Who owns companies? In a useful recent summing up in the FT, John Kay was unequivocal: as a matter of legal fact, in neither the US nor the UK, the most shareholder-oriented economies, do shareholders own the company, although almost everyone thinks they do. Of 11 characteristics of ownership listed by one legal scholar, shareholders satisfied just two, reported Kay, and those minor ones.
So who does own a PLC? No one does, says Kay, ‘any more than anyone owns the River Thames, the National Gallery, the streets of London or the air we breathe.’ Ownership as applied to companies is a myth, he concludes, that gets in the way of any progress on what to do about them.
He’s right. But we could say much more. The issue goes far beyond semantics or legal niceties. It is important – almost more important than anything else – because for the last 30 years the full force of corporate governance has been brought to bear on trying to make the myth work. And those trying hardest include those who make important resource allocation decisions in companies. As one governance authority put it: ‘Managers now largely think and act like shareholders’. Unfortunately the results have been a disaster for the company itself. The efforts to make the myth work have not only been fruitless: they have profoundly damaged the reality.
As well as a myth and a chimera, ownership is a giant, and increasingly toxic, red herring. The trail leads back to 1932 when Adolf Berle and Gardiner Means published their seminal work The Modern Corporation and Private Property, which declared the separation of corprate ownership and control under professional management a danger to shareholders and laid the foundations for agency theory.
Berle and Means’ concerns remained largely academic during the postwar boom years, but since the 1980s the conviction has grown that the evident shortcomings of the PLC – manifest in increasingly frequent collapses and scandals, short-termism, out-of-control executive pay – are all down to deficient ownership. Thus, the company is a brilliant social invention, wrote Martin Wolf in the FT, but ‘it has inherent failings, the most important of which are that companies are not effectively owned’. ‘Better-owned firms are the key to responsible capitalism’, declared Will Hutton’s Ownership Commission, and at least in the US and UK codes and company law have been altered to strengthen shareholder democracy and give shareholders more powers (to vote on pay, for example), all with the intention of making shareholders act like owners – in other words, making ownership work better.
But you might as well try to make the world fit the rules for Wonderland laid out by Lewis Carroll. The attempts are doomed to failure in law, logic and practice. Shareholders do not have the ability to control management and are too diverse to offer consistent guidance, which was the reason for employing professional management in the first place. But in any case, for shareholders to pursue control and ownership claims is self-defeating. It is to turn the goose that lays the golden egg into a sterile hybrid. The beauty of the PLC, its overriding USP, is precisely that it isn’t owned; it is its status as an independent self-owned legal entity that allows it, uniquely, to pursue its own self interest by making commitments to the future that aren’t and shouldn’t be overridden or controlled by any one constituent stakeholder.
Explaining this in a quite remarkable (perhaps even beautiful) paper entitled The Corporation As Time Machine: Intergenerational Equity, Intergenerational Efficiency, and the Corporate Form, the influential law scholar Lynn Stout argues that that the publicly-traded corporation is an even more extraordinary invention than we thought. In effect, a company with perpetual life, whose assets are ‘locked in’ or put out of reach of today’s stakeholders, and whose shares are publicly traded, becomes a kind of commercial Tardis that can transfer wealth forward to future generations when current investments pay off – but also back from the future to the present in the shape of higher share prices in anticipation of the future rewards (Google’s research into driverless cars might be an example of the two-way process in action). Companies operating in this implicit intergenerational exchange in the past gave us long-term investments in Xerox, Bell, Dupont, Kodak and IBM research labs, among others, whose extraordinarily fruitful discoveries are still dispensing their benefits to the companies and consumers of today.
But this kind of forward transfer, Stout warns, is now imperilled: ‘The public business corporation with asset lock-in, perpetual life, and freely transferable shares... is a legal technology that can play, and historically has played, an important role in promoting both intergenerational equity and intergenerational efficiency. However, the recent rise of a “shareholder value”-focused approach to understanding and governing public corporations has begun to erode public companies’ abilities to lock in their assets. Logic and evidence both suggest this loss of asset lock-in is threatening the public corporation’s ability to serve as a mechanism for transferring wealth between time periods and generations’.
Without the locked-in assets, the PLC becomes ‘a delicate creature’, vulnerable to pressures from short-term shareholders, activists and managers themselves for jam today in the shape of share buybacks and dividends, commonly funded by layoffs and cuts to research and investment spending, or sell-offs and even auto-immolation. Not surprisingly, that not only prevents companies transferring wealth and benefits forward for future generations – it also renders them less resilient in the present. The signs of this self-harm are already too obvious to be ignored: the shrinking population of publicly-listed companies in the US and UK, their shortening life expectancy, and – irony of ironies – diminishing returns to shareholders. Shareholder value thinking, says Stout, now ‘appears toxic to many, and perhaps most, public corporations’.
The conventional wisdom is right that that the corporate form has 'inherent failings' that better corporate governance should be used to fix. It is also right that ownership is part of the problem – just not in the way it thinks it is. Putting Stout's argument together with Kay's, we might conclude that not only are shareholders wrong to think that they own companies, but that abandoning all claim to the title would be the best thing they could do in the wider interest – and in their own too.