DISCUSSION Governance – Seeing the Big Picture

by Guy Beringer _______13th May 2015
Share

The recent stirring of public M&A markets has revived concerns over whether hostile bids can threaten the public interest, particularly where foreign bidders are involved. This has led to calls for public interest tests and government intervention to enforce them. There is, however, a more fundamental question. Why is our current system of corporate governance generally considered to be incapable of providing any defence of the public interest against a corporate predator without government intervention?

The reason commonly given is that boards of directors must look overwhelmingly to the interests of shareholders who will be motivated primarily by financial gain. But are directors (the great fiduciaries of our age) simply guarding a balance sheet or might they have been entrusted with more than that?

The public looks to directors to safeguard the broader interests of society. Directors say they would like to be able to do this but are overridden by their institutional shareholders. Their institutional shareholders say they would like to look to these broader interests but they are overridden by the financial interest of those people whose money they invest. Those people are, of course, largely the public who originated the complaint only to find themselves blamed for it- a very modern system of accountability which provides scapegoats but no solutions. It is an impenetrable system where each element seems to be inescapably driven by the financial interest of others.

200 years ago the radical journalist, William Cobbett, identified a similarly impenetrable system of government. Cobbett referred to the political system as ‘the Thing’. He argued that the Thing was a system controlled by the 400 or so people who owned and controlled representation in the House of Commons where their placemen sat.

Cobbett might well have seen the Thing reincarnated in the control which institutional investors hold over the governance of listed companies. This results in a narrow group of people exerting disproportionate control over the composition of the corporate boardroom and the thinking within it.

The apparent inability of outsiders to penetrate the modern corporate Thing has resulted in a growing chasm between the thinking of civil society and government on the one hand and the boardroom on the other.

There is a contemporary business failure to understand what drives governments, society at large and public institutions. Modern business is driven by a preoccupation with the financial interests of its own shareholders to the exclusion of society at large.

This failure to see the bigger picture requires a reassessment. Where might that reassessment come from?

The starting point will be a recognition that business and society are interwoven. The credit crisis led to an understanding that the financial underpinning offered by the state to a number of institutions was not a free good. There is another more fundamental privilege which has been accorded to the majority of businesses and which seems erroneously to be regarded as a free good. It is the privilege of limited liability and it is instructive to recall its origins.

The parliamentary debate on limited liability in 1855 was split. Those who favoured limited liability did so mainly because it allowed capital from ordinary people to be channelled into corporate entities whose actions would benefit society. Limited liability was, therefore, an artificial construct designed to benefit society. It was a privilege offered in return for public benefit.

This view calls into question contemporary views of directors’ duties and the unthinking acceptance that shareholder value trumps everything else. It also leads rapidly to the conclusion that the success of a company can only be determined after its purpose has been clearly articulated.

But if the corporate establishment can collectively have arrived at a basic failure to understand that limited companies were created for the benefit of society, might our regulators have similarly missed the target?

Modern corporate governance attempts to divide power. It divides risk into different elements. It elevates the influence of external non-executives. It offers a view of risk which is fragmented and which avoids direct individual accountability. It results in annual reports which produce a lexicon of risk and no useful realism. It is an approach that seems to believe that a dictionary can tell a story because it contains all the necessary words.

Regulators should seek people who can see and articulate the big picture. This might result in some counter-intuitive conclusions. The emphasis on non-executives and committees would be diminished. Compliance departments would be reduced in size and would not have an existence separate from the executive. The executive team would be given greater freedom but face more direct accountability. Risk reporting would be the CEO speaking directly to camera succinctly. Senior executive appointments would require a training in business ethics matching that in other professions.

Would regulators accept this paring back of the world so painstakingly constructed in recent years? The only circumstances in which they would do so would be where the leadership of the corporate world has convinced them that it understands the big picture and the role of business in society.

The above blog version was generated by Guy Beringer for tomorrowscompanyblog.com. To read the full version please click here.

Sign-up to our mailing list to receive all our latest discussions, publications and events.