Shareholders, not politicians, should decide on takeovers

The ongoing controversy over Melrose’s purchase of engineering company GKN illustrates many common misunderstandings about how free markets can work to the benefit of all. Shareholders, not politicians, should decide how to run their businesses, including whether a new management team could do better. There is only a limited set of circumstances where it might be right for the government to intervene – such as on grounds of national security, or to mitigate the risks of taxpayer bailouts. But these concerns are usually exaggerated. Some have also argued that decisions on takeovers should not be left to ‘vulture funds’ or ‘asset strippers’ who, they claim, are only looking to make a quick profit with no regard for the wider implications. This analysis is misleading (as well as the language), because one sure way to maximise shareholder value in any company is to improve its long-term performance. The interests of investors should therefore already be aligned with those of others who also want a company to thrive, including employees and customers. This alignment can be strengthened further via market mechanisms, if necessary, such as financial packages that reward managers for long-term results. This is far preferable to a more protectionist approach, where change is resisted, competitive pressures are weakened, and shareholders rights are undermined. Indeed, playing politics with companies might actually be the worst form of ‘short-termism’.

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