on 17 October 2014
Transform Shareholders into Real Owners
This book is about large companies with hundreds of shareholders. The author presents proposals that would lead to corporate action to be in line with their stated values and principles. The author, Professor Colin Mayer, concludes that the Corporate Social Responsibility movement on this point has failed.
The author makes two proposals. The first one is to create a trust that is responsible to see it that stated values and principles are practiced. This trust with trustees would be established next to the Board of Directors, the CEO and his executive committee, and the Annual General Meeting of shareholders (AGM).
The second proposal that strengthens the first one is to differentiate between shareholder voting power not only by the number of shares owned but also depending on the number of years they commit to hold and not sell the shares; the "committed shareholders."
The purpose is to radically reduce the influence from short term large share buyers that are only interested in making short term gains in buying and selling shares. The author expects that with this structure "ownership" becomes meaningful, the way it is in well run privately owned companies. The concept and feeling of "Ownership" in a large company with hundreds of shareholders is not meaningful.
The advantage for the CEO/top management would be that they could no longer be pushed by large short term shareholders to take actions that are in conflict with the values and principles of the corporation; the same applies to the Board of Directors. The committed shareholders can take a meaningful interest in the future of the company and will be interested in the short, medium and long-term performance.
The challenge will be to convince Board of Directors, Shareholders and Executive Management that a fourth group, the Trust with trustees will not become too complicated.
This innovations presented should be tested. If it works it will make a huge difference to bring actual corporate behavior in line what corporations claim are their values and principles.
on 10 July 2013
First things first: this book has its heart in the right place. Many of the proposed changes are well conceived and most of the analysis is correct. The sheer stupidity of the efficient market hypothesis and the idiocy of the shareholder value priority are suitably skewered.
However .... there are some adverse points that detract. First some of the arguments are specious and rather silly. As just one instance, the argument that Mayer uses about building institutions (p.33) is flawed -- personal investment of time and reputation by workers is not the same as investment in cash by shareholders (unless the investment in time and reputation is for no cash reward). Second, Mayer still appears to subscribe -- albeit half-heartedly -- to the principal-agent theory which is supposed to describe managers' attitudes towards shareholders' interests. The theory is ludicrously deficient on any but the most simplistic analysis but Mayer can never really bring himself to puncture it completely. Third, the book has been poorly proof read, which detracts from the argument and the reader's flow of thought in following the argument.
But what unsettled me most about the analysis is the choice of some of the examples of 'business leaders' quoted as authorities. For instance, Mayer remarks on p 93 that Roger Carr is 'an exceptionally thoughtful businessman'. (This comes after the heavily airbrushed explanation about the Cadbury takeover by Kraft which Carr gave at the Said Business School in February 2010 from which significant sections are quoted.) Oh come on! And Inspector Clouseau was the world's greatest detective.
Early in this fascinating exploration of corporate ownership and governance, Colin Mayer examines the classic defence - or perhaps the classic celebration - of shareholder value. Shareholders are the ultimate owners of corporations, runs this argument, and they have no protection; they have invested their money, which might be lost. Without shareholders, capitalism loses its foundation. Therefore, shareholders' interests must be protected at all costs by the corporation's hired executives. Thanks to the joys of the free market, this relationship may not be as single-mindedly focussed on supplying a cash return on capital invested as it might sound: it is in shareholders' interest that employees are trained (so that they are more productive) and treated reasonably well (to avoid the cost of replacing disgruntled employees). If the market puts a premium on environmentally-friendly, or well-made and reliable goods, then the executives can (and should) pursue that route because the shareholders will benefit from the premium charged for such goods. All is well in a laissez-fare world driven by the overarching necessity of keeping shareholders happy.
But, argues Mayer, the corporate world isn't actually like that. Shareholders are not the only parties with 'irrecoverable capital' invested in corporations - other stakeholders are equally exposed. If I devote my life to the furtherance of an organisation, and it disappears, I have lost something irrecoverable. If I am a lender or a supplier to the corporation, and it vanishes, I stand to lose a great deal.'The interests of these other parties,' writes Mayer, 'should at least rank alongside those of shareholders and, depending on the degree and extent of their commitment, potentially, ahead of shareholders.' These stakeholders are exposed by their commitment to the organisation in a way that is directly analogous to the financial commitment of the shareholder. Commitment, as you have guessed from the title of the book, is Mayer's main theme. 'Corporations are commitment devices,' he argues. The trust of various stakeholders 'derives not from the piece of paper that I hold in my hand but from the sacrifice that I see you making on my behalf.' Mayer proposes an intriguing rallying call: 'no representation without commitment.'
Some stakeholder commitments may be even more significant than that of the shareholder. Mayer takes the example of a corporation funded partly by shareholder equity and partly (as is almost universally the case) by debt. As the level of debt ('leverage') increases, so it is entirely rational for shareholders to demand that the organisation takes on ever greater levels of risk: if creditors will pick up the tab for substantial losses in the case of disaster, then risky bets look increasingly attractive from the single-minded shareholder viewpoint. As shareholding is increasingly dispersed and the interests of shareholders are increasingly short term, so shareholders are likely to demand that corporations take such risks to fund short term gains at the expense of the corporation's future - and, by extension, at the expense of future generations of stakeholders.
