A new paper by Sir Geoffrey Owen, Policy Exchange's Head of Industrial Policy and former editor of the Financial Times, wades into the debate about what companies are for - arguing that there is no case for abandoning the principle of accountability to shareholders, or the focus on maximising long-term shareholder value, as the measure of corporate performance.
In the think tank Policy Exchange's latest publication The case for shareholder -based capitalism' examines whether companies should they prioritise the interests of shareholders or those of other stakeholders, including employees, local communities and society at large.
Sir Geoffrey Owen said:
Some critics of the present system believe that big, investor-owned companies are responsible for causing or aggravating some of the world's most pressing problems, such as environmental degradation - and that this is partly due to the doctrine of shareholder primacy. The flaws in the system, according to these critics, will only be corrected if the influence of shareholders is reduced.
However, this is rather too simplistic a view. The focus on shareholder value does not imply that companies should be run for the sole benefit of shareholders. The shareholder-based system is simply the best means of ensuring that society's resources are used to the fullest possible extent, to the benefit of all its members.
The paper goes on to note that expectations among employees, customers and investors about how companies should behave are changing, and most companies are responding to these trends; they are moving in a more stakeholder-friendly direction. But that does not require a reordering of company law.
The paper considers the argument that companies should adopt a social purpose that ranks higher than making profits. The danger is that by diluting the line of accountability such a change will lead to confused decision-making and damage performance. It is entirely possible, indeed desirable, for companies to have a purpose that generates benefits for society and inspires their employees in a way that maximising shareholder value does not. But that can be done within the existing legal framework.
The capitalist system as it has evolved in the UK and the US has imperfections - for example, in the design of executive pay schemes - but to correct them does not demand a radical change in the way companies are governed. Moves to weaken the power of shareholders would undermine an essential element in a dynamic market economy.
In a foreword to the paper Mel Stride, chairman of the House of Commons Treasury Committee, said:
Sir Geoffrey addresses some of the pressing questions and criticisms facing modern capitalism, including the purpose of modern companies, how they reconcile their obligations to stakeholders and shareholders, the accusation of short-termism often levelled at British and American capitalism and finally how inequality relates to pressing questions of shareholder compensation and executive pay.
This paper is a valuable intervention on a live discussion.
A full copy of the report The case for share-holder based capitalism' can be found HERE.
For further information, please contact on amy.fisher@policyexchange.gov.uk or 07799 624 594.