Monday, 5 October 2009

Back to the beginning part 2

I'm really glad I went back and read The Modern Corporation and Private Property by Berle and Means. It is a great overview of the rise of the public corporation with dispersed shareholders, it's really well written, and it really does deserve its reputation as a foundation text in corporate governance.

But the other reason I'm glad I went back and read it is because it made me realise what a partial view you get of it from listening to governance people sometimes. Yes, it's central theme is the separation of ownership and control, but the book does not simply advocate the extension of greater rights to shareholders to address this (which is today's 'obvious' answer to the issue). They go further and argue that the separation of ownership and control changes the nature of property - hence the title.

Actually in the final chapter of the book they argue that there's a good case to be made that companies be run in the interests of 'the community'. There's also a bit in this chapter that really made me think of the ownership debate going on currently. Here they are not necessarily talking about the willing surrender of ownership, rather it is the result of wider share-ownership. But actually it reminds me of the stance some in the asset management industry are currently taking in respect of the Government, via the Walker Review, trying to get them to act more like owners:
"[T]he owners of passive property, by surrendering control and responsibility over the active property, have surrendered the right that the corporation should be operated in their sole interest, -they have released the community from the obligation to protect them to the full extent implied in the doctrine of strict property rights."
As I've said before, I think institutions should think carefully when they make the argument that they shouldn't be forced to act like owners. As Berle and Means suggest, this actually starts pulling at a thread that could cause much bigger issues to unravel.

Finally, it was also worth a read to bring to my attention the fact that an Adam Smith quote that is a particular favourite of governance people actually goes on quite a bit longer. The bit I am familiar with is the line about company directors "being the managers rather of other people's money than their own, it cannot be well expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own".

The quote is usually deployed again to strengthen the agency theory critique of public companies, and the need for a focus on shareholder value, and by extension greater shareholder rights. Yet actually in the passage Smith goes on to basically argue that joint stock companies are inherently flawed, and haven't done a great job. And this was long before the dispersed-shareholder version we have today arrived on the scene.


Nick Drew said...

joint stock companies are inherently flawed, and haven't done a great job

and there was me thinking that they were one of the engines of the modern world, without which there would have been no industrial revolution

if you want great enterprises (public or private, mind), you need to employ & trust professional managers - there is a distinct limitation inherent in the firm that will only expand as far as the founding family or autocrat can control it personally

same goes for government, of course

we do want big enterprises, because of what they and only they can deliver; but we (shareholders and electorate) don't want the manager-bastards taking over and dictating terms, do we ?? (in extreme cases, e.g. in Russia, the management of so-called joint stock companies have no regard whatever for shareholder rights beyond those of the big cheese who owns a couple of percent: KTO KOГO, as they say)

so it definitely needs sorting, in favour of the shareholders - including the 'passive' / non-executive ones

Tom Powdrill said...

yeah, that's what I found surprising about the quote. I mean he was writing when joint stock companies had a very limited shareholder base. and even then he though they weren't a great model.

I agree that we need this form of organisation, but then isn't part of the problem agency theory, which encourages us to look for problems that maybe aren't there (or at least not as bad as might be). there's a lot to be said for intrinsic motivation to do a good job IMO.

Nick Drew said...

even in a privately-held company with a small and engaged shareholder-base, there is generally a range of quite different detailed interests in play that need negotiating around

in order to achieve a decent degree of alignment, ideally, you want a clearly-articulated business model & strategy that (with whatever compromises) everyone signs up to

then, aligning your management (many of whom are also shareholders, perhaps quite big) is just a mechanistic challenge

although it's often done very badly, I've seen it done very successfully too (in both private and publicly-quoted companies)

the residual fact that some junior members of staff (quite reasonably) care about little more than the next pay-cheque, so to speak, is not really an issue

companies wouldn't have achieved what they have (some of them) if a good, workable alignment was somehow an inherent impossibility

(it's the same with the military: are we allowed to say 'leadership' ?)

Tom Powdrill said...

by the way - I think it's time we met up for that beer!