OPINION:The best way to demolish our economic governance system is to shift power, under law, from shareholders only – to all stakeholders, writes PAUL SWEENEY.
TO GO back to “business as usual” after this tragic recession ends, will make our suffering in vain. To endure mass unemployment, the desperate, unnecessary banking crisis, soaring taxes (to bail out the banks), reduced public services, but then to repeat the crisis in 10 or 20 years, would be folly.
So it was welcome that the chairman of the Irish Stock Exchange, Padraic O’Connor, has called for debate on the regulation and oversight of companies (Irish Times, Opinion and Analysis, April 30th). For much of this crisis was created in the boardrooms of Irish companies. O’Connor has struck the nail on the head on the vital micro-economic issue of how firms are governed. This crisis could have been avoided, had Irish company governance been more inclusive.
O’Connor is correct to warn against ill-considered regulation and he points out that there are conflicting priorities around markets, stability and consumer protection. However, I would argue against his view that priority must be given to market and shareholder concerns. While he is correct that investor confidence must be restored, I would argue that Ireland needs to transform Irish company law and practice. Regrettably, he is wrong to assert that most Irish firms operate to the highest standards.
We must abandon the Anglo-Saxon model of “shareholder value” which can give all power to top management, as it did in the banks in the Anglo-American economies, including ours, if we are not to have another deep recession in 10 years.
We must change Irish company law radically from the narrow interest of shareholders to the broader stakeholder model, as in Germany, the Nordic countries or even Japan. I argue this not just because Jack Welch, the so-called father of shareholder value, recently admitted that company law based on shareholder value was wrong. He did not just recant. He said that “shareholder value is the dumbest idea in the world”. Welch now admits that it is a result and not a strategy. He now admits that employees, customers and products matter.
There has to be a more inclusive corporate governance – where the wider interests of workers, consumers, suppliers, the communities and the environment must be considered by company boards, under law, not just shareholders.
Sometimes when a government thinks it is being pro-business, it can actually be working against it. For example, the pursuit of pro-cyclical economic policies in the property boom, combined with massive tax subsidies to builders and speculators, exacerbated the boom and the bust. These policies ultimately put many builders, banks and other firms out of business.
Similarly, this government’s policy of facilitating reduced financial disclosure and transparency has worked against Ireland’s reputation. This fine reputation has been destroyed by a few enterprise directors, aided by a few complicit state regulators.
This government’s policies which are ultimately anti-business include: (a) its provision of loopholes such as “unlimited company” status (no published accounts, no matter how large the company); (b) its bizarre move to reduce disclosure limits for companies, under proposed companies legislation; and (c) its failure and unwillingness to protect whistleblowers (who could have saved the banks).
Existing standards of Irish company governance, much of which is based on voluntary codes of practice, is still poorly executed by companies.
A recent Grant Thornton review on the extent of compliance with the combined code by Irish companies, found that approximately 50 per cent of stock exchange companies were non-compliant. It concluded that the voluntary approach to the code has failed and that the only acceptable solution is to incorporate governance principles into legislation.
The Government must reform corporate governance of firms radically; otherwise it will be difficult to restore international confidence in Ireland as a suitable place to invest and to do business. But just as importantly, the balance of power is too narrowly vested in top executives under the shareholder value-dominated Irish company law.
The best way to demolish cosy Irish capitalism, as the Financial Times called our economic governance system, is to shift power, under law, from shareholders only – who, too often, are only the top executives – to all stakeholders.
We cannot endure a deep recession, which was avoidable, and then revert to running the economy and business in the same way as we did before. Ireland cannot go back to cosy Irish capitalism. There has to be a transformation in the way companies are run. This means a change in the power relationship.
But as our tax euro are bailing out the banks, the relationship has already changed. Ireland must now become the world leader on good corporate governance.
Paul Sweeney is economic adviser to Ictu, the Irish Congress of Trade Unions