Managers v shareholders – Round 1
The prize for the first recorded case of shareholder activism may well go to an American professional investor named Benjamin Graham. In 1926, he spotted that Northern Pipeline, one of the offshoots from the break-up of JD Rockefeller’s oil monopoly Standard Oil, was sitting on a pile of unused assets that could be used for a handsome dividend to shareholders.
His attempts to persuade the company to distribute the spare cash were resisted with disdain and a degree of skulduggery by the board of directors, but he won in the end.
So who’s being greedy, exactly?
Fast forward to 1987, and a more famous (and fictional) professional investor named Gordon Gekko made a similar argument at the shareholder meeting of an ailing corporation, Teldar Paper, in the movie “Wall Street”.
Lambasting the Chairman and 33 vice-presidents for bureaucracy, mediocracy, and feathering their own nests at the expense of the company, he rallied the stockholders behind him with the infamous proclamation “Greed, for the want of a better word, is good”.
Supposedly based on the speeches of real life corporate raiders, the passage is more subtle than its most famous phrase suggests, and Gekko lands several rhetorical punches on what may have been a management guilty of complacency and underperformance to the detriment not just of the shareholders, but the economy too.
Nonetheless, Gekko epitomises the kind of ‘anything goes if the share price goes up’ financial capitalism that had been building momentum ever since Milton Friedman argued that the social responsibility of companies was to make as much profit as possible, and nothing else.
Getting beyond the principal-agent problem
Gekko’s speech was highlighting a well-known problem in economics known as the principal-agent problem. The agent, in this case the company’s management, have interests that are different from those of the principal, the company’s shareholders. As a result shareholders are not well served and companies underperform their potential, or so goes the theory.
But in some cases the cure has turned out worse than the disease. Executives have been loaded up with share options to better align their interests with shareholders. Far from leading us to the economic nirvana promised by Friedman, it has led to spiralling executive pay, grotesque inequality, and an endemic short-termism in corporate Britain that has resisted a succession of hand-wringing official commissions and enquiries into how to solve it.
Arguably, it led us ultimately to the global financial crisis that exploded 20 years after the cinema release of Wall Street, when the collapse of Lehman Brothers provoking the most severe recession in many countries since the Great Depression.
Another failed Wall Street firm, Bear Stearns, had gloried in its mantra – displayed on the walls of its dealing rooms – to “Make nothing but money.”
When there is no purpose other than profit, business can become not just harmful to society but its own worst enemy too.
From shared profits to shared mission
So where is society in all this? Aren’t people and planet the ultimate ‘Principals’ for business endeavour and, if so, how are their interests to be aligned with both managers and shareholders?
The answer may lie in part in a return to an earlier version of capitalism, but with an important upgrade.
The lesson from the past is that purpose used to be central to the very existence of a corporation. Limited liability was granted as a privilege, originally requiring an Act of Parliament, to encourage investment in socially and economically important infrastructure and large-scale commerce that was beyond the means of smaller business partnerships.
Business with a clear purpose is not a new idea. It is arguably the original point of it all.
From corporate raiders to co-operative players
The important upgrade, though, is to unite managers, investors and society, including future generations, behind a shared mission that can be articulated with sufficient precision to measure success or failure.
We now know that profits cannot be the single yardstick of corporate success. No market is so textbook perfect as to allow this to be anything other than reckless disregard for all the other important social, economic and environmental impacts – both positive and negative – that businesses have in the messy and complex real world.
But we cannot have no yardsticks at all.
After all, if managers are not held to account they might end up as complacent as Teldar Paper’s 33 pampered Vice-Presidents, and we will just have ended up with a new kind of principal-agent problem.
Instead, uniting behind the mission could be the way to move beyond antagonistic manager-shareholder-stakeholder trade-offs while still keeping managers on their toes and harnessing the creative power of enterprise for the greater good.