The intellectual basis for shareholder control of firms is that what is good for shareholders is good for everyone. In turn that is rationalized by the claim that only shareholders bear risks that are not compensated by contracts. This idea should be viewed as comic relief. Nevertheless, it has been the canonical view of academics, professionals, and law-makers for more than half a century—only challenged by occasional tweaks of company law that square the circle by denying any fundamental conflict between shareholders and other parties. Increasingly, however, this view has become untenable in a world where wage growth has not kept up with productivity, where state interventions, especially since 2008, have protected shareholders from losses, and where company scandals, often environmentally related, have proliferated.
There are three main ways in which private corporations can be encouraged to do good and avoid bad: investor pressure, state action, and stakeholder control.
Of these, the first—investors seeking compliance with set goals—tends to get the best press. Issues of environmental sustainability, board diversity, executive pay, and supply chain ethics are now actively monitored by specialized information providers. Hundreds of variables of Environmental, Social, and Governance (ESG) significance are combined into indices and metrics to judge the conformance of companies to ethical codes. A whole industry has grown up around this theme to quantify and sift information and it has met with acceptance, if not approval, from large global companies who, by and large, see it as a safer form of control than other options and a reasonable complement to established board governance. ESG thus follows an acceptable narrative as a way to correct market excesses such as an undue regard for short term interests, a disregard for spillover (externality) effects on society, excessive risk-taking, or an undermining of the moral foundations of markets. A key moment of approval for ESG came in a 2019 statement by the US Business Roundtable of senior CEOs who effectively endorsed stakeholder views. Nevertheless, not everyone is convinced. Nobel Laureate Joseph Stiglitz was not the only critic to warn that it was a rhetorical and disingenuous device to avoid a backlash against continuing anti-social and tax-avoiding behaviour of many of the signatory companies.
The Financial Times columnist Robert Armstrong, a strong pro-capitalist commentator, has explained nine reasons why ESG is a false hope that simply acts as a displacement activity—one that shuffles shares between investors without materially affecting behaviour. This has been underscored by whistle blower Tariq Fancy, previously chief investment officer for sustainability at Blackrock. He claims that a market-based solution of financial trades in sustainability has been fraudulently pushed by senior executives who are well aware that it cannot solve major issues such as climate change.
The second approach—regulation—is preferred by ESG sceptics such as Stiglitz. And certainly, it is hard to see any progress in such issues without the enforcement of minimal standards. But if the state is a social field of power, it is an uncertain ally of the less powerful. The regulatory approach invites some caution due to increasingly dense and strong state-to-company links exemplified by national champions, light-touch rules with the free choice of regulator, and revolving door appointments that have compromised regulatory agencies 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 gig economy, even as increased complexity warrants improvements.
Stakeholder corporate governance
These pessimistic conclusions in relation to either regulation and ESG do not mean that these cannot be part of a solution. But the large question-marks that hang over them open the door to the third candidate for checking the power of corporations: stakeholder corporate governance. There is reason to believe that this is the most important channel to moderate company decisions. It is an institutional arrangement that is based in the company itself and thus provides the quantity and quality of information that is needed to check abuses inherent in the current one-sided power structure. Stakeholder governance transmits knowledge from below that is not available to financial analysts and markets, nor even to regulators. In recent years, accountants, auditors, board members, financiers, and regulators have increasingly claimed ignorance of fraud and social damage that they were supposed to prevent. Stakeholder governance provides a check on both directors’ and shareholders’ actions in a way that traditional company boards—no matter how full of “independent” directors—cannot match.
In recent years, we have seen an astonishing line-up of broad support for stakeholder ideas—only to stall in the face of difficulties in implementing them. In the UK, various interests, including the Royal Society of the Arts, the British Academy, the Trades Union Congress (TUC), the Institute for Public Policy Research, Bank of England, and even the Institute of Directors, have indicated that they are open to stakeholder initiatives. Nevertheless, nothing ever seems to happen and initiatives fizzle out. Why is that such an enduring pattern?
The Conservative Party under Theresa May backed the idea of placing workers on the boards of companies in 2016. This was later diluted to the idea of an advisory committee and eventually dropped entirely. The Labour Party too has flirted with stakeholding from the early days of Tony Blair; other proposals such as workers on boards or worker-owned investment funds have now been sidelined. These ideas, however well intentioned, were lamentably unthought through. Workers on boards means little unless organized within a context where there a level of trust between labour and management. That requires an institutional architecture to be constructed, something that was totally neglected in the proposals by both political parties. By contrast, the TUC recognizes the level of transformation of industrial relations that is needed for such reforms to be effective but lacks the 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 may be why radical change is so difficult to argue for. One approach is to reform the system of shareholder voting so as to give greater weight to long-term strategic interests that are at risk under dispersed ownership. This however would at best only address one of the drawbacks of shareholder governance. More promising candidates include a focus on the legal framework with the aim of broadening the duties of directors and changing the complementary shareholder centric “soft law” in the form of governance codes and takeover codes. Other proposals have also been made for parallel models—rather than wholesale replacement—of shareholder governance by encouraging new forms of incorporation, such as foundation companies or not-for-profit business forms. Yet it is unclear how these institutions could form a large weight in the economy; some Nordic countries where that is the case have particular historical trajectories that enabled it.
The country specificity of solutions is also the main objection to the importing of German-style co-determination to liberal market economies such as the UK. There is now much good evidence that such a system works well in the context of complementary institutions. So, the prize would be considerable if some way could be found to approximate these institutions by incremental steps so as to lay the groundwork for countervailing power in the boardroom, with interests such as employees having serious weight through direct representation on the main board or a new supervisory board. One way of bringing this about might be to internalize the strategic training role within the company—not necessarily in terms of provision but of procurement and design. In such a framework, stakeholders and particularly workers would have an incentive to democratize decision-making in the workplace in a collaborative exercise with management—something similar to the works councils found in continental Europe. Other suggestions are to arrange the restructuring of companies in a collaborative way between labour and management by norms of information sharing and for the preparation of alternative competing plans for discussion and resolution. For sure nothing will happen until a critical weight of opinion opts for radical change. The dogs bark but the caravan remains. Corporate governance, clearly, is still in contention.