This past year inequality has become an issue in financial markets, and has coincided with an unprecedented groundswell of shareholder activism – to little noticeable real effect. Good governance is widely advanced as a cure for almost all of the perceived ills.
Unfortunately, in all too many cases the civic responsibility now being demonstrated and publicised is little more than marketing intended to improve the brand image. The underlying business models for many of these “responsible” companies remain firmly rooted in their exploitative and rent-seeking pasts. In the sustainability world, these tactics have acquired the soubriquet “green wash”. We should not forget that brand image serves as a barrier toentry and less competitive markets.
SHAREHOLDER RIGHTS
The “winner takes all” nature of much technological change offers little prospect of change or improvement. The organisation of the activities of these companies to avoid paying taxes, even though they are exploiting government developed intellectual property and infrastructure, is a depressing portent.
Although the shareholder primacy view of corporate organisation has been widely questioned and discredited, the changes in regulation and recommended best practice aimed at improving governance that have been proposed and implemented all take this shareholder view – just read the Walker Review and the subsequent Stewardship Code and the Corporate Governance Code. Even the new London listing rules revolve around and reinforce a related idea, one share one vote. Differential stakeholder approaches, such as A and B shares, are difficult to implement in such frameworks.
Shareholders do not own companies. In fact, shareholders possess very few of the bundle of property rights that constitute ownership; John Kay lists eleven rights of which only two or three are satisfied for shareholders. Even the remedies of principal-agent models of governance break down in the presence of widely dispersed shareholders.
Symptoms such as short-termism have been widely recognised, but little has been done beyond exhortations addressed at shareholders. It is not even evident that shareholders have the control rights needed to achieve the objectives sought.
DEEP DISTRUST
In the UK, there has long been a profound distrust of the alternative stakeholder model. The late 1970s Bullock Report recommended greater stakeholder involvement in the direction and management of UK companies, and sank without trace. At the time, even the Trade Union movement rejected its ideas. This suspicion is surprising given that there is a considerable body of evidence that employee ownership improves corporate performance. Indeed, we seem to have forgotten that much of the commercial success of Japan in the 1970s and 1980s stemmed from the degree of input and control of workers over the manufacturing process. Of course, it is now UK government policy to promote employee ownership, and a range of tax incentives has been introduced.
One favourite example of the shareholder paradigm is the movement away from the provision of occupational DB pensions to the provision of DC. This involves yet more financialisation of our economy and the foisting of risks upon employees that they are unwilling and unable to manage. The alienation of employees, customers or suppliers cannot be good business. The prospect is even more alarming; if we do not find ways to resolve these issues, we can expect government to impose “solutions” – the effects of which could only too easily be catastrophic.
Con Keating is head of research at BrightonRock Group
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