Can we trust in company share ownership?
Past governance failures have knocked share ownership confidence, writes Martin Hawes.
Shares are evil, a friend said to me recently. This was from the operator of a small business who was convinced shares were the worst investment that you could make under any circumstances: they were too risky and involved the trust of too many people.
In New Zealand, this is a common enough attitude and is driven in part by the 1987 crash. The attitudes engendered at that time have been reinforced by the ‘‘dot com’’ collapse and the GFC.
However, the attitude many Kiwis have towards shares is quite contradictory. Kiwis love their own small businesses, but they are suspicious of listed shares. My friend owns his business in a company and so he quite happily owns shares in that company. But he refuses to own shares in other businesses that he does not control.
Even when it is pointed out that small businesses (like his own) have a very high failure rate, he cannot see his way to owning a minority stake elsewhere because it is ‘‘too risky’’.
My friend does not think he is the world’s best businessman – he knows there are very high quality directors and managers running very successful businesses listed on the sharemarket, such as Amazon and Apple, or, closer to home, Ryman Healthcare or Infratil.
All of these and many others are great businesses which any rational investor would want to own. They have given very high returns over long periods of time. And even when we do not stock pick but just own the index, we know we are likely to get top returns.
But my friend does still not want a bar of any of them.
One thing in particular really holds people back from owning shares: trust. Kiwis have seen many instances in the past where directors of listed companies have taken the public’s money and lost it. Often enough, these people have acted out of self-interest and dishonesty. The public has simply lost money and trust.
Of course, both the Financial Markets Authority and the NZX apply much stricter rules than in the past and they demand compliance. New Zealand’s share market is no longer the wild west where anything goes. The unfair insider trading and takeover practices common in the past, now come with heavy penalties.
You cannot completely stop all nefarious behaviour, but at least you can now punish it. You cannot demand the directors of listed companies always make the right decisions, but at least those decisions are now transparent.
And you cannot stop companies failing. But, as I said to my friend at the time, shares are just a fractional ownership of a business and failure can happen to all businesses, including his own.