The business - Patrick Hosking on why small investors lose out

Small investors do occasionally flex their muscles at company AGMs, but they have never become the b

The boldest claims given for a shareholding democracy were always a bit crackpot. The notion that ordinary people would wield real power when handed a hundred or so shares in the Halifax, or sold a few shares in British Telecom on favourable terms, was absurdly optimistic.

The privatisation and demutualisation programmes of the 1980s and 1990s delivered some benefits. But the creation and mobilisation of a ball-busting army of vigilant, well-informed small punters was not one of them.

Popular capitalism has had its moments. Who can forget the thousands of small shareholders who descended on the British Gas annual meeting to roast the board over the chief executive Cedric Brown's pay?

Perhaps the avalanche of annual reports and dividend cheques sent to millions of homes over the years has helped to persuade people that capitalism can be a force for good. But for the most part, small investors have either baled out at the earliest opportunity, by selling their windfall shares, or passively enjoyed their dividends.

Companies in turn have rarely paid more than lip-service to their small shareholders, sometimes being downright patronising. The habit of sending out "abridged annual reports", denuded of such interesting details as directors' pay, was particularly insulting.

An early proponent of wider share ownership was Abbey National, which in 1989 was the first building society to demutualise, handing shares to millions of its customers. Even today it still has 1.75 million shareholders.

With customer-shareholders forming such a vast base, you might expect the company to have been consumer-savvy. In fact, until the new regime started trying to reverse the rot a year ago, Abbey treated its customers abysmally.

It offered uncompetitive terms; it closed branches in the teeth of customer opposition; it failed to invest in the core business and it gave up introducing worthwhile, innovative products. It turned its back on its pro-consumer roots - it had played an influential role in destroying the old building society interest-rate cartel - and decided to join the big boys in the wholesale markets, losing its shirt in the process.

For the small investor, the final chapter at Abbey National is definitely a whimper rather than a bang. Short of a very unlikely last-minute counter-bid, or an equally unlikely shareholder revolt, the company is selling itself to the Spanish bank Santander for £9bn.

Shareholders who choose not to sell their shares in the market will end up with euro-denominated shares in the Spanish bank and be obliged to file Spanish tax returns. Most will therefore sell out - thinning the ranks of small shareholders that little bit more.

Rising longevity, Gordon Brown and falling investment returns are all blamed for the pensions crisis - usually in that order. But one other factor, I'm sure, has played a part - people's bitter mistrust of the financial services industry. A series of mis-selling scandals has persuaded a generation to shun the pensions industry.

John McFall, the combative chairman of the Treasury select committee, has it right in a chapter he contributed to a new book, The Split Capital Investment Trust Crisis, edited by Andrew Adams of Edinburgh University: "In my two years on the committee, the biggest surprise for me has been the apathetic attitude of some in the industry to the interests of their customers," he writes, comparing them to Sherman McCoy, the self-centred bond trader in Tom Wolfe's masterpiece, Bonfire of the Vanities. McFall, who once famously lambasted the Financial Services Authority for being "not just asleep on the job, but comatose", adds that he expects regular future scandals. His comments echo those of Sir Howard Davies, who lamented as he stepped down from the FSA: "My biggest disappointment . . . has been the failure of firms, and particularly senior management, to learn the lessons of past mis-selling."

Oliver Letwin wisely gave up his part-time job at Rothschild's soon after becoming shadow chancellor. The conflicts of interest were too great. His colleague Howard Flight MP, whose title is Michael Howard's special envoy to the City of London, continues to be a director of the mini investment bank Durlacher. The connection doubtless gives him useful insight into the concerns of City firms (as well as a £25,000 fee). But things have turned awkward. Chief executive Christopher Stainforth was abruptly ousted from the bank the other day, apparently because of a row over bonuses of £392,000 shared by him and colleagues and not properly disclosed.

Flight is on the board remuneration committee. Shareholders are pressing to find out what he and his colleagues knew.

Patrick Hosking is investment editor of the Times