Corporations Must End Love Affair With Shareholder: Books

The modern corporation is broken, says Colin Mayer, an Oxford University business professor whose provocative new book, “Firm Commitment,” is aimed at overhauling what is in my view the world’s most important institution.

Mayer’s broadside has failings of its own. He thinks the corporation has hit rock bottom -- “We are currently at a nadir” -- but offers little evidence that business today is more corrupt or corrosive than in the past, or that the corporation as commercial vessel is more prone to take the form of a pirate ship than is a family firm or old-fashioned partnership.

Hey professor, remember the robber barons? How about Willy Loman?

Yet, ultimately, Mayer’s critique of the modern corporation will resonate with millions who sense that something serious has gone amiss -- and who will identify with the observation of John Maynard Keynes, in 1933, that “we have until recently conceived it a moral duty to ruin the tillers of the soil and destroy the age-long human traditions attendant on husbandry, if we could get a loaf of bread thereby a 10th of a penny cheaper.”

Harnessing Money

Let’s be clear: Mayer is no enemy of capitalism. On the contrary, he recognizes that the limited liability corporation, by insulating its owners from losses beyond their invested capital, has been extraordinarily effective at harnessing money on behalf of progress. But he argues that, shackled to the wrong ideas and governance structure, it’s proficient at causing harm.

The problem, he says, isn’t the shortchanging of shareholders by lax boards and overpaid chief executives but the very opposite. To Mayer the issue is our fanatical focus on shareholders at the expense of all else.

Corporations are failing socially and morally, he says, because they feel duty-bound to ignore the vital interests of the many other parties -- employees, suppliers and citizens, to name three -- who have skin in the game even though they haven’t invested capital.

Today’s prevailing business ideology -- that maximizing returns to shareholders is all that counts -- amounts to a pernicious dogma, in the author’s view. People take it for granted, like gravity, yet until we challenge it, Mayer says, we will remain trapped in a form of capitalism that is neither ethically nor environmentally sustainable.

It’s not even good for business, which needs long-term investment.

Low Trust

To Mayer, corporations are really vehicles for commitment. Investors, employees and others must be able to commit capital, talent and time, and the corporation must in turn commit to those who invest in it. Unfortunately, he says, “today’s corporations are currently locked into ‘a low trust’ equilibrium in which neither investors nor stakeholders wish to invest for the long-term and firms duly respond by undertaking short-term investments.”

Regulation isn’t the answer, since regulations can be circumvented and regulators co-opted, resulting in “a system that confuses rules with standards, compliance with compassion and obedience with integrity.”

New Course

Instead, he suggests that large corporations set themselves on a new moral course by embracing three principles: first, declare their values; then hire trustees to serve as custodians of those values; and finally, give enhanced (or even sole) control of the company to long-term shareholders while allowing unlimited short-term investments to maintain share liquidity.

The idea is to acknowledge and balance the interests of the corporation’s various stakeholders. Can any of this work? It sounds idealistic, but some European companies, as well as nonprofit organizations such as the British Broadcasting Corp., thrive with such a set-up. Mayer notes, moreover, that businesses and national economies in most of the world get by without the kind of dispersed ownership so common in the U.S. and U.K.

“What is being suggested here,” the author writes, “requires no riots, no violence, no fundamental changes in our capitalist system, just modest modifications to the most remarkable organ we have created to date which will give it an ethical, not an immoral, heart.”

It would still be a tall order. But Mayer’s book is a good first step.

“Firm Commitment: Why the Corporation Is Failing Us and How To Restore Trust in It” is published by Oxford University Press in the U.S. and U.K. (306 pages, $29.95, 16.99 pounds). To buy this book in North America, click here.

(Daniel Akst writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)

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