Nowhere in British or United States law are directors (and/or managers) of the incorporated limited liability company, claimed to be the agents of shareholders. The principal, for which directors act as agent, is the company itself. And as agents of the company, directors have a legal duty to act in its best interests at all times. But the business, academic and media worlds have bought the theoretical economists’ lie that company directors are the agents of shareholders and must act in their interests, which are interpreted as solely short term financial, even if it means selling the company down the river.
An interesting example is BBC business editor Robert Peston’s interpretation of BP’s business in America following the disastrous Gulf of Mexico fiasco. The company’s image in the United States is now so tarnished that its American assets could be worth more to almost any other company than they are to BP. Peston argued that it would therefore, under those circumstances, be the BP board’s duty to its shareholders to dispose of those American assets.
But the BP board’s real legal duty, despite Robert Peston and like minded, is to act in the company’s best long term interests. That may well be to pass up the opportunity of a quick buck for the shareholders, and instead work to rebuild its reputation in the United States and elsewhere and so create a solid American BP business.
Why is the BBC arguing the shareholder case? Surely, it should be taking a politically neutral stance, rather than making the free market fundamentalist argument about agency.
Fighting for Fairness by Remaking the Real Economy 
The current BP situation is exceptional and drawing conclusions from exceptions is risky. Whatever the legal niceties, I am uncomfortable that you suggest that directors should pay more interest to an inanimate entity than to their shareholders.
As directors cannot actually ask the inanimate company for its views, the chances are the directors will simply follow their self interest (and there’s plenty evidence for that!). Shareholders maybe ineffective in exercising control over directors in practice, but they are vital to the company. If the directors are going to ignore the financial interest of shareholders, why on earth should anyone invest in their shares? I certainly would not invest in such a company. In truth much of the population are at least indirect shareholders through their pension funds, so have an indirect interest in financial rewards for shareholders.
That may or may not be a reason for Robert Peston’s arguing the case for shareholders as BP is unquestionably important for pension funds simply because of its enormous size. Of course, if you only think of shareholders as greedy short term speculators with no real interest in the long term success of BP or any other company, your anti-shareholder view is more understandable. While I also dislike that kind of speculation, the fact is that most shareholders are long term term investors, not speculators. Taking the long term view, one might well argue that BP should hold on to its American assets for several years until the current fiasco becomes a distant memory rather than sell it off at a bargain price now – they have to regain their American reputation anyway. By way of comparison, Lloyds Banking now looks likely to produce a very nice capital gain for the short term minded taxpayers who were baying with fury at the Government for bailing out Lloyds only two years ago. True “investor” shareholders are interested in long term value, which incidentally probably accords with the interests of the inanimate corporate entity.
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My argument is that the most important consideration in the real economy, is the short term survival and long term prosperity of the inanimate entities. It’s from that success that all stakeholders, including shareholders, could benefit. I agree that the real shareholders (ie the members and investors in pension funds, unit trusts etc) may take a long term view, and that indeed would support the corporate entities – they have more than just money invested in their continued success. But it is the fund managers and traders who take decisions for those shareholders. These investment professionals now control, but don’t themselves own, approaching 80% of UK quoted equity. And their decisions are dominated by the need to be seen to perform over relatively short time periods – league tables are typically published re quarterly performance. They actively seek out situations and when presented with the opportunity of a quick buck it is very difficult for them to turn it down. And they are not in a position to ask the real shareholders what they think.
The crux of the problem, as I see it, is the dominance of agency theory, which I have referred to elsewhere on this site as a ‘lie’. It defines company directors as agents of shareholders with their sole responsibility being, as Friedman put it, ‘to make as much money for stockholders as possible’. The legal position is quite different and places the company as principal, with director’s duties being to look after its long term success, having regard to all stakeholder interests. I referred to Peston because he appeared still to be a fervent believer in the agency lie which has been taught to generations of economists over the past 30 years, and is only now being seriously challenged.
Regarding the BP situation, I agree the spillage is exceptional, but the cry for primacy of shareholder interests (which inevitably means short term) is not. In the long run real shareholders would gain from having their short term interests put on the back burner for the long term interests of the corporate entity. Compare real economy companies in UK/US with Germany or Japan where shareholder supremacy is not so decisive.
Is there still a lot of professional economist lurking somewhere inside there!!
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