Ruminations on Russia

From the FT 21/06/06:

“José María Aristrain, a Spanish businessman who owns 3.7 per cent of Arcelor and has a representative on the board, called for the scrapping of a plan to merge the companies through the issue of new shares to Alexei Mordashov, a Russian steel tycoon.

He also called for the replacement of Arcelor’s two most senior executives. Mr Aristrain said Joseph Kinsch and Guy Dollé, chairman and chief executive, should ”come out“ of Arcelor on the grounds that they represented an ”old way“ of running public companies in which shareholders’ views were ignored.”

Summer has finally arrived in Moscow.  You can tell because the mosquitos at the dacha are outsourcing themselves as back-up C130's, or more geographically correct, Antonov's.  I love the long hours of daylight and the impact it has on my ability to think - the flip side of which is my inability to think during the long hours of darkness.

I read three significant articles/threads Saturday morning;

• On the Arcellor/Severstal/Mittal steel deal.
• On private equity's ability to generate superior returns to public markets
• On the significant undervaluation that public markets ascribed BAA compared with Ferrovial and Goldman Sachs.

With one or two honourable exceptions, Marks and Spencer leaps to mind, private equity has identified greater value than the public markets and worked harder to realize it.  In some cases this has been as a result of short term financial engineering.  In most cases, private equity shareholders have been genuinely involved in the business and have made management work for the benefit of shareholders (the people who actually own the business).  By contrast shareholders of public businesses are only interested.

“A chicken and a pig were brainstorming...

Chicken:
  Let's start a restaurant!
Pig:
  What would we call it?
Chicken:
  Ham n' Eggs!
Pig:
  No thanks. I'd be committed, but you'd only be involved!”

Management of public businesses all to often work for their own benefit, or deride their shareholders ability to understand their businesses.  As proof you could point to back-dated option scandal or, to my mind more important, the battle to get shareholder voted representatives on the boards of public companies.

There will always be exceptions that prove the rule.  All too often the evidence points the other way.  Arcellor's treatment of its shareholders being a case in point.  Given that this is a blog about Russia I could happily point to any of the large listed Russian companies and make the same point.

What needs to be fixed here is not management but shareholders.  And in Russia we should give up the pretense that we are shareholders and buy derivative instruments instead.

[composed and posted with

ecto

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