A critical View from New York

The cover note promises "objectivity". Perhaps it is but I was a little frustrated with the fact that Mr Renton's good advice is not supported with a single footnote. For example, Renton recommends that a company's cash which is surplus "to the immediate needs of its traditional activities" should be returned to shareholders.

He argues that such issues are ethical rather than economic. If an investor buys shares in a bank that investor does not expect it to be put at risk drilling for oil. If an environmentalist buys shares in a clean company he does not want it to diversify into something polluting the environment.

For Renton, the immorality of such changes in direction without shareholder consent is not affected by the financial outcome. However, much as I may share Renton's high moral standards, many readers would be more convinced by research.

For example, in "Agency Costs of Free Cash Flow, Corporate Finance and Takeovers," (American Economic Review, 1986, vol. 76, 323-29) Michael Jensen provides an example from the oil industry where in the mid-1980s integrated oil producers spent $20 per barrel to explore for new oil reserves rather than return profits to shareholders or buy proven reserves selling in the marketplace for $6 per barrel. Jensen finds the worst agency problems in firms with poor investment opportunities and excess cash.

There are many other studies showing the adverse effects of diversification on company valuation (see, for example, "Corporate Focus and Economic Returns," Journal of Financial Economics, 1995, vol. 37, 67-87, by Robert Comment and Gregg Jarrell).

Regardless of the lack of citations or case examples, Renton provides an excellent checklist, often accompanied by good advice, on a litany of director concerns from the conduct of shareholder meetings and performance measurement to share distribution issues, litigation, and corporate takeovers.

The book is geared to Australia, so tax and other legal provisions will be different in other countries. For example, shareholder lists in Australia are not only available to other shareholders but to the general public as well.

Renton's coverage of election systems is typical. He provides a relatively balanced portrait of several options, including typical approaches, as well as proportional representation, and cumulative voting. Whether Mr Renton's advice is taken or not, his book is sure to help many readers more fully consider the obligations of directors and the various possibilities in meeting them.