Mayer's recommendations for a better way of doing business are robust,thought-provoking and entirely pragmatic. There are various alternatives, argues Mayer, and they will not suit every case. Heavy-handed regulation of corporate governance is doomed to fail for precisely this reason.
A core proposal of Mayer's is for the greater use of 'trust firms', in which a board of trustees, who do not interfere with the day-to-day running of the firm, guard the corporation's stated values and principles. India's tea-to-automobiles-to-communications Tata Group is a highly successful and exactly relevant example. Another core idea is the creative use of voting rights: if long-term shareholders were given greater voting rights than short-term shareholders, many dangerous incentives would be removed as votes become proportional to the outstanding life of the shares. 'Younger' long-term shareholders would have an incentive to nurture the organisation so that it would survive to provide, for example, their future pension rights; they would also have incentive to make the organisation productive and rewarding for 'older' long-term shareholders, since they would hope to be treated similarly as newer long-term shareholders become the voting majority.
The book's sleeve notes tell me that Colin Mayer is former Dean and current professor at the Saïd Business School at Oxford University and a previous chairman of a European economics consultancy firm. These are impressive and reassuring credentials:the man knows of what he speaks. Mayer's prose is a bit academic, and a few passages needed re-reading a few times for me to get his drift. It doesn't matter. I found this an exciting book: the corporation is immensely important to the future of us all; it is currently failing on almost every front. Mayer has some deeply thought-through and cogent suggestions for quite simple ways in which the corporation could begin to serve us all better.
on 24 March 2013
Excellent analysis of the downsides of the existing payoff structure of the plc and how to alter it. (Gibb's summary is sound.) Meyer advocates a more variegated ecosystem of corporate structures (in which he would include co-ops and mutuals) rather than the plc monoculture. He helps us to see that what we have got is the product of mostly arbitrary historical forces and events and that different is not so difficult. This book will annoy some radicals because it is more evolutionary than revolutionary, but the new species proposed are worth serious consideration. While tax avoidance/evasion and the lobby for sustained redistribution to the 0.01% persists this book does not give a complete solution, but it is an essential part of the answer.
In this book Dr. Mayer takes us through three sections, of how the corporation is failing us, why it is happening, and what should we do about it. He reminds us that we compare to what we know . He discusses differences between the major economies such as the UK and the US, explaining how diversity of ownership disincentivizes individual shareholders from caring about companies' behaviour. The book also features explanation and discussion of the conflict between executives, managers, creditors, owners, and their interests, and the different values which are prized in the different markets.
Dr. Mayer proposes the trust firm as a solution to immoral and counterproductive behaviours, by separating the controllers and beneficiaries from the managers. His suggestion that these firms should establish values and principles is laudable, but one wonders about its likelihood of happening in most modern markets.
The content is a bit on the heavy side in places but it is a solid read and I found it quite educational, particularly in the historical sections.
on 12 March 2013
Colin Mayer reminds us of the secret wonder of the corporation, but equally the need for reform. This book is very readable. The argument is spare and lean and swift. Mayer positions the corporation fairly. That said, this book is not a paean to corporatism and he has numerous criticisms of current thinking. Moreover, Mayer has some practical suggestions to make, not least of which the idea of distinguishing shareholder rights and responsibilities based on their commitment to holding shares over time - very Long Finance. What makes this book worthwhile during a period of furious discussion about reform is that Mayer has identified a deeper rooted problem with the concept of corporations, along with a sensible place to look for solutions.
on 14 August 2013
As business books go this was surprisingly superior to most. Whilst not facing full on to the fact that modern capitalism is close to being finished as a viable economic system the author comes surprisingly close to admitting it at times, focussing most of all though on the serious shortcomings of our corporations, their structure and overall business culture.
Mayer outlines how to adapt the structure of corporations rather than completely dismantling them as business entities- the latter of which I would argue is the only sustainable and fair way to progress business-wise in this century- and he is clear and practical in his solutions within a capitalist framework. Critically he acknowledges the need for more mutual and co-operative business structures and personally I think this is most definitely the way to go, not only if we want a more efficient and equitable business environment in the decades to come, but also in order to actually maintain a viable planet to live on.
Not as radical as I would have liked in it's analysis and [frustratingly] I can sense that sort of book dying to escape from here, but it is nonetheless a much needed and valuable book, intelligently presented and argued. Read it.
on 3 December 2013
Why the Corporation is Failing Us
CM is a professor at the Said Business School,Oxford. He is concerned that corporations are being run for short term profits and with unethical aims, solely for the benefit of the shareholders. Corporations should be devices for getting groups (workers, managers,and investors) to commit to long term goals. Corporations such as Amazon have justified tax avoidancce on the grounds that they have a fiduciary obligation to act only in the interest of the shareholders.
CM discusses the malign effects of hostile takeovers, and of family firms in which the firm is passed on from generation to generation. He suggests that companies should be overseen by a board of trustees who would balance the interests of the various stakehoders and ensure that a long term policy is persued. There have been corpoate scandals such as Enron and Lehman brothers and the ongoing banking revelations. This is a timely book.
Rating 5 out of 5