Shared governance, and shareholder non-governance | OUPblog
The intellectual basis of shareholder control of corporations is that what is good for shareholders is good for everyone. In turn, this is justified by the assertion that only shareholders bear risks that are not compensated by contracts. This idea should be taken as comic relief. Nevertheless, it has been the canonical view of scholars, professionals and legislators for over half a century, only challenged by occasional corporate law tweaks that crisscross the circle by denying any fundamental conflict between shareholders and other parties. Increasingly, however, this view has become unsustainable in a world where wage growth has not kept pace with productivity, where state interventions, especially since 2008, have shielded shareholders from losses, and where corporate scandals, often linked to the environment, have multiplied.
There are three main ways to encourage private companies to do good and avoid evil: investor pressure, state action, and stakeholder control.
Of these, the former, investors seeking to conform to set targets, generally get the best press. Issues of environmental sustainability, board diversity, executive compensation and supply chain ethics are now actively monitored by specialist information providers. Hundreds of variables of environmental, social and governance (ESG) materiality are combined into indices and metrics to judge companies’ compliance with ethical codes. An entire industry has grown up around this theme of quantifying and sorting information and it has met with acceptance, if not approval, from large global corporations who, on the whole, see it as a more secure form of control. than other options and a reasonable complement to established board governance. ESG therefore follows an acceptable narrative as a means of correcting market excesses such as an undue consideration of short-term interests, a disregard for ripple effects (externality) on society, excessive risk-taking or an attack on the moral foundations of the markets. A key moment of endorsement for ESG came in 2019 in a US Business Roundtable statement from senior CEOs who effectively endorsed stakeholder views. However, not everyone is convinced. Nobel laureate Joseph Stiglitz was not the only critic to warn that it was a rhetorical and dishonest device to avoid a backlash against the persistent anti-social and tax avoidance behavior of many signatory companies.
Financial Times columnist Robert Armstrong, a pro-capitalist commentator, has explained nine reasons why ESG is false hope that simply acts as displacement activity – activity that mixes stocks between investors without materially affecting the behviour. This was pointed out by whistleblower Tariq Fancy, former director of sustainability investments at Blackrock. He claims that a market-based solution to financial exchanges for sustainability has been fraudulently pushed by senior executives who are well aware that it cannot solve major problems such as climate change.
The second approach – regulation – is preferred by ESG skeptics such as Stiglitz. And certainly, it is difficult to see progress on these issues without the application of minimum standards. But if the state is a social field of power, it is an uncertain ally of the less powerful. The regulatory approach urges caution due to the increasingly dense and strong ties between state and business exemplified by national champions, light rules with free choice of regulator and appointments to revolving door that have compromised regulators such as the US Environmental Protection Agency. . In addition, there has been a reduction in state competence and capacity for effective regulation in areas such as the information sector or the on-demand economy, even as the increased complexity justifies improvements.
Stakeholder Corporate Governance
These pessimistic conclusions regarding regulation and ESG do not mean that these cannot be part of a solution. But the big question marks above them open the door to the third candidate for controlling corporate power: corporate governance by stakeholders. There are reasons to believe that it is the most important channel for moderating business decisions. It is an institutional arrangement that is based in the business itself and thus provides the quantity and quality of information needed to control the abuses inherent in the current one-sided power structure. Stakeholder governance imparts knowledge from below that is not available to financial analysts and markets, or even regulators. In recent years, accountants, auditors, board members, financiers and regulators have increasingly pretended to ignore the fraud and social harm they were meant to prevent. Stakeholder governance provides control over the actions of directors and shareholders in a way that traditional corporate boards, however many there are of “independent” directors, cannot match.
Over the past few years, we have seen an astonishing range of broad support for stakeholder ideas, only to stagnate in the face of difficulties in implementing them. In the United Kingdom, various interest groups, including the Royal Society of the Arts, the British Academy, the Trades Union Congress (TUC), the Institute for Public Policy Research, the Bank of England and even the Institute of Directors, indicated that they are open to stakeholder initiatives. However, nothing ever seems to happen and initiatives run out of steam. Why is this such a durable model?
The Conservative Party under Theresa May backed the idea of putting workers on company boards in 2016. This was later diluted into the idea of an advisory board and eventually dropped altogether. Labor has also flirted with participation since Tony Blair’s early days; other proposals such as workers on boards or worker-owned investment funds have now been ruled out. These ideas, however well-intentioned, have unfortunately been thoughtless. Board workers mean nothing unless they are organized in a context where there is a level of trust between workers and management. This requires the construction of an institutional architecture, which has been totally neglected in the proposals of the two political parties. In contrast, the TUC recognizes the level of industrial relations transformation needed for such reforms to be effective, but lacks buy-in and commitment from others for radical change.
Reforming corporate governance
There are in fact multiple competing plans for corporate governance reform and this is perhaps the reason why radical change is so difficult to defend. One approach is to reform the shareholder voting system to give greater weight to long-term strategic interests that are threatened by dispersed ownership. However, this would at best solve only one of the drawbacks of shareholder governance. Among the most promising candidates is a focus on the legal framework to expand the duties of directors and to modify complementary “soft law” centered on shareholding in the form of governance codes and codes of takeover bid. Other proposals have also been made for parallel – rather than wholesale replacement – models of shareholder governance by encouraging new forms of incorporation, such as foundation corporations or not-for-profit corporate forms. However, we do not know how these institutions could constitute an important weight in the economy; some Nordic countries where this is the case have particular historical trajectories that have made it possible.
The national specificity of solutions is also the main objection to importing German-style co-determination into liberal market economies such as the UK. There is now plenty of strong evidence that such a system works well in the context of complementary institutions. Thus, the price would be considerable if a way could be found to bring these institutions together in incremental steps to lay the foundations of countervailing power in the boardroom, with interests such as employees having serious weight through direct representation on the main board or on a new supervisory board. One way to achieve this could be to internalize the strategic role of training within the company, not necessarily in terms of delivery, but of sourcing and design. In such a framework, stakeholders and in particular workers would be incentivized to democratize decision-making in the workplace in a collaborative exercise with management – something similar to the works councils that the found in continental Europe. Other suggestions are to organize corporate restructuring in a collaborative manner between workers and management through standards for information sharing and for the preparation of competing alternative plans for discussion and resolution. It is certain that nothing will happen until a critical weight of opinion has opted for a radical change. The dogs bark but the caravan stays. Corporate governance, clearly, is still in the running.