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Schumpeter
Mar 2nd 2013 |From the print edition
COMPANIES are the building blocks of the modern world. America has some 6m of
them employing 120m people and controlling $30 trillion-worth of assets.
Emerging markets are catching up: the number of Chinese companies increased by
80% in 2004-08. Globally 3m new firms are registered each year.
But are companies so good for the world? Enron and Lehman Brothers were not.
Corporate debacles have scorched the global economy: the IMF calculates that
the financial crisis produced total bank losses of $2 trillion. They have also
led to a collapse of trust in business: a recent survey of trust in the
professions found that businessmen and bankers came last, along with
politicians.
Why have so many prominent companies gone up in flames? In a new book, Firm
Commitment , Colin Mayer, of Oxford University s Sa d Business School, takes a
familiar argument that shareholders have too much power and gives it new life.
The idea that the main function of companies is to boost shareholder value
rests on a misunderstanding of the nature of the firm, he says. Companies are
not owned by shareholders in the way that ordinary goods are owned. They are
artificial persons with a distinct legal identity. Companies are not just
devices for lowering transaction costs or bundling contracts together. They are
devices for getting groups of people workers and managers as well as investors
to commit themselves to long-term goals.
The doctrine of shareholder primacy is particularly dangerous when combined
with dispersed ownership, he believes. Dispersed ownership (which often occurs
when founding families sell shares to finance growth) leads to a separation
between ownership and control. Managers exploit this separation to feather
their own nests. Owners respond by relying on two devices shareholder activism
or the market for corporate control.
Mr Mayer concedes that dispersed shareholding produces benefits. It provides
companies with liquidity, extends the role of professional managers and limits
the ability of founding families to mess things up. But he worries that the
costs are also mounting. The risk of a hostile takeover often reduces a company
s incentive to invest for the long-term. The temptation to trade firms rather
than build them can hollow out even great institutions: witness the demise of
Britain s once-mighty General Electric Company (GEC). The ease with which
traders can buy and sell shares means the fate of companies can be determined
by people with no stake in their long-term success. Roger Carr, the chairman of
Cadbury, a British food firm bought by Kraft after a bloody takeover battle,
noted that individuals controlling shares which they had owned for only a few
days or weeks determined the destiny of a company that had been built over
almost 200 years.
Can anything be done to limit the damage done by such predatory behaviour? Mr
Mayer thinks corporate social responsibility (CSR) is just hot air unless it
changes the financial incentives of people who run companies. He worries that
government regulation, at best, treats diverse organisations as if they are the
same and, at worst, does more harm than good: the Bubble Act of 1720,
introduced after the collapse of the South Sea Company, delayed the development
of the joint-stock company by over a century.
He is more sympathetic to a third option building long-termism into companies
DNA. Many continental companies such as Germany s ThyssenKrupp and Bosch are
owned or partly owned by foundations that are obliged to take a long view.
Germany saw only three hostile takeovers between 1945 and 2000. For all the
talk of the Anglo-Saxon model , America is less wedded to shareholder power
than Britain. American managers can call upon devices (such as poison pills
and staggered boards ) that make it harder for raiders to take them over. Tech
firms often issue two classes of share (voting and non-voting) so that founders
can remain in charge. Google crowed that this would make it harder for outside
parties to take over or influence Google .
Mr Mayer wants to go further and create a new class of companies trust
companies. These would be overseen by a board of trustees who would be charged
with balancing the interests of various stakeholders and ensuring that the
companies lived up to their corporate values. They would also have recourse to
different classes of shares with different degrees of power. Voting rights
might be linked not just to how many shares you own but also to how long you
have held them.
The companies we keep
Mr Mayer s proposed cure is less persuasive than his diagnosis. Trust companies
can behave as badly as shareholder-controlled ones. ThyssenKrupp, for example,
was recently fined 103m ($127.5m) by Germany s cartel office for its role in
fixing the prices of rail tracks. Mr Mayer praises the Tata Group, which is run
by a trust. Fair enough, but Tata had decades to build up its war chest behind
India s old trade barriers. He points out that great founders like Mayer Lehman
(of Lehman Brothers) infused their firms with values that also helped them
grow. Boards of trustees, being committees, are more likely to produce CSR
waffle.
Mr Mayer saves his argument by linking it to a wider plea for corporate
pluralism. He argues that different sorts of companies are good at different
things. Anglo-Saxon firms are good at making tough decisions. Continental ones
are good at making long-term investments. Partnerships are good at creating
loyal workforces. Policymakers often assume that one corporate form is best,
and discourage others. It would be better if they fostered variety, since
diverse ecosystems are much more robust.
http://Economist.com/blogs/schumpeter
From the print edition: Business