Tag Archives: finance

Power sharing

Shareholders don’t really “own” firms, so why do they call the shots?

We all like to read stuff in the papers we agree with, but it’s particularly satisfying to discover an idea that gives intellectual ballast to something you believe instinctively. For me, this was the case with Prem Sikka’s piece on corporate power and funding in yesterday’s Guardian.

British Motor Corporation share certificate from 1959.
A share certificate issued by the British Motor Coporation (forerunner of British Leyland and Rover) in 1959. Should possessing one of these give you dominance over other providers of capital, effort and knowledge?

Prem is professor of accounting at Essex University (stay with me). His point is simple but revolutionary: the idea that shareholders “own” firms is wrong. In fact, shareholders provide only a small fraction of total capital for most large firms – around 5% to 7% for major banks, and less than 50% for almost all FTSE 100 firms. Most capital – including what accountants call “intangible assets”, like knowledge and brand loyalty – comes from other stakeholders, including workers, suppliers, customers and society at large.

Given this, “there is no logical or financial reason to prioritise the interests of shareholders over other stakeholders in large companies,” says Prem. “In an era of universal suffrage, enabling only those with financial interests to elect directors is unsound.”

(This prompted me to dig out the accounts from my own small business. We are by no means a heavily indebted firm but, sure enough, the capital from other people – creditors, the bank and the goodwill of our clients – would probably add up to rather more than I and my business partner have put in.)

Last summer, I wrote a piece asking why, when we have so many models in the public and “third” sectors, we still only have one clapped-out model in the private sector: the shareholder-controlled, profit-maximising corporation. Shareholders are the one stakeholder in a firm whose sole interest is maximising profits in the short-term. And yet we let them run the whole shooting match. I didn’t pick up on Prem’s argument about shareholders not really owning firms and having no moral right to control them, but he’s the professor of accounting, not me.

His solution is “to get rid of shareholder supremacy from company law”. Yes, we need to promote alternatives to the conventional corporate model – mutuals, co-operatives, not-for-profit organisations and the like – but we also need to rethink what a “company” is, and what it’s for.

We might also be able to get rid of the awkward distinction between the “private sector” and the “third” or “not-for-profit” sector. Many small private firms already operate informally on a kind of “third” sector model, with goals other than just maximising profits (I know mine does). This is because of the choices their owners make about what they want to achieve, how they want to live their lives, or simply because they want to treat their workers with respect. No doubt these small businesses are what the serious “entrepreneurs” on Dragon’s Den dismiss as “lifestyle businesses”.

But large firms are locked into this one corporate model which forces them, sooner or later, to behave in the same way – running cartels, rigging prices, avoiding tax and ripping off their workers and customers. It’s only through these “institutional abuses” that companies can meet the inflated profit expectations of the stock market and the equally-inflated salary expectations of their directors, argues Prem.

Like me, Prem believes “the primary purpose of a corporation is to serve society” in whatever way works best. Supporters of the status quo will argue that shareholders’ ruthless pursuit of profit does this by bringing prosperity and creating jobs. But workers and other stakeholders want those things too. Why do we think here-today-gone-tomorrow shareholders, who often have little involvement in the company they’re supposed to “own”, know better than all the people who work in it, depend on it and, just perhaps, actually care what happens to it?

Empty vessels

Many British firms are just investment vehicles with nothing inside.

I run a small business. We don’t have a mission statement and we’re not about to write one. But I do sometimes think about what the purpose of our business is. I know it’s not to maximise profits. It might be to make enough profit so my business partner and I can earn a reasonable living. It might be provide us with work we enjoy. Or to work with clients we like and whose aims we respect. Or it might just be a way of dodging the routines and vicissitudes of corporate life.

It’s probably a bit of all of these things and more. We have a variety of purposes and a range of motivations, some of which probably conflict with each other, and the relative weight we give to them probably changes from time to time. I suspect most very small businesses are like this — their purposes directly reflect the lifestyle choices and shifting enthusiasms of their owners and workers.

Large companies, with thousands or millions of anonymous owners, inhabit a different universe. Shareholders demand returns, and increasingly the returns they want are quick ones. Fewer and fewer investors in our hyperactive financial markets are interested in long-term earnings from anything as boring as dividends; they want higher share prices and they want them now. That way they can cash in their winnings double quick and don’t have to stick around for when things go south.

Maximising shareholder value is the only game in town. This means prioritising short-term profits over long-term growth and sustainability, ramping up asset values, constant image makeovers and rebranding exercises, hyping up mediocre or under-developed products and a mania for acquisitions and mergers (since takeover speculation tends to inflate share prices – I will write more on the Anglo-American obsession with takeovers, which many executives seem to see as some sort of virility test.)

The problem of short-termism in British firms has been well recognised, even by business insiders. But I think we’ve gone beyond short-termism. The problem is no longer just that companies think too short-term to achieve their purposes, it’s that they often don’t seem to have any meaningful purposes at all.

If shareholder value is all that counts, then firms are nothing more than financial products – effectively they are all part of the financial services industry which dominates the British economy. Many big British firms seem to be conglomerates of convenience, flashy investment vehicles cobbled together to catch the eye of speculators. It doesn’t seem to matter much to their owners or top executives what they actually do or make.

Writing in the Observer about the phone hacking trial last month, Will Hutton said: “Companies in general, and media companies in particular, must put a sense of purpose at their heart.” Even some business moguls can see the problem. Hutton quoted Elisabeth Murdoch (of all people): “It’s increasingly apparent that the absence of purpose, of a moral language within government, media or business could become one of the most dangerous own goals for capitalism and freedom.”

Good, but looking at the published strategies of FTSE 100 companies is still dispiriting. Capita and Wolseley are two (not untypical) examples. Capita tautologically describes its “business goal” as “building a sustainable business that meets the needs of our stakeholders”. Capita “generates and supports growth” by “targeting growing markets”, “securing organic growth and acquisitions” and “building our capacity and scale”. Capita grows by growing. This is a firm which seems to have no other purpose than to get bigger.

Wolseley, which (I think) has something to do with building materials, has a “vision statement” on it’s website: “Wolseley creates enhanced value for all stakeholders by leveraging the considerable strengths of its individual businesses.” That’s it. At least it’s short, but it’s no more meaningful than Capita’s.

Nothing about what they produces or the services they offers, nothing that shows any pride or interest in the work of their staff, nothing about what the firm aims to do for people or to contribute to society. It’s as if these companies exist in a separate world called “business” and have no relationship at all with the society in which they operate. Simply replacing the word “shareholders” with “stakeholders” doesn’t really cut it.

Does this matter? I think it probably matters a great deal. I have a small hunch this sort of attitude, coming from the top, has something to do with Britain’s notoriously lousy productivity, and a big hunch that it’s behind our rubbish levels of staff engagement. Certainly its hard to see how many workers will be enthused by concepts as remote and meaningless as “leveraging strengths” or “enhancing value”.