The little UK bank reporting season is over. £15Bn profits have been reported. Bonuses are being calculated. The time they took us all over the brink is becoming a distant memory, along with the ‘too big to fail’ mantra. Sir John Vickers’ commission on banking regulation won’t report for another twelve months and by then the boot will be firmly on the other foot. Government will need the bank’s profits to push share prices up so the public holdings can be disposed of at a profit, or at least at not too big a loss. It will be business as usual, at least till the next time.
Almost every empirical study of the value of takeovers indicates that overall there is no gain; the acquirer doesn’t benefit and the overall economy usually loses out. The only ones who gain are the shareholders of the acquired company, and in cases like the Tomkins sell out currently going through, its top management whose pay off is really nothing more or less than a bribe. This is in contrast with ordinary employees who usually face an immediate cull as well as a long term loss.
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.
“The directors of … companies, being the managers of other people’s money rather than their own, it cannot well be expected, that they should watch over it with the same anxious vigilance … Negligence and profusion must always prevail … in the management of the affairs of such a company.” So wrote Adam Smith 250 years ago. And that remains a core concept in the right wing free market fundamentalism that drives us today.
The Financial Reporting Council (FRC), which oversees issues of corporate governance, has been busy recently. In June it published an updated UK Corporate Governance Code. Now, this month it has published the companion UK Stewardship Code for institutional investors. So we now have both sides of the governance coin, ready for implementation, the considered regulation by City insiders to prevent a repetition of the banking excesses which landed us in such a pickle two years ago. What do they amount to?
The Anglo-Saxon model of corporate governance, granting total supremacy to shareholder interests, still dominates most free market economies. Through charitable (ie tax allowable) think tank propaganda and lobbying, shareholder supremacy is continuing to make progress where it is not already total, such as in Germany and Japan. In those countries there is great pressure to conform to the Anglo-Saxon model. It is the Western orthodoxy, what Galbraith referred to as an institutional truth, that is a lie that has to be bought into in order for one’s career to prosper. With such universal acceptance, the time is surely not far off for its collapse.
‘The Rise and Fall of Management’ highlights some issues as of particular importance to the current situation. For instance, the universal adoption of agency theory. Agency is a legal relationship where the agent acts on behalf of the principal who is bound by the agent’s actions, and the agent is bound to act, in his or her professional capacity, in the principal’s best interests. So much is not in doubt. Moreover, early examples of this legal relationship related to the commercial world, as in the old overseas trading companies where the ship’s captain acted as the agent of the ship’s owners. That origin too is not questioned.
Keynes recognised that the legislation protecting worker’s rights might lead to powerful trades unions, motivated by political ideals rather than the long term interests of their members, being the cause of wages led inflation damaging economic activity. His mistake was to argue that it was a political problem for governments, rather than a problem for economics. So no action was taken till the advent of the Thatcher government.
Today the boot is on the other foot. Free market fundamentalism is no less political than the unions were 30 years ago. The fervent ideological belief in private industry being good, public bad, regulation bad, and above all, the primacy of shareholder property rights and the purpose of industry being to maximise their value … all that is equally damaging to industry, perhaps even more so, than was unbridled union power.
Economists, by whom we are all ruled (to quote Keynes), are themselves ruled by abstract theory, rather than by observation of anything which actually exists in the real world. They tend to focus on dichotomies defined by ideal types, such as socialism and capitalism, both easy to describe in their pure forms but non-existent in the real world. Or, another dichotomy: the means by which resources are allocated: central planning or market forces. In reality, resources are allocated by both means: some by market forces and some by planned decisions. The real world takes advantage of both means, but economists argue that there is a simple choice to be made between alternatives as the one best way.
Corporate governance is another simplistic dichotomy on which economics depends. Would companies be best controlled by shareholders or workers? Free market capitalists, including all the UK and US governments of the past thirty years, argue for investor control. That has seen many industries destroyed for the short term interests of their shareholders. Cadbury and Chloride are recent examples of UK companies threatened by this approach to governance. There have been few examples of successful worker controlled companies and there may be little reason to expect them to be more successful than those in investor control.
But the middle ground, where neither shareholders nor workers have absolute control, and where both share responsibility, may be more fertile for corporate success. Germany’s two tier board structure consolidates that joint responsibility and has served German manufacturing industries well. A pragmatic balance between the interests of stakeholders seems more likely to produce the best outcome for the company and therefore all its stakeholders. But it is less easy to make the case than the simplistic dichotomies of economic theory.