Wednesday, 11 June 2014

Andy Haldane vs 'win win'

Andy Haldane gave a very interesting speech recently on inequality. What particularly caught my eye was the section at the end where he talked about the competing claims on firm resources, and how corporate governance structures can favour one outcome (and one party) over another.

There's a regrettable tendency to focus on 'win wins', and how there aren't really any competing interests, if we only look to The Long Term. I don't think this is true, and it would be better if we focused on the need to mediate between competing claims. So it's nice to hear someone a lot smarter than me making the same point.

Here's the key bit:

If there are legs to this story, then one important element is corporate governance. This defines decision-making within firms - how much to invest, how much to distribute, and to whom. Company Law in a number of countries, such as the UK, gives primacy to the interests of shareholders when defining the objectives of a company and its decision-making. The objectives and rights of a broader set of stakeholders, including workers, suppliers and wider society, tend to be secondary (Mayer (2013)).
This governance structure has stood the test of time. But it is not without distributional consequences. If power resides in the hands of one set of stakeholders, and they are short-termist, then we might expect high distribution of profits to this cohort, at the expense of ploughing back these profits (as increased investment) or distributing them to workers (as increased real wages). To some extent, this matches the stylised facts on rising inequality - rising executive and shareholder compensation and faltering real wage growth. The shareholder model may, ironically, have contributed to unfair shares.
If so, this suggests that one avenue worth considering further is corporate governance reform. A set of corporate incentives which had as its fulcrum long-term company value and which more fully reflected the interests of a wider set of stakeholders might help rebalance the scales - for example, towards investing rather than distributing. Such an alternative model is certainly not without precedent. It is found in a number of countries around the world (Mayer (2013)).
Inequality and corporate governance are deep, structural issues. Central banks do not have many, perhaps any, of the solutions to these problems. But the stakes - a more stable, faster-growing, fairer society - could not be higher. There is a collective public policy interest in getting them right.

No comments: