Board, but usually a majority are outsiders. Management runs the company. Also, equities are one of the riskier asset classes. Income products are more suitable for the "aging population" as you put it. Plus, a majority of these companies are 80%-plus institutionally (mutual funds, asset managers, hedge funds, etc.) owned. If anyone is going to have a say in the future decisions of the company, it's the institutions, not the retail investor who owns 0.001% of the company.
Wait what? Who makes the decisions in a company then? Or better stated, who is accountable.
The job of the BoD is to protect the shareholders. They hire who they think is best fit to run the company. There may be stated goals financially and operationally, but the implementation of those goals is soley on management (CEO, CFO, COO, etc.). Boards have very little day-to-day involvement of the operations of a company. Now, if the Board doesn't think management is executing, it's on them to replace mgmt. As a shareholder, if you don't think the Board is serving your best interests, you vote to replace members of the Board.
When you say Directors do you mean Board of Directors or literally people who hold the title of Director within the company?
The BOD is there to represent the shareholder's best interest.
Actual directors rarely have the power (without higher approval) to make a decision that would tank the stock.
Another very real conflict takes place between stockholders and bondholders, who aren't necessarily the same people. Decisions will often affect both the stock and the debt in different ways, leading to a real conflict of interest there. It's pretty hairy.
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