The border between creation and cataclysm

Some books are too big to carry around so I’ve been reading three, one on each bedside table (London & Cambridge) and one in my bag.

The (portable) one I just finished is Colin Mayer’s excellent Prosperity: better business makes the greater good. It’s a book about corporations which have certainly not had a good press in recent times. This is a vitally important subject and it’s a really well-written book. Colin (a colleague of mine on the Natural Capital Committee) thinks that for the most part big companies deserve their dismal reputation: “The interests of the corporation have progressively diverged from those of the societies in which they operate.”

The book pins the blame squarely on the Milton Friedman doctrine that companies sole aim should be maximising shareholder value, a doctrine embedded in corporate law and governance in the UK above all (about the only country in the world that has fully swallowed and digested the Friedmanite Kool-Aid) but also to some extent in the US, and in other western economies. Mayer sees the doctrine as somewhat incoherent internally: “There is considerable irony in the conclusion that the market is needed in the form of the market for corporate control to ensure that the corporation fulfils Ronald Coase’s objective of being lower-cost and more efficient than the market.”

A historical section shows the extent to which this version of corporate rationale diverges from the past of the corporation. Corporations were created to fulfil public functions, binding people together over long periods of time to do so. The book argues passionately and convincingly that making a profit for its owners is an essential task of business, but certainly not the purpose of a company. A corporation is not a set of contracts, but of relationships: “Those relations are based on trust. That trust depends on commitment and that commitment is to the purpose of the corporation – a purpose that inspires and unites all to a common goal of producing profitable solutions to the problems of people and planet.”

Mayer points out that in the US and UK, public equity markets are shrinking as companies delist and private equity grows. He argues the merits of family owned businesses, including additional voting rights to protect their interests, & I’m not convinced by this. I think there is decent evidence that productivity is lower in family firms; the famous Mittelstand has been praised for bringing in professional managers rather than always handing on the business to the children; and companies like the tech giants are hardly a great advert for dual classes of shareholders. Another suggestion – industrial foundations run by trustees – is more appealing.

The book ends though with some pragmatic reforms, saying they are needed urgently – “we are on the border between creation and cataclysm.” These suggestions cover corporate law and governance – dethroning the shareholder value mantra in the law in favour of requiring a commitment to corporate purpose; accounting changes – proper accounting for natural capital use in particular; ending the favourable tax treatment of debt – a total no-brainer; and reshaping regulation around activities and principles rather than around specific types of institution.

These seem perfectly sane and practical. Will any government pick them up? Political will seems to crumble when faced with consistent and intense corporate lobbying, as the ultimately feeble response to the financial crisis illustrates. I think the climate of ideas will need to change too, and it’s up to us economists to debunk the ‘market’ for control of these important social institutions.

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PS I also read (slowly) Robert Tombs’s much-praised The English and Their History. I quite enjoyed the early parts, not knowing much pre-15th century history, but the book sat less and less well with me as it went on. Its enormous length and ambition stake a claim to universalism but it turned out to be yet another southern English, Westminster focused account with little about how different the rest of the country is, just token sections on the Midlands and North in the Industrial Revolution and the era of municipal socialism.

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