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.
Category Archives: Shareholder Value
The focus on maximising shareholder wealth at the expense of the company and its other stakeholders
BP, the BBC and Agency Theory Again
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.
Paradoxes of Free Market Ownership
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.
Common Theft by Financial Intermediaries
“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.
Codes of Corporate Governance Practice
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 Importance of Agency in ‘The Rise and Fall of Management’
‘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.
Continue reading The Importance of Agency in ‘The Rise and Fall of Management’
The Politicisation of Industry
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.
Corporate Criminality and the Free Market Philosophy
A key tenet of the free market philosophy, elegantly expressed by Milton Friedman, was that businesses should focus exclusively on maximising shareholder value and not allow other considerations, apart from compliance with the law, to intrude on their business activities. That’s what Friedman stood for. And that’s what governments over the past 30 years have lived by. And that’s what still protects big business from having to pay for its own excesses. The speculative banks, the oil companies, the private equity and hedge funds, all steal from the tax payer with the total impunity provided by Friedman’s malign theory. Occasionally, there’s a coincidence of events hitting the headlines together, shouting out the criminal injustice of what is allowed to go on. Today, it’s BP’s destruction in the Gulf of Mexico, the 25 year late convictions over Union Carbide’s poisoning of Bophal residents, and the revelation of multi-billion pound additional decommissioning costs of old UK nuclear power plants. Despite BP’s disastrous poisoning from the Deepwater Horizon well, the company remains much exercised over its next multi-billion pound dividend hand out to shareholders. Friedman still rules.
As always, it’s the average Joe tax payer, who pays the real price, while the exploiters laugh all the way to their tax haven based banks. But the law, for example the 2006 Companies Act, charges company directors with the duty to care for the best long term interests of their company, having regard to the interests of all its stakeholders, not just its shareholders. In fact this has been the case since mid-nineteenth century when limited liability was first established. But Friedman’s rule has become so ubiquitous that company directors have come to believe it is their legal duty to make as much money as possible for shareholders ignoring any other social responsibility.
There will be no change in practice – and criminal pollution will continue – till that simplistic theory is dead and buried and Friedman discredited along with it. Academics might seek an alternative theory with which to replace it, but that is not necessary. Economic theories tend always to be over simplified as they apply to the real world. Rather than a new theory, all that is necessary is to impose existing law such as the Companies Act. That would require directors to act in the best long term interests of their company and all its stakeholders, which the law lists as including employees, suppliers and others specifically including the local community and the environment. Company directors who transgress, as those at BP, Union Carbide, RBS etc, etc, etc, should immediately face the full force of the law.
Simplistic Economics
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.
Financial Swindlers
So it turns out the top brass at Lehman Brothers were deliberately lying about their indebtedness to the tune of $billions. Shades of Enron! So what’s new? Speculative markets are based on lies. In the old days financial institutions such as pension funds and insurance companies, served some social purposes. Today, hedge funds, sovereign funds and the like, serve no social purpose. They exist only to make money for their investors and themselves, both being in a position to take risks with ‘loadsamoney’. They have no moral compass beyond ‘making as much money as possible’ to quote the famous economic mountebank, Milton Friedman. So, of course, they are liars. The accounting profession are culpable, deliberately falsifying balance sheets so they appear less risky than they are. And firms of auditors are liars, declaring the accounts to be “true and fair” when they know perfectly well they are nothing of the kind. But very few of these parasitic liars end up behind bars.
Fighting for Fairness by Remaking the Real Economy 