Submission to The Business Skills and Innovation Commons Select Committee: Corporate Governance Inquiry

Abstract

This Submission deals with corporate governance reforms that we propose are needed in the UK.The context for this Parliament Inquiry into corporate governance in the UK largely revolves around public distaste for the ‘unacceptable face of capitalism’ (eg see ‘Philip Green is not the only unacceptable face of capitalism’, Financial Times (28 July 2016)) which has manifested itself in several recent corporate scandals, such as those at BHS and SportsDirect. We believe that the capitalist model is still a sound basis for economic order as it can be supportive of individual development and freedom, economic growth, and aligned with our democratic values. However, modern capitalism is interposed by the corporation (eg Galbraith, 1976), now the predominant way of organising business and enterprise. For various reasons, the modern corporation can fall short as an effective vehicle through which to realise the optimistic capitalist vision.In the UK, the legal construct of the modern corporation is a ‘separate legal person’ subject to internal control by the ‘Board of Directors’ and, to a greater latitude than in many jurisdictions, by shareholders. The dominant ‘contractarian’ ideology of the corporation which underlies shareholder primacy unabashedly supports the purpose of the modern corporation as maximising shareholder wealth. Neither the legal nor prevailing ideological construct of the modern corporation reflects the reality that (a) the economic organisation is made up of many more parts than its ‘Board’ or shareholders, and (b) the societal institution that is the corporation serves multifaceted purposes and carries out activities not narrowly confined to shareholder wealth maximisation. Where recent corporate practices now reflect the ‘unacceptable face of capitalism’, we argue that this is because such practices are based on exploiting the limits in existing corporate law and ideology, i.e. pursuing a narrow-minded view of ‘shareholder primacy’ which ultimately subverts the more positive elements that could characterise a capitalist economic system.Importance of Corporate Governance: The economy-wide framework of corporate governance (as embodied in both legislation/regulations imposed by the state and company-level business practices and attitudes) could play a significant role in driving recognition and fair valuation of plural and diverse sources of ‘capital’ mediated by the modern corporation. We should not accept that corporate governance should only be about the Board’s accountability to shareholders. The argument for accepting such a model, which has been in the past justified by arguments concerning corporate efficiency, is increasingly weak, as the US and UK corporate sectors, representative of this approach, have produced many instances of corporate scandals and malpractices, and have contributed greatly to social inequality. It is also increasingly clear that a corporate objectives driven by considerations of short-term shareholder value maximisation are associated with various undesirable features of the UK economy, such as internationally weak levels of research and development expenditure (less than half that of China as a percentage of GDP), an unhelpful tendency amongst listed companies to distribute cash flow to shareholders (through share buy-backs and dividends) rather than re-invest in innovation, training and long-term success, and low levels of labour productivity relative to other advanced economies. Rising levels of income inequality and low levels of public trust in business are also deleterious side effects of the UK model of corporate and economic governance.This does not mean that we argue for corporate law to intervene into the distributive outcomes in a corporation directly, as we view this approach to be too intrusive. We argue that there is a need for more emphasis on ‘procedural justice’, i.e. in the adoption by companies of a framework for corporate governance where the voice of different ‘capital’ suppliers to the corporation can be heard in such a way that the interests of any one powerful group may be effectively balanced and complemented.We submit that: (a) Directors’ duties framed towards the long-term success of the company is the correct position but the current s172 should be redrafted and flanked by new duties proposed in this submission;(b) The corporate governance of a corporation must incorporate ‘key stakeholder’ representation in salient decisions;(c) There should be a case for considering duties for controlling shareholders whether in private or public companies in order to be consistent with the long-term success of the company as a whole;(d) There is scope for more governance over executive pay other than relying on shareholders’ vote. Executive pay levels at larger companies often represent the unbalanced and distorted face of capitalism that society is increasingly finding unacceptable and symptomatic of weak underlying governance;(e) Reform in Board composition that reflects a balanced corporate governance framework is desirable.