Outstanding explanation of what is wrong with corporations and how to fix them
The corporation is a rent extraction vehicle for the shortest-term shareholders; by threatening interventions such as takeovers and hedge fund activism, they can hold all other stakeholders, including longer-term shareholders, to ransom, according to Colin Mayer in his book Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in It. The book describes why our erroneous ideas concerning corporations caused the global financial crisis, and why government interventions are making the problems worse and not better.
The idea that the primary duty of directors is to act in the interests of shareholders leads to a variety of problems, and actions which align the interests of directors with shareholders simply reinforce the problems rather than solving them. Directors are effectively forced to maximise the short-term value of shares by engaging in high-risk and untrustworthy behaviour, with the costs being borne by other stakeholders including employees, creditors, the environment and future generations. Corporate Social Responsibility programs confuse the issues without solving them.
Solutions proposed by the author include:
- Requiring shareholders to register for the period for which they intend to hold shares, with voting rights being awarded pro rata to the length of time remaining before the shareholder can dispose of the shares. This makes it more likely that the directors will work for the long-term well-being of the company and its stakeholders, rather than for maximising short-term rent extraction.
- Corporations should become “trust firms”, with boards of trustees who ensure that the firm has clearly articulated values and principles and abides by them, but who do not otherwise interfere in the day-to-day running of the firm.
- The tax system should be used to promote the adoption of public values by private corporations. Rather than paying corporation tax, those corporations that demonstrate a public purpose, and an effective governance mechanism for upholding it, would be recipients of subsidies funded from corporation tax levied on corporations that have no public purpose.
- Rather than viewing corporations as agents of the shareholders, corporations should be seen as independent entities which make credible commitments to other parties.
I found the book to be both entertaining and persuasive. In my opinion the author has identified and described in a clear manner a range of problems which most other authorities know exist but are unable to describe or explain. This is an important book and should be read both by those who lead corporations and by those responsible for regulating them.