15 July 2021
Better Business Makes the Greater Good
2021, Oxford University Press, 288 pages,
Reviewer: Richard Bronk, https://imaginationineconomics.com/
Why do companies exist? And how can their structure be re-engineered to ensure that they contribute to building a more prosperous, sustainable, and fairer society? This is the ambitious agenda of Prosperity – a radical call for change from one of the UK’s foremost experts on corporate governance and Professor of Management at Oxford’s Said Business School.
The book is far more than a manifesto for change. It’s often passionately expressed critiques of the status quo and detailed recommendations for reform are grounded in an historical analysis of the evolution of the corporation since Roman times and a comparative analysis of geographic differences between corporate governance regimes. This underlines that the current emphasis in the UK on companies as vehicles for maximising shareholder value (and corresponding legal protections for minority shareholders that trump the interests of committed owners and other stakeholders) is a contingent, and far from inevitable, creation of theory and law. Indeed, one contribution of the book is to underline how far the UK is currently an outlier in corporate governance. Prosperity also provides a textbook survey of the relationship between companies and the regulatory, legal, financial, and tax systems in which they operate, as well as a number of vivid examples of corporate success and failure. The range of the book can make it occasionally daunting to read but also very rewarding.
Mayer is sharply critical of the Friedman doctrine that the sole purpose of companies is to make profits for their owners and that all other corporate obligations can be derived from the duty of managers to maximise shareholder value within the legal and regulatory rules of the game. In this he is not unusual. The originality comes in turning on its head many of the concerns of modern corporate governance. In particular, Mayer argues that – far from being the source of a damaging ‘agency problem’ – the separation of ownership and control is foundational to the socio-economic contribution companies make. It is this separation that allows companies the space and management freedom to develop ‘idiosyncratic value’ and make long-term commitments. If managers are forced to prioritise short-term returns for remote owners, their ability to uphold the long-term commitments necessary for investment and successful cooperation with other stakeholders and partners can be severely constrained. For this reason, Mayer argues that, instead of corporate law being geared to aligning the interests of shareholders and company managers, the law should enable managers to have more autonomy in making judgment calls about how best to pursue corporate goals and realise innovative ideas.
There are normally two types of call for reform of the shareholder model of corporate governance. The first moderate line of criticism does not dispute that corporate success should ultimately be measured in terms of the profits generated for owners. Instead, it argues that companies make healthy long-term profits not by aiming directly at profits but rather by pursuing a set of intermediate goals or corporate purposes and, also, by committing to long-term investment, in cooperation with a range of stakeholders. Such moderate critiques usually share Mayer’s criticism of the recent turbocharged fixation with short-term shareholder returns caused by the constant threat of hostile takeovers and intervention by shareholder activists focused solely on rent extraction.
Many of Mayer’s recommendations – ranging from encouraging ‘anchor’ shareholders (and allowing them greater voting rights than other shareholders) to accounting more fully for intellectual and human capital – are relevant to a reformed shareholder model. So, too, is his call for companies to be made more resilient to shocks by removing the current tax distortion in favour of debt over equity finance caused by interest on debt being tax deductible while dividends are not. This distortion encourages high levels of gearing and share buy-backs that artificially boost short-term return on equity at the expense of the capital buffers needed by innovative companies in conditions of uncertainty.
Taking the book’s argument as a whole, though, it stands in a second, altogether more radical tradition that seeks to supplant shareholder value as the ultimate goal of business and measure of its long-term success. An important caveat here is that Mayer’s starting point is very different from many socialist critiques in this vein, in that he sees corporations – if properly structured – as almost uniquely well-placed to solve the myriad problems facing people and the planet. Companies, he underlines, have the power to promote cooperation and collaboration in the realisation of diverse innovative solutions, with a degree of commitment and group creativity that is hard to replicate in other settings.
To realise this potential, however, Mayer argues that companies should be required to enshrine their corporate purpose – their reason for existing – in their articles of association. In this model of corporate governance (‘purpose is primary and shareholder value derivative’) managers would have a fiduciary duty to deliver on the social and economic purposes for which the company was founded; and he recommends boards of trustees to safeguard purpose, long-term value, and the interests of all parties. By this act of articulating purpose and demonstrating credible commitment to its delivery, Mayer argues, the corporate landscape would be transformed.
Prosperity also focuses on the need for companies to internalise the external costs of their activities. Indeed, it sees a rigid refusal to remedy harms done to the environment or other public and social goods in the pursuit of profits and shareholder returns as the reason that the corporate sector is caught in a sterile spiral of ever-increasing regulation designed to curb these external costs. The book proposes that profits should be considered ‘fake’ unless the measures of profit take account of the costs of remedying damage to both internal human capital and external natural and social capital. Furthermore, companies should not only remedy the social and environmental harm they cause; in many cases, their very purpose should be to exploit the market opportunities presented by the societal need to alleviate poverty and safeguard the environment.
This reader was left only partially convinced by some of the more radical aspects of Mayer’s vision. In particular, making corporate purpose the primary objective for managers sounds straightforward but, in practice, the challenges are considerable. In an uncertain and constantly changing world, does it make sense to enshrine too rigidly a particular mission or goal? If a corporate purpose is drawn narrowly, could it not become as much a constraint on the dynamic realisation of socio-economic value as deriving all duties from the requirement to maximise shareholder value? If, on the other hand, a catch-all purpose is envisaged, that still leaves managers with the unenviable task of pursuing novel imaginaries and making a series of agonised trade-offs between competing goals and stakeholder interests, with no obvious measure of accountability.
Mayer’s call to eradicate the distinction between internal and external costs of corporate activity is also potentially fraught. While a company racking up unaccounted damage to its own human capital is clearly damaging to its capacity to flourish long-term, external harms caused by its activities are social in nature and cannot all be remedied. Who, for example, is to decide if noise or traffic levels caused by an industrial plant are excessive? Likewise, consider the social costs inflicted by a firm out-competing another with corresponding job losses in a particular location: these would presumably not need to be compensated by the winning firm. But this only raises the question of where the boundary of corporate responsibility should be drawn. Here, I would argue, democratic politics must play a key role in setting boundaries for legitimate corporate behaviour and deciding which kinds of external costs must be remedied. There are limits to how far firms on their own can decide on the balance between different social and private goals and how to safeguard public goods.
In the end, it may be a moot point whether it is necessary to redefine corporate purposes completely. Mayer’s more moderate proposals for insulating managers from recent extreme versions of fixation on shareholder value by limiting hostile takeovers and rent-seeking by corporate raiders may be enough to improve corporate performance and social welfare considerably. Much of the recent damage to the social, economic, environmental and financial fabric of society could be avoided by returning to a paradigm of well-tempered or enlightened companies – companies operating in the interests of long-term committed shareholders but with sufficient discretion granted to managers to commit credibly to long-term projects, balance the needs of different stakeholders, and make judgments about the necessary trade-offs between a variety of intermediate goals and social responsibilities. In making clear how much is to be gained by such rethinking of corporate governance, Mayer’s book performs a great service.