‘Business leaders are serving the short term interests of shareholders at the expense of the wider economy … the failure to adopt a sufficiently long term view is hampering economic growth’. That is BoE Chief Economist Andy Haldane’s summary explanation of current economic failure. It is the inevitable result of accepting false belief that the role of business is to maximise shareholder value at the expense of all other interests.
Anglo-American governments have encouraged the pursuit of that objective since the days of Thatcher and Reagan. It has neither legal nor valid economic theoretical support. Nevertheless it continues to cause enormous damage in advanced economies. In the UK it has produced the following:
• reduced long term corporate investment especially in research and development
• increased corporate focus on short term deal making, asset stripping, mergers and acquisitions, etc.
• increased focus on aggressive tax avoidance and evasion.
• encouraged the culture of ‘casual dishonesty’, growing corporate fraud and criminality (eg between 2009 and 2013 the 12 global bankers paid out £105.4bn worth of fines to European and US regulators for crimes ranging from mis-selling mortgages to rigging capital markets, and £61.23bn provisions for future fines).
• Reduced quality of employment in real economy: job security, hours of work, wages and pensions.
• Converted corporate management into shareholders by excessive remuneration including unjustified share option bonus schemes.
• Massively increased inequalities of wealth and income which, in this increasingly financialised and globalised environment, extracts from the real economy with no ‘trickle down’ benefits.
• Encouraged avoidance of environmental responsibilities and externalising the costs of pollution whenever possible, thereby contributing to finite resource waste, species loss and climate change.
Addressing these issues is now urgent. It is dependent on burying belief in the primacy of shareholder interests over the common good. Agency theory is the only theoretical justification which dishonestly depicts the company as a ‘legal fiction’ and therefore directors relate directly to shareholders as their agents, legally bound to work in their best interests at all times. Today, that is the generally accepted understanding. But it’s a lie. The company is a legal fact and directors have legal contracts with the company not the shareholders. Certain wording was added to the Companies Act in 2006 to make it at least conceivable that company directors might be the agents of shareholders. Previous Acts had identified directors’ duties as “to promote the success of the company” end of story. The 2006 Act added “for the benefit of its members as a whole,” which additional wording is frequently quoted as supporting shareholder primacy. There is no other legal justification, statute or common law, anywhere in the world.
The independent status of a company as a separate legal ‘person’ effectively changes when a majority shareholding is established. The company then in effect, becomes an item of private property owned by the majority shareholder who can do with it as they wish. This enables assets to be stripped out leaving the company unviable, but without liability when the company is closed down.
The changed nature of shareholding since the 1986 computerisation and deregulation of stock markets needs also to be addressed. Previously the average duration of shareholdings was somewhere around 6 years. Today it is around 6 months and becoming ever shorter, shares being nominally held by financial intermediaries with a high proportion of trades being by automated ultra-fast systems. The granting of voting rights to such short term equity holders only serves to reinforce the focus on short term shareholder interests and is against the long term development of corporate enterprise and therefore the economy.
The currently dominant economic theory also argues that the market is the most efficient mode of allocating resources. But that is based on the false assumption that markets are competitive. That same theory argues the benefits of minimised regulation. Consequently, since the 1980s, competition regulation has been severely reduced and underfunded. Markets have therefore been allowed to develop as oligopolies and would-be monopolies, with the result that market ‘decisions’ are not made as a result of competition, but corporate monopolists which seek only to maximise shareholder value. The abuse of competitive markets needs to be outlawed and competition revived and protected.
What to do:
• Remove voting rights from shares until held for a minimum of 6 months.
• Remove “for the benefit of its members as a whole” from Section 172 of the Companies Act.
• Reinstate the single limited liability per group – ie when a company acquires a subsidiary it legally accepts full legal liability for the activities of that subsidiary.
• Renew and reinforce the regulation of competition (eg via a renewed Office of Fair Trading, and Monopolies and Mergers Commission etc), properly funded so that competition is revived and maintained.
• Regulators to investigate and reverse any significant examples of loss of competition eg where a single operator has greater than 25% market share. This was the rule prior to 1986, but is more important now with new technology facilitating abuse.
• Where conflicts of interest are also involved take action to separate:
1. Separate retail banking from investment banking – making it clear that BoE support as lender of last resort is only available to retail banks which maintain ratios of liquidity as agreed with BoE.
2. Re professional services: separate Audit from Accounting and from Management Consultancy.
3. Review privatised public services to ensure genuinely competitive operation and remove any conflict of interests between public service and private shareholders.
• The adoption of German style two-tier board structures would be a hugely positive step, with employees having a proportion of the votes on the supervisory board (carrying strategic rather than operational responsibility).