As the global economy claws its way out of the financial crisis and battles with poor growth and productivity, is it time to think radically about how companies are run?
This was the theme of our latest Vital Topics lecture delivered by Bank of England Chief Economist Andy Haldane, who questioned whether the model which gives primacy to company shareholders was fit for purpose in today’s world.
“At root companies are social constructs that serve not just shareholders but society as a whole, whether that be through its customers or employees. But are companies serving society as well as they might? Given the disappointing growth story we have seen in both advanced and emerging economies since the economic crisis, this question could not be more relevant than today.”
Haldane blamed a lack of investment as one of the key reasons for the stuttering global economy. “As the global savings glut has got larger so investment has fallen short, and this goes a long way to explaining why central banks have had to set interest rates as such historically low levels, with some now even setting negative rates.”
He said a slowdown in population growth, the impact of technology, and rising inequality had all played their part in this poor investment story. But he cited corporate governance as another reason too.
“A focus on shareholder interests may have had a detrimental impact on investment globally. Take dividends. It is almost impossible for any public company to cut dividends today as investors demand short-term rewards. Every pound that goes to investors is a pound that does not go into investment. The average public company invests far less than a private company of a similar size.”
Haldane said a general move towards short-termism in business was a key reason. “If you look at actually who owns companies in the UK you’ll find that in 1991 pension funds owned 31% of shares, whereas in 2010 this figure had fallen to just 5%. Fifty years ago private individuals owned more than half of UK listed shares, but by 2010 it was just 11%. What’s more, today most private individuals are just passive investors who have simply invested in funds which then track the market. The result today is that we have a pool of passive long-term investors and active short-term investors.”
He said these trends added to a rising discontent globally about how big business is run. “A majority of people do not trust business right now. One reason is a sense of fairness. For instance, if you look at the ratio of CEO pay to the pay of the average worker, in 1970 this ratio was around 20:1, whereas today in the US it is nearer 300:1.”
Haldane concluded by saying there were a number of policy responses which could be considered to challenge conventional wisdom. Should we do a better job of supporting long-term investors? Should we be thinking of giving more voting rights to those who hold shares for longer? Here in the UK, should we be rethinking the Companies Act 2006? Is it time to think radically in a way to support growth and productivity?”