Between the lines: Emphasis on shareholders has its flaws

In a simplified description of corporate behaviour, it might be only slightly facetious to depict the duty of managers as being to exploit customers and employees to the maximum and pander to shareholders.

There are limits.

Sometimes wayward managements suborn shareholder interests to their own, and employees can be pushed only so far, as Tranz Rail implicitly recognised yesterday when it accepted it had to do something about its fatality rate.

But for the most part, companies in the past decade have adopted the mantra of creating shareholder value, and that goal is often regarded as good not only for the shareholders, but also for the company and even the wider economy.

The model raises the question: just who are the shareholders?

In privately held companies, the answer is usually obvious: the people who own them.

Listed companies are different.

While mindful of the interests of present owners, most listed companies seek to boost shareholder value by fostering demand for the company's shares by making them attractive to new owners. Clearly, the company's likely profitability is a key in that and large companies often embark on roadshows for international investors telling them of the good news ahead.

Ahead usually means six to 12 months, which happens to be the timeframe of most sharemarket analysts, a yardstick further reinforced by assessment of management performance, which is usually measured against the latest reported profit. But is this good for the company, and the long-term interests of shareholders?

The share price of Telecom, once the sharemarket's star performer, has tumbled this year, wiping much of the trumpeted shareholder value created in the previous five years.

That can hardly be blamed on the incumbent chief executive, Theresa Gattung, whose performance to date appears almost flawless.

In part, Telecom's problems derive from the way telco stocks have fallen out of favour globally.

But Telecom is also facing intensifying pressure in its home market while trying to build new growth opportunities in Australia.

As a result, earnings prospects look flat in the foreseeable future, and to fund its growth Telecom plans to slash dividends from the 90 per cent-plus that investors became accustomed to.

Much of the pressure Telecom faces was reasonably foreseeable back in the days when profits were burgeoning and the share price was moving towards $10.

Only two or three years ago, Telstra New Zealand's chief executive, Peter Williamson, gleefully accused Telecom of "juicing the lemon."

Competitive disdain, perhaps, but Mr Williamson was not alone in thinking Telecom was creating problems for itself by skimping on investment to keep profits high.

The price of parsimony may soon become evident, with a technologically superior Telstra Saturn soon to expand its Wellington base to Auckland and Christchurch.

And every dollar of profit that Telstra Saturn can take off Telecom in New Zealand will be a dollar less Telecom can spend battling Telstra in Australia.

The result is that Telecom's present batch of shareholders face the prospect of flat returns, with the far-from-risk-free promise that when the growth businesses in New Zealand as well as Australia get going, things will turn up.

One might argue that Telecom is now pitching itself to shareholders three years out.

But when the Business Herald asked Ms Gattung how she defined the company's shareholder base, she redefined the question, answering that Telecom sought to use its capital to maximum efficiency and to maximise the economic value added.

That answer offers little insight into the time horizons Telecom is working to, although that might have been of greater interest two or three years ago when the company was still producing stellar growth.

In recent years, Telecom has had the rare distinction of being a strong performer in the New Zealand sharemarket. But it can be argued that that was in some degree at the expense of current shareholders.

Perhaps it's time for companies and their boards to give a clearer definition of who they regard as their owners.