Companies’ Moral Compass

Schumpeter’s piece entitled Companies’ Moral Compass, [The Economist 9 March 2013] seems to point the way to progress! The points made by Colin Meyer of Said Business School, Oxford, are obviously correct for those who understand how the jurisprudence governing corporations has evolved historically. Corporations are indeed fictional entities in law. More than that however: shareholders do not (and cannot), under limited liability, be the owners of the corporation’s assets. Because the shareholders do not own the assets of the corporation they are not owners in any recognisable sense of that term of the corporation. But these misunderstandings persist and distort everything we have to say about the corporation and its direction. The Economist, at least until now, has done little to dispel this myth.

Since shareholders, at least in Anglo American jurisdictions, have no clear proprietorial rights, especially where publicly traded companies are concerned, this raises fundamental issues not just about the ownership of the corporation but its purposes. It undermines the popular belief that the role of the director is to maximise shareholder value. If this is not true then it also raises questions about the purpose of governance arrangements for the

corporation. Once the fallacy of shareholder primacy is exposed we are bound to ask the question – what should the governance arrangements of corporations aim to achieve?

It seems clear that boards in Anglo American jurisdictions, as they are currently instituted, are failing to address a number of concerns. There are at least two points that need to be emphasised. First the role of independent supervision of the company’s activities is confused with the day to day running of the business. Mixing executive and non executive directors on single boards simply doesn’t work as the evidence proves beyond reasonable doubt. Second the confusing of these two separate functions results in there being no effective mechanism in place for the internalisation of wider stakeholder and shareholder concerns, parties who have a direct and enduring interest in the affairs of the corporation.

Colin Mayer recommends the creation of separate trusts. This might well be a way forward. More generally what is needed – and exists under our very noses in Rhineland and Nordic jurisdictions – are separate and independent supervisory boards. Their role as directors is to ensure that the wealth of the corporation is properly husbanded in the interests of parties other than either semi-detached institutional investors, or worse still self serving directors.

Richard Tudway

Principal

The Centre for International Economics