An improbable range of private companies

I’ve just agreed to join the working party set up by government’s Financial Reporting Council to discuss corporate governance of private companies. The SoftBank story reminds me what a wide diversity of ‘private’ companies there are.

 

After reading a recent article about Masayoshi Son in The Economist recently I am wondering what SoftBank’s Vision Fund means for Better Stewardship.

 

This is an investor with a war chest of $100bn. It plans to invest in 70-100 unicorns ($1billion companies) and then create ‘a virtual Silicon Valley in Softbank’ where these companies will collaborate with each other. A $500m investment in Improbable, a British virtual reality firm, has already been made.

 

It is certainly a long-term investment, pushing innovation and disruption, which could eventually provide competition for Amazon, Facebook and Google.

 

Will it prove to be a force for good or a source of distorting competition? And what will it mean for the ownership of companies that are currently private?

 

I’ve just agreed to join the working party set up by government’s Financial Reporting Council to discuss corporate governance of private companies. The SoftBank story reminds me what a wide diversity of ‘private’ companies there are. Some are wholly owned by big international funds. Others are still owned by families or employees or customers.

 

Private companies may offer investors more hope of rewards than listed companies. Here the system cries out for reform – or disruptive competition.

 

I’m still reading the excellent Tragedy and Challenge, by Tom Brown who vividly describes how little fund managers understood the engineering companies he ran or chaired. He also summarises the problem we have with fund management in the UK along these lines;

 

‘Overall the fund management situation is a terrible problem for the UK. There is a very small group of extremely highly paid London men (£1m+ salaries are commonplace and the manager of one extremely lacklustre fund was recently reported to have received £15m for his endeavours) who have no experience of running companies and no interest at all except their own short term profit. They have a got a stranglehold over the quoted company sector.

 

There is a cycle in capitalist countries. Companies employ people, who save and invest through fund managers, who buy shares in companies that employ the people. The fund managers currently have inappropriate power in this cycle. It is a problem that greatly inhibits the responsible and long-term thinking companies that we desperately need.’

 

There is other evidence that reinforces my sense that ordinary citizens investing their scarce savings are put at a huge disadvantage.

 

According to Monday’s Financial Times, Less than one in five of the funds sold to retail investors in Europe in the past three years outperformed their benchmark after fees were taken into account, Ordinary savers are getting a rotten deal. The fund managers who claim to serve them are failing them while being highly rewarded.

 

If we are to achieve Better Stewardship in the future, and so create a stronger link between companies and ordinary citizens, what is the best way forward? Is it to channel savings into so many unpromising funds with high fees and disappointing performance? Or is to create ways by which we offer those citizens a stake in the adventurous new investments of tomorrow, the kind that SoftBank is promoting.

 

One thing is for sure: we need a fresh approach. That’s what Tomorrow’s Company and I are looking for in our work on Better Stewardship.

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