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Putting ownership to rights

Wed, 31st Aug 2011

From Understanding Organisations and The Gods of Management, both written in the late 1970s, to Myself and Other More Important Matters (2006), Charles Handy has been the shrewdest and most prescient of writers (and teachers) about business and society. Unless the contradications of corporate ownership are rethought, he argues, the tensions between capitalism and democracy can't be reconciled.

Simon Caulkin: Is capitalism finished? How do you see its future?

Charles Handy: I believe that in its present form capitalism is incompatible with democracy. It throws up such intolerable inequalities that any democratic regime would eventually be forced to constrain it, put iron rings of regulation around it, so it will lose its force. And I think that’s what’s happening, so in that sense as a power for continued growth and expansion, it will be increasingly fettered. I don’t know if that means it’s finished or that it will be improved.

But in my book The Hungry Spirit [1998] I argued that there was another way, even though though it wasn’t easy to see how it would happen. The idea that companies are owned by shareholders is, excuse me, balls. It is the cause of all kinds of problems. The only right that shareholders really have is to elect the board of directors. Of course that means directors have to pay attention to them, because otherwise they’ll lose their seats. But that’s a draconian measure which doesn’t give you any day-to-day power, really. Somehow the myth has grown up that shareholders are owners; whereas the law says that the corporation is an individual and therefore has the same legal and moral obligations as a person. Even more than that, a company is a community, a group of companions, which means that it can’t be owned by anybody else in any real sense. You can own the assets, but not the inhabitants in it – we used to call that slavery.

So it’s very strange that over the past century that view has become respectable – due, of course, to those two great social inventions of limited liability and shareholder capitalism, so that people could ‘own’ a company without ever going near it, and didn’t have to invest all their assets in it. And the two together created huge economic expansion.

But –a big but – with unintended consequences of irresponsibility. If all assets aren’t at risk, you can take much greater risks, and if you can own shares without ever going near the place, irresponsibility was built into the system from the start because of those two great social inventions.

So what you’re then thrown back in my scheme is the obligation of directors to act as responsible persons. What does that mean? It means loving your neighbour as yourself, respect for community and people, and the purpose of the company, as Bill Hewlett and Dave Packard stressed long ago, is in some sense to change the world through your goods and products. Steve Jobs said the same thing to his people at Apple, ‘We’re going to change the world’, which to a degree they’ve done.

SC: And in the process you make a lot of money.

CH. And in the process you make a lot of money.

One of the projects Liz [photographer Liz Handy] and I are working on at the moment is a book about a man who set up a unique company called Camellia. He was a Canadian chartered accountant Buddhist who fell in love with tea gardens, and starting with a small shareholding in a little Indian tea company in Darjeeling, he built up the largest tea company in the world. It now has 76,000 employees. He’s a Buddhist, takes life very seriously, and early on he put 54 per cent of the shares into a foundation whose principal purpose was to maintain the ownership of the company in terms of the shareholding, so that it couldn’t be sold unless the foundation so agreed. To maintain the company in existence in perpetuity. And secondly, to invest the dividends from the shareholding in social things in the countries where it grows its tea – hospitals and schools and so on. So it’s a very goody-goody company. But it's a very well managed company with all the right values, and  I have to tell you that in the process the share price has trebled. And there are many other example of companies that set themselves up to improve the world by, in effect, putting customers first, employees second, the community third and shareholders – well, shareholders have rights.

So I ended up saying that the language of ownership is all wrong. I think we should change to a language of rights. So shareholders have rights, chiefly to elect directors, but also to a due return on their risk capital. But it’s not an overwhelming right. Workers have rights too, which are increasingly encoded in law, and so do customers, which are gradually being encoded in law too. But you could argue you should go further – long-term employees might get voting rights, they don’t have to have shares, but they have voting rights, for example. In due course even customers might get more legal rights than they have at the moment.

Rather than fettering capitalism with endless regulations, which companies will undoubtedly get round – like John Kay and others I simply don’t believe ring-fencing will work – thinking in terms of rights is a more plausible way of preserving the dynamism of capitalism.  

Ownership doesn’t work conceptually, legally, theoretically or practically. Shareholders are like punters at the racecourse – because they place bets, it doesn’t mean they own the horse. We might not bet on it again next year. I just don’t think it’s very productive. We need a new conceptual framework..

SC: But you’re not against a market economy.

CH: Without a market economy, we’ll stagnate. I desperately want to preserve capitalism, although maybe under another name, because this one is in such bad odour... Capitalism provides creativity and vigour – because of course people are made up of a mixture of altruism and selfishness; to think that people are totally altruistic and will work for nothing in the public sector is crazy. But self-interest unbounded swamps altruism.

SC: Along with shareholders owning companies, there is another harmful myth, that companies can exist independently of the society that they are part of. How did that come about?

CH: Responsibility to society got lost when ownership was dispersed. The mill owner was well aware of his responsibility to society, but then ownership floated off, became virtual. It’s absurd: if you think of the company as community, which is how the word is derived, then it has to exist within a larger community.

I’m also a convert to what one of my ex-students called the the ‘bonsai’ view of companies: there’s an appropriate size for each, and it’s different depending on whether you’re in aerospace or a coffee shops. This abiding myth of corporate managers that they can grow for ever, it's absurd. If you ask the London Symphony Orchestra if they want to grow, they don’t want to double the number of violinists – but they do want to expand the repertoire, or just get better. So we need to redefine growth, which should increase profits, but not necessarily by buying up other companies.

SC: To summarise: do you consider yourself an optimist or a pessimist?

CH: I’m a long-term optimist and a short-term pessimist. In other words, I think human beings are incredibly creative and always seem to come up with answers when disaster is pending. But in the short term I’m really not impressed by our business and financial leaders today  – they seem to me to be overwhelmingly trimmers, tweakers, and adjusters – bereft of long-term vision.


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