The media expressed shock and horror that Centrica should jack its prices up to its customers and pass £1.3bn of its surplus profits back to its shareholders. But why? That’s what Centrica’s directors think they are there for. And the media and most everyone else appears to share that misunderstanding that it’s the legal duty of company directors to maximise shareholder wealth. But it’s simply not true. It’s based on a lie. The capitalist system was much more soundly based than that, but is currently being destroyed by such dishonest, even criminal corruptions of the truth.
In real competitive markets, exploitation of customers, employees and the rest, for the sole benefit of shareholders, is constrained by competition. So everyone benefits. But where a market is carved up between a small number of monopolistic giants, exploitation is inevitable. Some markets are like that. Gas is one. So are most privatised markets because government attempts to create pseudo competitive conditions invariably fail, succeeding only in establishing an additional layer or two of bureaucracy to handle the unavoidable extra regulation.
Sam Laidlaw, Centrica CEO, was clearly embarrassed by the obvious fact that Centrica’s profit was earned simply by increasing prices, because they could. His lame justification of the extreme profitability and payback to shareholders, was that it was “important that Centrica makes a fair and reasonable return so that we can continue to make our contribution to society and to invest.” Such obvious obfuscation might be enough to satisfy the media, but it shouldn’t fool real people.
The dominant business objective, to maximise shareholder value, is based on a lie invented by academic economists, swallowed whole by financials, business people and naïve politicos. The lie, surprising though it seems, is that the company doesn’t actually exist. Two, otherwise obscure 1970s articles, reduced the company to some sort of theoretical notion, a ‘legal fiction’ (see The Road to Co-operation for detail). Such a contention supported the otherwise insupportable Friedmanite contention that corporate officials had no duty other than to make as much money as possible for shareholders. Since, according to this dishonest argument, the company doesn’t exist, its directors must actually be the agents of shareholders, bound therefore to act in their best interests.
But it is a lie because the company does exist. It is specifically a legal fact; it is the principal to which its directors relate as agents, bound to act in its best interests; their contracts of service and employment are with the company; and company law ever since mid-nineteenth century culminating in the 2006 Companies Act, specifies their duties to the company and its long term, having regard to the interests of all stakeholders, not just shareholders.
Directors’ prime legal duty is to the company’s short term survival and long term prosperity. To fulfil that they must first of all so manage the company as to avoid waste in all its forms. That includes such obvious things as waste of materials or manpower. But it also includes not paying any more tax than is legally necessary, it being up to government to create the clear and non-negotiable legal framework within which tax is payable. Equally, directors have a duty to provide shareholders with a return in terms of dividends and the prospect of capital growth which would be sufficient to ensure the company’s continued autonomy. Paying out more dividends than that would merely be waste.
The existential lie proved a very fertile field for academic publication – more than a thousand ‘learned’ journal articles have been published on ‘agency theory’. It may have been swallowed whole, or it may have been cynically adopted, but either way, it became the dominant belief about business, and resulted in the hollowing out of the real economy, the plutocratic excesses among corporate bosses and financials, and the ongoing exploitations by such as Centrica.
So there should be no surprise that Centrica seeks to maximise its shareholders’ wealth, nor shock that such maximising requires the sublimation of all other interests, such as those of customers and employees.
But it would be understandable if the media were to express some regret. And perhaps some serious consideration of alternative ways of doing things.