Andrew G Haldane: Who Owns A Company? by BIS
Speech by Mr Andrew G Haldane, Executive Director and Chief Economist of the Bank of England, at the University of Edinburgh Corporate Finance Conference, Edinburgh, 22 May 2015.
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The views are not necessarily those of the Bank of England or the Monetary Policy Committee. I would like to thank Jeremy Franklin, Conor Macmanus, Jennifer Nemeth, Ben Norman, Peter Richardson, Orlando Fernandez Ruiz, John Sutherland, Ali Uppal and Matthew Willison for their help in preparing the text. I would also like to thank Andrew Bailey, Mark Carney, Iain de Weymarn, Sam Harrington, Alan Murray, Rhys Phillips and David Rule for their comments and contributions.
Introduction
This might seem like a simple question with a simple answer. At least for publically listed companies, its owners are its shareholders. It is they who claim the profits of the company, potentially in perpetuity. It is they who exercise control rights over the management of the company from whom they are distinct. And it is they whose objectives have primacy in the running of the company.
This is corporate finance 101. It is the centerpiece of most corporate finance textbooks. It is the centerpiece of company law. It is the centerpiece of most public policy discussions of corporate governance. And it is a structure which, ultimately, has survived the test of time, having existed in more or less the same form for over 150 years in most advanced economies.
That the public company has been a success historically is not subject to serious dispute. It was no coincidence that its arrival in a number of advanced economies, in the middle of the 19th century, marked the dawn of mass industrialization. The public company was a key ingredient in this second industrial revolution. Perhaps for that reason, the public company is, in many people’s eyes, the very fulcrum of capitalist economies.
Yet despite its durability and success, across countries and across time, this corporate model has not gone unquestioned. Recently, these questions have come thick and fast, with a rising tide of criticism of companies’ behavior, from excessive executive remuneration, to unethical practices, to monopoly or oligopoly powers, to short-termism. These concerns appear to be both strongly-felt and widely-held.
Among the general public, surveys suggest a majority do not trust public companies, especially big companies.1 Among professional investors, sentiment is well-encapsulated by the following quote from Larry Fink, CEO of Blackrock – the world’s largest asset manager – in a letter sent to the Chairmen and CEOs of the top 500 US companies earlier this year:
“[M]ore and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases, while under-investing in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.”
Among academics, John Kay’s UK government-initiated review into short-termism in equity markets and their effect on listed companies (Kay (2012)), Colin Mayer’s Firm Commitment (Mayer (2013)) and Lynn Stout’s The Shareholder Value Myth (Stout (2012)) each raise deep and far-reaching questions about the purpose and structure of today’s companies.
Are these concerns legitimate? What is their precise micro-economic source? And are they now of sufficient macro-economic importance to justify public policy intervention? To answer those questions, it is useful to start with the origins of modern-day companies, before looking at the potential incentive problems among stakeholders embedded in those structures.
Finally, I consider public policy actions that might mitigate these problems.
These problems are not specific to any industry. But banks’ balance sheets and governance structures mean they may be especially prone to these incentive problems. So I will use them to illustrate some of the micro-economic frictions and their macro-economic impact. Indeed, it is no coincidence that the most significant changes to corporate governance practices recently have been within the banking sector.
A short history of companies
Let me begin by defining “corporate governance” in its broadest sense: as the set of arrangements that determine a company’s objectives and how control rights, obligations and decisions are allocated among various stakeholders in the company (Allen and Gale (2000)). These stakeholders comprise not only shareholders and managers, but also creditors, employees, customers and clients, government, regulators and wider society.
Over the past two centuries, several dozen pieces of company legislation have been enacted in the UK alone. This legislation has successively defined and redefined these purposes, rights and obligations among stakeholders. This legislative path has been long and winding – Table 1 provides a summary. It has been shaped importantly by the social, legal and economic climate of the day. And it is the interplay between these contextual factors that, through an evolutionary process, has delivered today’s corporate governance model.
Moving to incorporation
Tracing definitively the origins of what today are called companies is not straightforward. It is possible to sketch a timeline stretching back at least to Rome around 700BC to find something resembling a company (Shelton (1965)). Certainly, by the sixth century AD a number of corporate entities were codified in Roman Law (Moyle (1913)).
Modern concepts of tradable “shares” in companies appear to have emerged in the mid-thirteenth century in continental Europe. In England, early methods of incorporation were set out in a common law case in 1615: incorporation was a privilege bestowed by the state, either by a Royal Charter or a private Act of Parliament. At least in principle, this meant a company was incorporated with public good objectives in mind.
A prominent early example of such a company was the Bank of England. It was established in 1694 under both a Royal Charter4 and an Act of Parliament.5 The Charter establishing the Bank made clear that its purpose was “to promote the public good and benefit of our people”. And so it remains today.
But this incorporation process was costly, lengthy and cumbersome. It was also subject to favoritism and abuse. Lawyers and businessmen began to find legal loopholes allowing them to found companies while remaining unincorporated. These unincorporated entities were generally small partnerships, whose members both owned and controlled the company and faced unlimited liability.
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