Who owns the company?

SIR – Schumpeter’s column on outsourcing company boards talked of “the relationship between shareholders who own companies and managers who run them” (August 16th). The notion that shareholders “own” the corporation is in most important respects wrong and needs careful qualification. Institutional investors (commonly referred to as shareholders) in publicly traded corporations under Anglo-American jurisdictions are in many fundamental respects different from the shareholders of private and untraded corporations.

They do not and cannot, because of limited liability, own the assets of the corporation. Schumpeter could do worse than read the judgment of the House of Lords in Salomon v Salomon (1897) which starts the ball rolling. The corporation owns its assets and the board manages these assets. The only thing the shareholders own is a conditional claim on the profits of the corporation, depending ultimately on the board as to what dividend, if any, the corporation declares. The only ultimate sanction they have is to sell and buy elsewhere.

The problem with the boards of publicly traded corporations is that they have too much unaccountable power. Because the boards are unitary in structure there is no proper or effective independent governance. The scale of cronyism is both wider and deeper than Schumpeter cares to admit. Neither Sarbanes-Oxley nor the Cadbury code of best practices addresses this matter in a fundamental way.

Governance arrangements are not the same elsewhere. In Rhineland and Nordic jurisdictions there are important lessons to be learnt about “inclusivity” which Schumpeter sensibly supports.

Richard Tudway

Principal

The Centre for International Economics