Unpicking Shareholder Primacy

The idea that companies, if not all economic activity, exists to maximise the wealth of shareholders or owners, dominates the world of corporate governance and much else. Bankers and traders believe it. Industrial managers have been led to accept it. Universities and business schools preach it. It is part of the free market ideology, often identified by its origins, as the Anglo-Saxon or Anglo-American approach. And its many adherents claim it is the only system that really works. Shareholder value is, for them, the acid test, all that matters. All this is despite clear evidence to the contrary from Germany, Japan, China, India and many other jurisdictions.

Much of the literature on corporate governance argues that these other approaches are in fact converging on the Anglo-American model and even assesses the level of their maturity in terms of how closely they comply with the Anglo-American line. It’s all nonsense.

Firstly, the Anglo-American designation is misleading. Shareholder orientation is truly American in origin, not British at all. Its roots lie in what the early American economist, H C Carey, highlighted as the American difference. As the early American immigrants spread west, taming the prairies, they took the land as their own property. It was all they had and they nurtured and defended it, as was their legal right proclaimed in the Homestead Acts. For those early Americans, owning property, and their right to defend it with guns, was their new and uniquely American experience, their life blood. In Britain, the march of agriculture was achieved through the enclosure movement, which involved the dispossession of fellow Britons. Historically, the perspectives on property of the ordinary American and the ordinary Brit were quite different. Ownership is bone deep in Americans; for them shareholder primacy is obvious and natural. In Britain, a sense of fairness and justice has in the past been regarded as of prime importance.

Furthermore, the Americans really understand and believe in the whole free market shareholder primacy ideology, and are prepared to flex when bigger realities obtrude. From time to time they’ll bend the rules. For example, they have a track record of defending established industries, such as steel, against foreign competition if it becomes too threatening. The Brits, on the other hand, don’t fully empathise with the ideology. They’ve applied it blindly, letting their industries slip out of their hands, or simply die, because the ideology says they should not intervene.

But the times are changing. America is no longer a young country with open prairies to exploit as a free resource. America is now in the same zero sum game as other mature economies. This new situation isn’t yet really hurting the owners and shareholders, but it is hurting almost everyone else. Corporate governance needs to take account of those other, more urgent, interests, before it is too late. Shareholders are not the only ones that matter.

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