It’s not the time to rock M&S boat

Anthony Hilton
25 Mar 2009

The storm clouds do seem to be gathering again around the head of Sir Stuart Rose, executive chairman of Marks & Spencer. Reports circulated at the weekend — in what looked like a deliberate leak designed to up the pressure — that institutional shareholders in various guises had begun once again to express disquiet over Sir Stuart acting as both chairman and chief executive. Earlier this week, the Corporate Governance arm of the National Association of Pension Funds weighed in alongside them.

Institutional shareholders raise their heads above the parapet only rarely, but unfortunately this unusual boldness is too often focused on the wrong issues. This is perhaps because they tend only to get collectively wound up on matters of principle — such as breaches of the combined code or challenges to pre-emption rights.

And of course, having decided to go to war to defend a principle, it then becomes hard to reach a pragmatic compromise, even when this is the common-sense solution — as we see currently at the other end of the City in the spat over the proposed Chinese investment in Rio Tinto. The grumbling against Sir Stuart similarly seems in part at least a hangover from those who still resent the decision last year by the M&S board to invite him to do both jobs while he identified and groomed a successor as chief executive.

What is not clear is what the institutions hope to achieve by destabilising Sir Stuart in the current economic climate. True, the business is not doing well, but very little on the High Street is. Nor could one reasonably expect anything different, for M&S is far too big to duck the pain that has disabled the whole economy — though, that said, its problems in food do seem to smack of a business model which only really works in good times. There are grumblings about the amount of debt the business carries, and there is a feeling that the much-vaunted M&S revival was perhaps less than it seemed at the time.

But at the end of the day what do shareholders want? Do they really think now is the time to force him out, or to indulge in an act of tokenism by splitting the job again? Do they think that a new face in the boardroom will bring customers flooding back into the shops?

We can see across the economy that there is a grave shortage of people who know how to manage in hard times, and there is no obvious candidate to take over from Sir Stuart or to slot in underneath as chief executive. Nor should one underestimate the effect on staff morale if he were tossed overboard at this time.

In time perhaps, that often-floated merger between M&S and Sainsbury's will come to pass — much to the satisfaction of the investment bankers who have been promoting it for years. But now is surely not the time for that either. The fact is these are hard times, and the interests of shareholders would surely be best served by letting Sir Stuart get on with it, and without the distractions. Shareholders should follow the first rule of medicine — don't make things worse.

Insurer with the right policy

It is a sign of the perverse nature of today's markets that a slashed dividend  is taken as a sign of confidence while a maintained one is seen as a sign of a management in denial.

Legal & General could have maintained its dividend today, but chose instead to halve it. That is not a decision taken lightly in this company — you can go back a generation and not find a precedent, However, the board has judged that the market is only interested in the strength of the balance sheet, and convincing investors it is fully focused on conserving capital to ride the storm is key to maintaining confidence.

In contrast, Aviva recently decided that it was strong enough to pay a full dividend. It endured a torrid day in the stock market as a result. On that basis, L&G should do rather well today.

The other positive from chief executive Tim Breedon is that the capital surplus at £1.9 billion is well above the £1.6 billion the board said it had as a minimum just a few weeks ago.

The level of provisioning before arriving at this figure is itself instructive — the board has taken the average annual level of defaults throughout the depression of the 1930s and applied that  to every year of the portfolio — stretching out for 40 years. If that doesn't reassure the market, nothing will. Indeed, if that level of default ever came to pass, half the economy would be on its knees. Insurers' solvency would be the least of our problems.

Once the reassurance is out of the way, the interesting thing about L&G is not the figures it published today but the way it is repositioning itself for a changed world in the future. Its business uses a lot of capital.

Capital will be less available and more expensive in the future, so the emphasis is being moved to less capital intensive products, and greater cash generation. It is planning and positioning itself for lean times, not just for this year but also for well into the future.