Take this question: Do we fear failure more than we value success? Ah, well, someone will surely say, we have to go back to our caveman days to answer that. Survival in these times naturally depends on caution. It’s all just a question of logic.

Take this example: You have two random cavemen, one of whom was intrigued by the hissing sound emanating from beneath the bush, while the other thinks it might be a better idea to just quietly pass on by. There is a good chance that, on average, the least curious caveman is going to make it back to the cave, where he will enjoy some recreational activity and pass on his lily-livered genes to the next generation. The curious caveman … less so.

Hence, we have inherited a biologically determined fear of failure. Call it the law of the survival of the faint-hearted. Over the millenniums, we have gradually and sensibly become more afraid of failure, because there was a time when our very survival depended on it. It’s rather obvious.

Or is it? Every day, you see people walking on high wires, climbing mountains, driving too fast and generally being idiots from the standpoint of survival. People are such maniacs, we have to have laws preventing them from doing harm to themselves and others, like driving blindly through intersections. Sadly, that law has not yet made it to SA.

These thoughts about the value of failure and success passed through my mind while reading the outcome of the Richemont AGM last week. Richemont AGMs have almost never been in the news. But this time, the company was facing an activist shareholder, Bluebell, which was seeking to put a representative on the board to speak for holders of A-shares. The family holding company of Richemont’s chairman, Johann Rupert, holds 9.1% of the total A-shares, but the family company’s B-shares hold 50% of the voting rights.

This kind of dual-class structure is one of the controversial issues of our times. The JSE, for example, has now banned this kind of structure, as have many other stock exchanges. Notably, however, the US exchanges have not, arguing that shareholders have the choice whether or not to invest in the company, so caveat emptor.

The argument against such structures is simple: they shield management from shareholder accountability. The argument in favour is more complicated. Quite often, you want companies early in their lifecycle to be protected from predatory takeovers by larger competitors to improve innovation and competition. Ironically, it’s often to the advantage of shareholders to allow founders to put that safeguard into practice.

But if the structure becomes protective rather than defensive, as it often does, you have a problem. Ultimately, the issue is whether you value disruptors more than shareholders. Just to be clear, I think the JSE made a mistake enforcing an overall ban on dual-class structures; there are surely more creative ways of dealing with the issue.

But the structure is now very relevant to Richemont because Bluebell’s argument is that the structure is more defensive than protective, and the evidence it offers is very simple: Richemont is underperforming – by some margin – the three other big luxury goods groups: Kering, Hermès and the big enchilada, LVMH.

In case you think Bluebell is somehow like Tinkerbell and the dappled sunlight world of fairies, think again. This is a tough professional group, involved in battles with a range of companies on different issues. More importantly, they often represent not only themselves, but others, so there may be some more manipulative forces at work here.

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But the tricky question is whether Richemont’s underperformance is a consequence of its dual-class shareholder structure, or something else. The extent of the underperformance is really glaring: over 10 years, Richemont is up 80% – not too bad, you might think. But Kering is up 320%, LVMH is up 420% and Hermès is up just more than 500%.

But there are complications here: Richemont is really a jewellery and watches group, and the watch market has been somewhat under pressure from that notorious fruit company and their ugly piece of electronic detritus, otherwise known as the Apple Watch. It’s not that it’s declining – the buyers of Jaeger-LeCoultre are a different cut of people to those who wear that electronic rubbish – but the market has been kinda flat for almost a decade now.

By contrast, Kering is a clothing group with some other interests centred on Gucci. Hermès is essentially a fashion accessories group with lots of add-ons. These are very good businesses, because people are paying a fortune for goods that don’t cost a huge amount to make. LVMH is difficult to describe; it’s just a monster, five times the size of Richemont and the other two. There are media assets and retail assets, and just about everything else. But its fashion and leather goods section is its money-spinner, centred on Louis Vuitton, Christian Dior and Fendi.

Hence, comparing these businesses is simplistic. And that is illustrated by the fact that over different time periods, the performance of the companies has been very different. Over the past year, for example, Richemont has performed as well as Hermès and LVMH. It has also done a lot better than Burberry and Swatch.

However, Bluebell does have one strong, implicit argument. Just to take the most extreme example, Richemont’s turnover is twice that of Kering, but its market value is half that of Kering. When money managers see that kind of value disparity, they start licking their lips.

Essentially, the argument here is that Richemont has been too cautious over the years. The dual-class shareholder structure has protected it from accountability to shareholders and, hence, the natural tendency of the self-protective caveman has been evident.

And, it is true, Rupert is cautious by nature; famously his nickname is Rupert the Bear. And the company’s balance sheet reflects that caution: Richemont is sitting on cash of about $1.5-billion while the more aggressive Kering is sitting on debt of about $6-billion. But neither has the company been a laggard.

As it happens, shareholders overwhelmingly rejected Bluebell’s three resolutions to reconfigure the Richemont board, and not only B-shareholders but the A-shareholders too. Shareholders evidently trust Rupert, partly, I suspect, because of his characteristic caution. But it’s worth noticing that tactically, Bluebell misstepped: the company nominated former Bulgari executive Francesco Trapani as a director. Richemont argued he was too closely associated with LVMH, and shareholders agreed with that.

However, I still think Richemont does have an enduring problem, and it’s not only with succession, but with ambition. 

It’s easy to say people fear failure more than they value success, and that may be true of cavemen. But it is definitively not true of shareholders. BM/DM

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