In one finance tradition, there can only be one god – the stockholder - the first commandment of finance is to maximise his or her value. An alternative account promotes polytheism, with the lords of debt providers, government, employees, customers, suppliers et al, enjoying equal celestial honour to shareholders.
In 1932, two Harvard alumni, Adolf Berle and Gardiner Means, identified corporate governance as a problem. A concentration of large corporations but widely diversified shareholders led to a separation of ownership from control. Hence the need to protect dispersed investors from closely-knit managers. Senior executives may be tempted by short-termism, back overly-risky investments with excessive leverage and lack longer-term cultural values that define a successful business. While in traditional finance the loser is the shareholder, a compelling implication of the stakeholder approach is that poor management is not only bad for shareholders, but for creditors, employees and other stakeholders also.
G in ESG is a reliable tiller, maintaining a clear course to ensure corporate legitimacy in modern society.
Family businesses are one credible way around some of these problems. Families tend to pursue longer-term investment strategies. Their presence in firms helps to avoid conflicts of interest with managers, while upholding deeper values and commitments to a broader stakeholder base, including the local community and employees. The Achilles’ Heel of the family firm has centred around issues of internal rivalries and succession, and sometimes access to growth finance (allow me a plug here – Investec specialises in growth finance!).
Where family ownership is impossible or inappropriate, companies often fall back on other individuals for decision-making and governance. This is no magic wand. Non-Executive Directors (NEDs) find themselves caught between Scylla and Charybdis - dispensing advice and their experience to Executive Directors, while simultaneously trying to provide oversight for a wide spectrum of long and short-term shareholders. Too often this structure ends in Board failure. Other potential solutions, including mutualisation, have their own problems.
There are no easy fixes here, but there are important principles that are sometimes forgotten. Firstly, different companies may need different forms of governance depending on their ownership structures and on where they find themselves in their life cycles - there is no silver bullet and regulatory straightjackets are almost certainly not the answer.
Secondly, there are reasons to consider the establishment of separate Trust Boards, entities designed to act as guardians of evergreen values and culture. Ultimately, values are what matter.
Thirdly, a single liquid share structure vulnerable to capture by short-term shareholders may at times be suitable, but not always. There is nothing wrong, per se, with assigning different voting rights to shareholders, depending on their degree of commitment.
The worst solution of all would be to throw the baby out of the bathwater. The modern corporation, in its various ownership forms, has many virtues – it is a question of the G in ESG being a reliable tiller in each case, maintaining a clear course to ensure corporate legitimacy in modern society. Now more than ever.
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