Is insurer Aviva really putting morals over money?

Why an apparently obscure issue involving corporate IOUs could be more important than it looks

Aviva: Putting morals over money? (Reuters)

Aviva, the insurer, has quietly taken a step that could be considered as revolutionary: It has put its shareholders’ interests second in favour of doing the right thing.

Let me explain: Several years ago General Accident (GA), one of the companies that became part of the series of mergers that formed Aviva, issued some IOUs called preference shares.

Those that buy this sort of corporate paper get a fancy pay out but no vote on company decisions. Today the pay out on the GA prefs looks very expensive and as things stand the company won’t, in future, even be able to count them against the capital regulators demand it holds.

So it proposed to buy them back, an eminently sensible decision and demonstrably in the interests of the company’s ordinary shareholders.

That created a problem because GA said the preference shares would pay out “in perpetuity”. Some of the holders who have bought them down the years on the understanding that they would have paid much more than their face value. As such they were left facing a nasty hit.

Legally Aviva’s advice was that it could buy the prefs back at face value. Companies often buy back this sort of debt when they can refinance it more cheaply.

Morally? Well, that’s a more complicated question and, amid quite a City fuss, Aviva has backed down, and said the holders of the prefs can keep them.

“The Board and I have a duty to consider not just the financial implications of our actions,” said CEO Mark Wilson. “We must consider the impact to Aviva’s wider reputation. I hope our decision today goes some way to restoring that trust.”

It’s the first part of that statement that stands out: The company is basically saying that it is putting something that looks like morals above money. Some of capitalism’s most devoted adherents would see that as the blackest heresy, the first step on the road to the system’s ruin.

On the other hand, a recognition that a company has to serve interests beyond just the narrow desires of the people who currently sit on the shareholder register might just point the way to making capitalism work better. Including for shareholders.

Companies have regularly got themselves into pickles through following the short term impulses of the latter. The institutions that dominate big companies’ shareholder registers have proven themselves to be rotten stewards. Too often they’re the absentee landlords who let bonus driven executive tenants bring the house down. Just look at Carillion.

They tamely acquiesce to absurd pay packages for bosses, only waking up to their implications when it is too late, for example, the £100m bonus handed to the boss of Persimmon Homes.

They let bad bidders buy good companies cheaply. The cheerfully sign up to deals that are accidents waiting to happen.

Institutional shareholders have regularly facilitated their investments’ demise.

They might do rather better if companies did more to consider the interests of a wider group of, shall we say stakeholders, including their employees, their customers, even their communities, when making decisions.

The most successful businesses are already those that do their best to ignore their shareholders worst impulses by, for example, prioritising investment over dividends.

Aviva’s shareholders will lose a little financially through its decision, but long term they will gain if the company establishes itself as a straight shooter on the capital markets.

It is true that this is a relatively obscure issue involving insurance company paper. It might just be a one off. But if it makes people think, it could serve as a crack in a damn that is capable of being widened.