Whose interest does the senior corporate executive really represent?
The contributors to the TUC’s new book on corporate governance agree that “maximising shareholder value” is the governing doctrine of most large public companies. But before asking if companies should be run for their shareholders we need to know if they are.
The book Beyond Shareholder Value contains a range of views, but they broadly split into two types. On one side of this division stand those who assert that such companies shouldn’t be run exclusively in the interests of shareholders. At one end of this group are those such as the TUC itself which argues for greater worker representation throughout the company up to and including the board. An academic version of this argument is that democracy itself is incomplete so long as workers remain disenfranchised in their workplace.
At the other end of this first group are those who argue for wider representation in and around companies, not just worker representation, but also potentially savers, investors, suppliers, communities, taxpayers and so on.
Explicitly or implicitly, all of those in the first group can be described as advocating some variety of stakeholding, that is, that companies should not just serve shareholder interests, but rather the interests of all who have a stake in the company. Most of the discussion in these chapters in the book is taken up with both the why and the how of this.
Those who argue that companies shouldn’t be run in the interests of shareholders alone are the larger group here and it may be for that reason that Jesse Norman, the Conservative MP who spoke at the book’s launch, has since described it as being “generally of the left”. I think that is fair.
So who’s on the other side? Those who assert that notwithstanding the doctrine of shareholder value, companies actually aren’t run in the interests of shareholders. The arguments from this side are more fragmentary but if you look for them they are there.
- The point that previously thriving companies, turned over to the doctrine of shareholder value, subsequently collapsed (ICI, Citigroup).
- The all-encompassing critique of the bonus culture counterposing the interests of senior executives to those of the company – and therefore, among others, shareholders
- That the collapse of both Enron and Worldcom at the start of the 2000s was taken by US policy makers as a sign of that the pursuit of shareholder value had harmed shareholders – yet the response (Sarbanes-Oxley), which sought to increase shareholder accountability, failed to stop the similar but much bigger financial crash of 2008.
- The lament that institutional investors lack the incentive to devote the necessary resources to the governance of the companies in which they hold shares.
This last point motivates the charity ShareAction, whose Manifesto for Responsible Investment, launched in July, is directed at creating a set of duties and incentives for institutional investors to help realise a vision of “an investment system which truly serves savers, society and the environment”. Getting the recent Law Commission conclusion that pension trustees are “not legally obliged to chase short term profits and ignore wider considerations” clarified in law is one of its current priorities. ShareAction doesn’t appear in the TUC book, but this demand for “wider considerations” to be taken into account, coupled with the hostility to “short termism” is right at the heart of it.
How do the two sides of the division in the book impact upon one-another? It is perfectly possible for people to agree that companies don’t serve shareholders’ interests without even having to discuss whether they should. But for those who say accountability should be wider, whether companies actually serve shareholder interests makes the difference between widening accountability (which assumes that there is some in the first place) and creating it. These are very different challenges.
The unaccountability of senior corporate executives appears in the book as an historical problem, first identified in the 1930s, arising from the split in the joint stock company between owners and managers. For several decades, unaccountable managers (so the story goes) created giant firms, good for executive self-aggrandisement, but poor for efficiency. The rise of shareholder value in the 1980s is presented as its antidote. For sure it has wrought a revolution in companies themselves. Yet if senior executives remain unaccountable, has their self- aggrandisement suffered nothing more than a change of form, bloated empires giving way to personal riches beyond most people’s wildest dreams?
At this point, there are three points to make. First, much the stronger challenge to senior corporate executives comes from the assertion that despite the doctrine inscribed on their banner, they don’t actually serve shareholder interests.
Second, shareholders should be included among the stakeholders whose interests need to be represented. Arguments for stakeholding need to be reformulated to that into account.
Third, if senior executives have been unaccountable for so long, successful stakeholder reform is unlikely. That doesn’t mean nothing can be done since the state can still tax, legislate and regulate. But that’s a quite different agenda from the one centred on the representation of stakeholders.