A culture of equity ownership across the population has formed part of the American scene for many decades. Europe has not had a long tradition of widespread equity ownership, with the possible exception of Britain. A feature of this culture is that shareholders make their voices heard when public companies under-perform. This takes the initial form of outspoken criticism and often voting against the re-election of company boards. If such actions prove to have limited or no effect, large stakeholders will often orchestrate a takeover by another company, or the removal of the incumbent management.
The Irish marketplace has historically been characterised by a high degree of conservatism in this regard. However, there are signs that this is changing. The Eircom privatisation created a new army of small shareholders and its first annual meeting as a quoted company proved to be a very lively affair.
While private investors are becoming more vociferous, the stance taken by the large institutional shareholders remains paramount. This was abundantly clear at the recent Eircom extraordinary general meeting, where institutional backing for the Vodfone purchase of Eircell was always a foregone conclusion. It would also seem to have been the case at the recent Smurfit annual meeting, where the board successfully received shareholder support for the various motions that were put to a vote. However, a small number of the major domestic institutions voted against the board or abstained on a number of motions to express their disapproval of what they perceived as the excessive pay of top management. Several of Smurfit's institutional investors have also long been unhappy about the failure of the company to separate the role of chairman and chief executive.
In the Irish market, the Smurfit Group has produced one of the worst returns to shareholders over a long period. At its peak, Smurfit was the largest industrial stock quoted on the Irish Stock Exchange. Now it barely makes it into the top 10 with a market capitalisation of just over #2 billion (£1.6 billion). In contrast CRH is now capitalised at #8 billion whilst the largest stock in the index, Elan Corporation, has a market capitalisation of just under #20 billion.
In absolute terms, the Smurfit share price is trading around the same price as five years ago, representing an under-performance against the overall market of approximately 55 per cent. A significant portion of this under-performance can be attributed to the sector within which the company operates. Paper and forest stocks in the US have under-performed the S&P500 by about 60 per cent over the past five years.
Therefore, Smurfit's management can justifiably point to the difficult industry in which they operate as largely explaining the poor performance of the share price. However, it is not the whole story. Smurfit shares trade on a much lower valuation, as measured by the price/earnings ratio (PER), than the companies in its US peer group. This is most evident in the rating of Smurfit Group shares that trade on a lowly PER of 8, compared with 17.1 for International Paper. Some of the reasons for this must lie in the issues that have caused controversy amongst Irish institutional shareholders, namely the failure to split the roles of chief executive and chairman, and the very high levels of remuneration awarded to the top echelons of management.
It remains to be seen whether this recent expression of shareholder dissent has any positive consequences. However, if it acts as a catalyst for positive change within the group, then in time it may improve the company's stock market rating to the benefit of all shareholders in the company.
