Category Archives: Corporate Ownership

Different forms of ownership, public limited company, co-operatiuves and various forms of co-ownership.

Corporate Ownership, Economics, free trade ideology, Management Practice, Management Theory, Shareholder Value

The Neoclassical S-Curve

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The pattern of technological progress has been found to be surprisingly consistent. New technology has to clear various hurdles before attracting funds for its commercial development. A successful project that gets fully exploited grows fast, all the time getting detailed improvements and added features. Eventually, progress begins to slow, returns from further R&D diminish and the technology begins to stagnate, before being replaced by something totally new and different which starts the whole process off again. The graph of this progression is the S curve, starting at the tail of the S, going through a rapid growth and tailing off, before being replaced by a new S.

About 30 years ago, when Friedman’s fixation on maximising shareholder wealth was beginning to be widely adopted, S curves were a trendy form of strategic analysis. They had been applied to many industrial sectors, studying the introduction, development and replacement of technologies, all following discernible S curve progressions. However, the idea was not then applied to theoretical development.

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Company Law, Corporate Governance, Corporate Ownership, Free Market Capitalism, free trade ideology, Political Decision, Shareholder Value, Stakeholder theory

A Further Word on Cadbury

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The takeover of British confectioner Cadbury, with its long and honourable history in British industry, from its Quaker origins to its death throes earlier this year, has been featured as the main topic of two posts on this site, and mentioned in passing on five others. It is a compulsive story which celebrates the satisfaction of greed, the naïve stupidity of ideologically driven government, the destruction of Britain’s real economy and its real jobs, and the fatalistic acceptance of all this by the population at large.

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Agency theory, Corporate Ownership, Economic History, Economics, Moral Hazard, Shareholder Value

The Root Flaw in Economic Thinking

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The idea of economic man, sometimes given a Latin nomenclature to increase its gravitas, is the real cause of economics’ more recent failures. Forty years ago it was referred to as a nineteenth century idea, as though the study of economics had moved on since that primitive Victorian era. But with Friedman’s shareholder primacy in the ascendancy with its supporting “theories” of agency, transaction costs and the market in corporate management, economic man resurged and is still dominant today, and wreaking its massive destruction.

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Company Law, Corporate Governance, Corporate Ownership, Economic History, Economics, Free Market Capitalism, Shareholder Value, Stakeholder theory

Unpicking Shareholder Primacy

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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.

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Corporate Governance, Corporate Ownership, Economic History, Economics, Free Market Capitalism, Management Practice, Political Decision, Public Sector

Cut or Spend? Fad or Strategy?

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Before the British coalition government’s proposed cuts were announced they were greeted by 39 top business people writing to the Daily Telegraph confirming that they would create the necessary jobs so as to make the public sector cuts work. That way tax rises might be avoided and long-term cuts in public sector activity achieved. For them, any reduction in tax and spend would be a Good Thing. Well, business people would say that, wouldn’t they! But were they expressing a seriously thought through strategy, or merely expressing the currently dominant free market fad?

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Agency theory, Corporate Ownership, Economic History, Economics, Free Market Capitalism, Management Practice, Shareholder Value

The Institutional Truth of Transaction Costs

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Since Adam Smith’s example of the pin factory, economists have never been able to produce a satisfactory theory of the industrial firm. They’ve thought of it as a black box, expressed it as a production function involving such illuminating variables as price and quantity, and they’ve reduced it to the agency relationship falsely claiming managers to be the agents of shareholders (see other postings on this site). This inadequacy may be part of the reason why, despite Adam Smith, mainstream economists give markets pride of place over the firm.

Belief in the extreme power of market forces, so long as they were free from regulation or any other form of interference, led to the curious belief that the market could produce any item at some cost: the costs of transactions in the market. Only if a firm could produce cheaper than the cost of market transactions, would the firm be justified in production. This fertile thread of economic theory, originated in an article by Coase in 1937, but was developed in the 1960s by a group led by Williamson – last year’s joint Nobel laureate. It challenged the legitimacy of managerial decision makers, arguing the power of market forces to decide.

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Corporate Governance, Corporate Ownership, Economics, Free Market Capitalism, Management Practice, Moral Hazard

CBI's faux call for tougher takeover rules

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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.

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Bank Bonuses, Corporate Ownership, Economics, Moral Hazard, Shareholder Value

Paradoxes of Free Market Ownership

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The hero of the free market philosophy is surely the entrepreneur, the one who has the entrepreneurial spirit to start from small beginnings and build something not only with their own sweat, blood and creativity, but also by putting their own money at risk. They control and own. Most of them fail but a few succeed and go on to greater things, giving employment to large numbers and addressing some want or need in a uniquely satisfying way which assures their success. That is the free market hero; and socialism’s arch villain.

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Bank Bonuses, Corporate Governance, Corporate Ownership, Economic History, Financial Reporting Council, Free Market Capitalism, Moral Hazard, Shareholder Value

Common Theft by Financial Intermediaries

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“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.

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Accounting profession, Audit profession, Corporate Governance, Corporate Ownership, Free Market Capitalism, Regulation, Shareholder Value

Codes of Corporate Governance Practice

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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?

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