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BBA Conference: TSR aided the crunch, says Myners

City minister Lord Myners has hit out at the market’s total shareholder revenue focus as a reason for the credit crunch.

Speaking at this year’s British Bankers’ Association, Myners criticised the market’s “slavish” adherence to shareholder reward and called for firms to begin looking to the long-term rather than at TSR.

Myners said TSR, which is how shareholder worth is measured over an elapsed time period, is too short in the context of the lifetime of the company and the nature of the investor assets. He said: “It is odd, more than odd – this is non-sensical.”

He said: “Share prices are normally taken as the last trading price at the close of business on the evening of the day of valuation. But markets can be very thin and volumes are most likely to not reflect the size of holdings the fund manager might have in an individual company on behalf of multiple clients.

“It is nonsense to say that the share price rose or fell by 10p on the last deal of the day in a thin market should then be multiplied by hundreds of millions of shares, and then reward a huge benefit as a consequence of this share increase or decrease.”

Myners warned that there cannot be a better understanding of true shareholder value while the focus of investors is outperforming competitors and indices over the short-term.

He said: “This approach has led, rationally, to fund managers creating portfolios that are highly diversified and lacking stock conviction. It’s going along with the crowd, and undermines the core feature of capital market theory.”

Myners said this approach has a bias towards the extremes of valuations around the top and bottom of the market and helped towards major institutional shareholders not standing up to increased leverage build up in the banking sector.

He said: “This is why no major institutions questioned hubristic takeovers and few challenged the wisdom of putting companies under pressure to optimise balance sheet efficiency by taking on more debt or risk falling into the hands of bank financed private equity, no one spoke up for the end client – the pension scheme holder or funder.”

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