Paying too much attention to what shareholders say they want may actually make things worse for them. There’s a growing body of evidence (for example, Rosabeth Moss Kanter’s “How Great Companies Think Differently,” HBR November 2011) that the companies that are most successful at maximizing shareholder value over time are those that aim toward goals other than maximizing shareholder value. Employees and customers often know more about and have more of a long-term commitment to a company than shareholders do. Tradition, ethics, and professional standards often do more to constrain behavior than incentives do. The argument here isn’t that managers and boards always know best. It’s simply that widely dispersed short-term shareholders are unlikely to know better—and a governance system that relies on them to keep corporations on the straight and narrow is doomed to fail.
This is pretty close to my view of the world. Shareholders will always play a significant role in the governance of companies, but we should be aware of the limitations of shareholder oversight. It may work best where the shareholder has a big stake and limited overall portfolio, and so can do the monitoring job properly. And it may be restricted to a relatively small set of issues where all shareholders (not just the handful of more enlightened corp gov/RI investors) are on the same page. That, evidently, will only be a small minority of remuneration policies as an example.Given how many unintended and unwelcome consequences have flowed from the governance and executive pay reforms of the past few decades, we’re wary of recommending big new reforms. But we do think that giving a favored role to long-term shareholders, and in the process fostering closer, more constructive relationships between shareholders, managers, and boards, should be a priority. So should finding roles for other actors in the corporate drama—boards, customers, employees, lenders, regulators, nonprofit groups—that enable those actors to take on some of the burden of providing money, information, and especially discipline. This is stakeholder capitalism—not as some sort of do-good imperative but as recognition that today’s shareholders aren’t quite up to making shareholder capitalism work.
There's a bit of a danger that calling for more 'shareholder engagement' is seen as a way to look like problematic issues at PLCs are being tackled, without actually doing much. Certainly some people felt that back in 2002 the Government was given shareholders a vote on executive pay to avoid having to get stuck in directly (despite all our noise in opposition about Cedric the Pig etc).
I suspect that we're going to start seeing more commentary in the vein of the HBR piece. Just as one example, I can remember Robert Peston writing a piece (when a print journo) about how shareholders had it in their power to tackle governance abuses. Reading his commentary on the (bleurgh!) 'shareholder spring' suggests that he's rather changed his mind about shareholders being either willing or able to do so.
I've written (a lot I know) about how I think regulators will come to be a bigger voice in governance, and this is clearly happening in the financal sector already. But I would like to believe that there could also be a renewed focus on employee involvement in the governance of companies. People in the UK corporate governance world typically hate this idea, but then they hated the idea of annual director elections and binding votes on executive pay and they happened anyway.
There are some signs of movement. A piece in the FT this week suggests the new Socialist Government will move on employee representation on boards and rem comms as part of its efforts to tackle executive pay. I also note that incoming TUC GS Frances O'Grady has already flagged up employees on rem comms as a reform the labour movement is interested in. And, of course, Labour has committed to implement the High Pay Centre's proposals, which include employee representation on rem comms. Just by nature of the fact that people are discussing the idea means that it's become a bit more conceivable that such a reform might be enacted. It's no longer quite so shocking.
I am, against my better judgment, starting to get my hopes up.