Consider the following thought experiment: write down your list of top 10 policy priorities. What would your key areas for major reform be in today’s Britain? Most likely even the more wonkish amongst you would not have placed ‘corporate governance’ on that list. Corporate governance has not traditionally been a hot topic in Labour policy circles; nor has it been a historical strength of Labour governments. This is a mistake of historic proportions.
Corporate governance is usually seen as a somewhat dry area of policy, replete with arcane rules about boards and audits, necessary but also fairly dull stuff, hardly an obvious candidate for passionate political debate. So why do we think it is such a mistake to overlook it?
We can start by looking at what corporate governance is. The best definition comes from the law professor Margaret Blair, according to whom corporate governance is: ‘the whole set of legal, cultural, and institutional arrangements that determine what public corporations can do, who controls them, how that control is exercised, and how the risks and return from the activities they undertake are allocated[i].’ Traditionally corporate governance has been all about the relationship between managers of companies and shareholders, which helps to explain its limited appeal. But there have been times and places when reform has been taken seriously, to hold directors accountable to a wider range of groups affected by their decisions. Holders of power must be held accountable, but our current system holds directors accountable only to shareholders. There is nothing natural about this, it is a choice informed by a prevailing ideology which stipulates that the goal of companies should be to produce shareholder value. That approach was formalised and rose to prominence in the United States in the 1980s, although UK company law and governance had long been shareholder-oriented. However, as a policy choice, corporate governance could be different, and many company law and management experts strongly disagree that companies should maintain such a laser-like focus on shareholders above all other groups. It has been scrutinised particularly critically by those who value high quality, productive jobs and those who place a high priority on sustainability. So there is no reason why Labour should accept it as a given. After all, a Tory Prime Minister, Theresa May, came to office 10 years ago promising to put workers on company boards. There is so much more that could be done.
Much of what companies do is positive; they provide jobs, economic prosperity and a large part of the tax base that funds public services. But we also know all too well when things go wrong. Take the water companies. Last Summer, a seven-year old boy was hospitalised for several weeks and almost died after kayaking in contaminated water in Lake Windermere. He was also not the only one. Hardly aweek passes without one or other of the water companies in the headlines, either because of thousands of people left for weeks without water, the omnipresent sewage pollution, or because their share prices are soaring (unless it’s the hapless Thames Water) now that they have been allowed to charge customers more. And water is far from being the only public service tied to the corporate world in a way that doesn’t seem to be working for most of us. In her recent book The Asset Class: How Private Equity TurnedCapitalism Against Itself, Hettie O’Brien outlined how investment funds, often from the US, have taken over a range of services, especially in social care, and how this has led to over-indebted providers and poor quality services as short-term cash extraction becomes more important than caring for people – allowing a select few to get extremely rich whilst normal citizens struggle to pay their bills. Though these are the most egregious examples of corporate avarice, this is by no means a limited problem. We could point to conflicts between the public interest and corporate priorities, to the growing indebtedness of companies across a range of sectors and to the record level of CEOs’ pay (atBritain’s largest companies the boss gets well over 100 times the salary of the average worker). All this is done in the name of shareholder value, making it hard to claim that the corporate world is best serving the interests of ordinary people. The root cause of the problem is simple – it is the insistence that companies must at all times prioritise the interests of their shareholders over the other groups affected by their decisions and actions.
It is true that we have seen some positive changes. The Employment Rights Act should tip the balance of power in favour of workers in ways that are more than symbolic; a repeat of P&O Ferries’ 2022 decision to fire almost 800 staff and rehire them under far worse terms and conditions should now be far less likely. But in some ways these address the symptoms rather than the cause, and there is much more that can be done. We have already discussed the failings of the water sector which have amply highlighted the limits of shareholder-driven governance. Renationalisation may not be necessary. However, we cannot expect the corporate sector to regulate itself whilst CEOs are incentivised to increase debt and payouts to shareholders, and subject to a constant threat of hostile takeover if they fail to do so. Change can and will only come through government action.
For example, converting utilities into public service and benefit corporations (an approach advanced by the Liberal Democrats) would embed a purpose other than shareholder returns. This would constitute a real move away from the ideology of shareholder primacy. In practice this could mean employee and community representation on boards, and/or ‘golden shares’ for regulators to veto key decisions. The same model could, in time, be applied to other sectors. Moreover, legislation could be introduced to reform the rules on corporate takeovers in the UK, making it easier to block hostile acquisitions of companies in selected sectors that have particularly important impacts, such as care provision, health, energy, defence and education. Currently, most takeovers go ahead if the shareholders are happy with the price they are offered, regardless of what this means for the future of the company and its stakeholders. Provisions could also be made to allow boards to block takeovers that involve excessive debt or pose a threat to the future of the business and its stakeholders. Competition law scrutiny of private equity takeovers could be made stricter. The Competition and Markets Authority is currently investigating the market for veterinary services; the lesson learnt here is surely that this investigation should have been carried out before private equity consolidation of the sector was allowed. Those private companies that will continue to operate in sensitive sectors such as care should be subject to minimum service standards and staffing levels.
There is much more that can be done in numerous areas, such as board structure and pay, affecting how power in the corporate world is exercised that need not involve major upheaval at a time when economic performance is lacklustre and growth slow. These are just a handful of suggestions for reforms that would help to preserve our environment and protect some of the most vulnerable people in our communities.
It is surely not controversial that those who wield immense power over their employees, our communities, the political system and the environment should beheld accountable to those whose lives are affected by the exercise of their power. Looking at it this way corporate governance is key to ensuring a more balanced distribution of power and economic outcomes. At its core, corporate governance concerns the nature and purpose of the corporation. Without the legal personhood that the law gives to corporations, they would not be able to function. They owe their existence to society which therefore has every right to regulate them and to be involved in debate about their ultimate purpose.This was best articulated by President Theodore Roosevelt just over a hundred and twenty years ago: ‘Great corporations exist only because they are created and safeguarded by our institutions; and it is therefore our right and duty to see that they work in harmony with these institutions[ii].’
[i][i]Blair, M. M. (1995). Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century. Brookings Institution Press.
[ii] From Theodore Roosevelt’s first Annual Message to Congress, 1901.
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All blog posts represent the views of the author alone and not necessarily those of Mainstream.
Tanweer Ali is an Assistant Professor at the Prague University of Economics and Business. Andrew Johnston is Professor of Company Law and Corporate Governance at the University of Warwick
