Shareholder tyranny in post-mature economies

A recent article in The Economist pointed out that Britain, the original industrialiser for long in relative economic decline, owned 45% of the world’s foreign direct investment in 1914, but now has substantially less than 10%. The United States’ foreign direct investment peaked at around 50% in 1967 and is now less than half that. Today China (including Hong Kong and Macau) has a share of just 6%, but is growing fast. Britain and the United States might best be described as in the post-mature phase of their economic development. Such characterisation is also confirmed by the Anglo-American emphasis on finance and wealth ownership, rather than technology, customers and wealth creation. Those latter are the concern of more dynamically positioned economies, such as China and India, which are in the early growth stages of their development.

The focus on finance and ownership results from adherence to the free market ideology which, in terms of corporate governance, accords the shareholder, primacy over all other considerations. Other postings on this site have dealt with some of the adeverse results of this ideology. For young economies emerging on the global stage, free global markets could be a huge benefit, encouraging their growth, even at the expense of mature economies. This is to be applauded in terms of creating a more equal and fair global distribution of wealth and income. But it is going to be painful for those post-mature economies most affected. Yet, curiously, it is the post-mature economies which are most strident in promoting the free market ideology. Employment in Britain and the U.S. will suffer most as a result of the new global competition. It is unclear how far this new imbalance will push post-maturity into actual decline.

Shareholder primacy is the euphemism given for this approach to corporate governance. A more appropriate term would be shareholder tyranny. It is a tyranny which dispossesses all other stakeholders. Adherence to the dogma will, unless checked, continue the destruction of jobs, the hollowing out of real economy firms and the theft and disposal of their assets. This risks causing social unrest, to use another euphemism. But it doesn’t have to be like that.

Japan and Germany have both been more careful to avoid the worst effects of the free market shareholder primacy dogma. Their governance systems provide some protection for their real economy firms. They effectively lock out the financial parasites from their destructive processes. In Germany the two-tier board structure with 50% employee representation on the supervisory board, provides some protection. In Japan, the tradition of company groupings with extensive cross shareholdings has similar effect. In both jurisdictions the rapacious activities of the financial sector have been restricted. The felicitous consequence is that real economy jobs are more secure and real economy firms are less prone to being taken over, stripped and destroyed. Not only that, but their financial sectors, so restricted, have not grown, as they have in Britain and America, into the huge economic overhead which is ‘too big to fail’.

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