The corporation, as an institution, is in crisis. So argued Colin Mayer, Peter Moores Professor of Management and the Saïd Business School, in his October 20 presentation at the PEFM seminar.
Mayer attributed the crisis of the corporation to its governance structure. He argued against the prevailing view that the greatest concern with respect to corporate governance is the ‘agency problem,’ i.e. the fact that shareholders exercise insufficient control over corporations.
Instead, argued Mayer, the problem of the corporation lies precisely in the fact that short-term shareholders are able to hijack the corporation, distracting from the commitments the corporation might have to other stakeholders, including consumers and employees. Shareholders might even reward the corporation for infractions where these seem to provide short-term benefits that outweigh reputational costs or fines; Mayer cited the case of Barclay's share price increasing by 60% during the six months after the LIBOR scandal broke.
How to bring corporate action more in line with the interests of broader stakeholders? Not through greater or tighter regulation, argued Mayer, insisting that the current regulatory push (e.g. ring-fencing, caps on pay) would merely discourage tightly regulated behavior such as lending and encourage unregulated behavior, leading to more shadow-banking and greater trade in derivatives.
Rather than turning to regulation, the answer may lie in shifts in the corporate governance of financial institutions. Drawing on studies of successful financial institutions that served important public functions, including lending to SMEs and financing innovation, Mayer stressed three crucial features of these institutions’ governance: (1) Long-term ownership, through institutional or family owners, (2) Lenders and loan officers with knowledge of business, not just finance, and (3) Devolution of decision-making, including loan approval, to the local level.
To encourage a healthy diversity of forms of corporate governance, including cultivating blocks of long-term shareholders currently absent from British firms, Mayer argued that measures common to the US, such as anti-takeover provisions and the possibility of dual-class shares, would be beneficial. Mayer also pointed to the rise of new corporate forms, such as the public benefit corporation (a public benefit corporation currently capturing headlines is Ello, a Facebook challenger committed to not selling user data).
Participants in Monday’s seminar were skeptical of what they saw as Mayer’s cynical view of shareholders, opposing the notion that shareholders would reward corporate malfeasance. Yet Mayer defended the claim that shareholders would reward corporate violations of regulation if this was seen as shareholder-oriented and argued that, more importantly, corporations with governance structures weighted towards long-term ownership and committed to particular public values performed consistently well.
Despite skepticism about deterministic regulation, policy implications arose out of Monday’s conversation: regulation ought to emphasize corporate disclosure, enforcement, take a systemic approach (echoing an emerging emphasis on macroprudential regulation) and be international in scope to reduce regulatory arbitrage.
Against recent corporate scandals, participants in Monday’s seminar were treated to an alternative vision of the corporation: publicly-minded energy companies, financial institutions fostering community businesses, lenders supporting innovation in British tech and industry. It remains to be seen whether the innovations in corporate governance deemed necessary will catch on and be encouraged by regulators.
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