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CHAPTER 10INTERACTION WITHSHAREHOLDERSDavid Pitt-Watson, Chair, Hermes Focus Asset ManagementSNAPSHOT■ Shareholders want to maximise returns but limit their risk. They put their trust incompanies they invest in to manage that risk as effectively as possible.■ Well-managed communication with shareholders will help investors understandthe nature of risks your company faces.A POSITION OF TRUSTThe directors are fiduciaries; that is they bound in law to promote the company’sinterest, not their own, and to do so for the benefit of the shareholders as awhole, after paying regard to the implications for other stakeholders.For most of our large companies, the shareholders are a very different group ofpeople to the directors. Therefore for the system to work, shareholders need toknow that those they employ work on their behalf.Typically a shareholder wishes to maximise their returns, but minimise theirrisk. That is the skill they will seek from the management of their company; notthat they avoid risk, but that they manage it. That is no trivial task, and itrequires a mixture of skills: industry knowledge, strategy, management of peopleand organisations, finance and so on.The legal institutions through which we run this system are there to helpmanage this risk/return trade-off. That is why we have limited liabilitycompanies: so that shareholders can limit their risk. It is why we have investmentfunds, so that people can diversify their savings. It is why we have stock markets,so that those who wish to take big risks (albeit with commensurately high enoughreturns) can raise the money to do so.In practice though, it raises a number of questions. The first is, “Who are theshareholders?” Most people think of shareholders as large investmentinstitutions, or sovereign wealth or hedge funds. But in fact these institutions arethemselves fiduciaries for other peoples’ savings. Their aim should be to look67