Corporations flawed to the core
Discredited model of operation is responsible for financial crisis and lack of trust in business, says author of new book
Prof Colin Mayer says that corporations such as the BBC have significant features such as clearly defined values, long-term ownership structures and strong boards
The model of corporation that developed as the 20th century unfolded is fundamentally flawed and is responsible for both the recent world financial crisis and the breakdown in trust in business that now exists. That’s the view of ProfColin Mayer of Said Business School at Oxford University, author of Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in It .
Taking an historical perspective, Mayer notes that corporations were originally established to serve public purposes and evolved into family-run entities with long-term holdings before coming under the control of individual shareholders. Later, companies became dominated by pension and life assurance corporations, but increasingly share registers feature a large number of short-term traders.
The current model, he says, aligns the interests of shareholders with management and those companies that on the surface have the best corporate governance structures, are often the worst offenders when it comes to the wider good.
“There is an upside potential for management and shareholders in taking high risks. The downside risk is one that is primarily taken by creditors, in some instances, that means that the risk is effectively underwritten by the taxpayer as we have seen in the case of the banks,” he tells The Irish Times .
Mayer says the corporations have to work with a remit wider than that of maximising returns for their shareholders and pay for senior management and have to consider the interests of a wide group of stakeholders including employees, customers, suppliers and society in general.
Profit, he argues, is a product, not a purpose, of the corporation that is derivative from its fundamental activities.
“We need corporations whose values we all value, for which we are proud to work, from which we are confident to purchase and in which we can expect a fair return on our investments,” he says.
“We need companies whose shareholders appreciate that there are responsibilities as well as rewards for being owners and who are committed to promoting the interests of the corporation, not just their own .”
The consensus view that emerged in the late 20th century, he says, is that when markets fail, there is a need for more regulation and state engagement and where state organisations malfunction then privatisation and more liberal markets are required. This analysis is flawed, he argues. The problem lies in the structure of the corporation.
Mayer argues for a more benevolent far-sighted model of corporation and cites examples such as Tata and in the UK The John Lewis Group and The BBC. While they are not perfect they have significant features such as clearly defined values, long-term ownership structures and strong boards dedicated to upholding their core principles.
“There is no model of the corporation which serves all purposes, at all times and in all places. The corporation should be diverse in its ownership, control and values, and adaptive and flexible in responding to its changing obligations and opportunities,” he says.
Specifically, he believes that the model of corporation should be one where the main control rests with those shareholders who commit to long-term share ownership. Board control, in terms of voting rights, should be weighted towards these committed stakeholders and could operate on a sliding scale, giving least control to those who merely trade shares short-term. Similar models exist in the Nordic countries, he notes but the UK has blocked this form of dual share ownership for listed companies.
Mayer is critical of financial institutions that offer complex financial instruments to unsuspecting consumers. In essence, he says, it relies on the long-tail of distributions – financial instruments that offer small but steady returns with high probability against a small probability of devastating losses.
“The smart Ponzi, hedge fund and investment bankers pass on the steady returns that they have enjoyed on these schemes and instruments over several years just before they explode in the face of their unsuspecting successor. “The winners in the financial crisis were the investors and executives who sold out just before the crash,” he notes.
Trust in corporations has emerged as a major issue both for consumers and for employees. “There is no doubt that the consumer movement is changing the attitudes of corporations, putting pressure on them to deliver on their wider obligations. Social media has been a very powerful force in this regard. The ability to reveal bad practice is there, but there’s an opportunity too for companies to engage and to articulate their values.”
Employees and potential recruits are also increasingly concerned about the values of the organisation they work for.
“I see it in the attitude of students and younger people. They want to work for organisations that they respect and organisations that they feel will be respected by the wider community – they don’t want to be associated with discredited companies or professions.”
Prof Mayer is in Dublin this week to address a European Corporate Governance conference that is being held as part of Ireland’s Presidency of the Council of the EU and which is supported by PwC, Arthur Cox and the Irish Stock Exchange