Balanced and erudite contribution to an important debate.
As a Business School Dean and teacher on a variety of international business courses, I warmly welcome Professor Tudway's balanced and erudite contribution to an important debate. My students from all over the world have found his approach to be stimulating and thought provoking. His thorough research, his logical and reasoned arguments and his clear grasp of the complex issues which inform this debate shine through in every chapter. From a practicing teacher's perspective, it is a well-structured learning resource, full of contemporary illustrations to support his clear and incisive exposition of the subject matter - a joy to use in the classroom and to support other teaching and learning materials.
Ray Hilditch, Richmond University
Why did I write the Looming Corporate Calamity?
It was prompted initially by project work I was doing in the Russian Federation. I recall well a meeting at which I was asked one simple question: who owns the limited liability corporation? The Russian government of Boris Yeltsin had been urged by the US government to put corporation law based on American Law on their own statute book. They were keen to get a clear answer to that key question. This was in the mid 1990s when I was providing advice on capital markets reform.
The Kremlin in Moscow
With little hesitation I said…. . the shareholders own the corporation. This reply led to further questions. I very soon realised that my initial rely was in some crucial respects misleading. The privatisation of Russian state owned enterprises was already in train. Officials were clearly interested in settling this important question. The argument from the Russian side was that the shareholders couldn’t be the owners. Limited liability capped shareholder liability - in the event of corporate failure - to the value of the shares lost. I saw immediately the logical force of the argument.
That event was to radically reshape my thinking about the nature of the corporation and the relationship between the shareholders and the corporation. In my research I very soon discovered that the limited liability corporation is a fictional entity in law and most importantly that it owns its own assets. The shareholders, in short, are detached from the corporation. They own shares. But this is different. Owning shares amounts to a non specific undertaking by the corporation to pay a dividend from future profits. Shares, in law, are clearly not claims on the assets of the corporation. They reflect property rights which are at best tenuous. Shareholders or institutional investors have very limited powers. All they can do is sell their stake if they’re not satisfied.
I then asked myself the key question. How did the myth of shareholder ownership arise and why has it been absorbed and accepted with so little challenge. In my research I discovered that the myth had been deliberately created. The myth aims to resolve an issue which is central to something called the Agent Principal problem. This first surfaced in the US in the 1930s. It arose as founding shareholders of corporations gradually sold out to institutional investors. This gradually left the corporation without the influence of founding shareholders. It placed increasing powers in the hands of paid directors in the day to day management of the corporation. The myth amounted to a move to rein-in and realign the interests of directors and managers with those of the shareholder. This explains the shape of corporate governance reform that has evolved in Anglo American jurisdictions.
The reality, however, is that little has changed. The directors rely heavily on the mantra that they are ‘the servants of the shareholders’ when they are not. It suits them perfectly. The shareholders or institutional investors know the reality of the situation. They have limited powers over the directors and the corporation. But one unintended consequence is that the progressive aspects of managerial capitalism have been replaced by the ideology that directors are there to maximise profits for the shareholders. There is nothing in statute or corporate law that supports this conclusion. Despite everything that has happened the Agent Principal problem remains unresolved. Corporations as a result have become increasingly less socially responsible in their actions and behaviour. The corporate calamity continues to loom. Radical reform must be put in hand.