Opinion

Published

The big bad corporates

3 Mins

All rookie entrants to the City are taught that big companies are generally blue-chip investments and small companies are inherently risky. Indeed, those arbiters of regulatory fashion, the FSA, are very keen that private clients should be alerted to the dangers of putting money into small caps. Events, dear boy, suggest otherwise as, yet again, the heavy brigade lumbers into the ditch.

This time around it is BP and the Pru in the frame. The former with a highly embarrassing oil leak and the latter over a painful misjudgement with the FSA over approval for its mega Asian deal.

What do these events have in common? I would suggest senior management failings. Why do these happen? I would suggest that big companies, by their nature, only have so-called professional managers and, more often than not, these managers have no close attachment or feel for their companies. Creative energy therefore gets channelled into self advancement through office politics, resulting in the management eye frequently being off the ball at crucial moments.

The scene is usually very different in small companies. Here, senior managers are often the creators of the company and, naturally, have a deep attachment to it. In these circumstances, crucial decisions are taken with the benefit of a level of knowledge and interest, which is just not there in those big uglies.

Mix into the above ingredients the phenomena that small companies have to manage their balance sheets prudently (as banks instinctively prefer lending to the so-called blue chips  – remind me, what happended to GEC?) then you begin to wonder why a portfolio of small-cap investments is regarded as inherently more risky than one populated by behemoths.

The time has surely come for the small-company universe to take heed of the new political landscape that is being created before our eyes. After all, the attention given by government and media to the constituents of the FTSE 100 is massively disproportionate to the number of people employed by small companies. Proportional representation would suggest, at the very least, a Minister for Small Companies at the cabinet table!

For more than 30 years, the City Grump has had experience of senior positions in most aspects of city life. These include stockbroking, stock exchanges, fund management and corporate finance.

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