Shareholder Capitalism: What happened to the stakeholder society?


Prem Sikka
Professor of Accounting
University of Essex

(From The Tribune, 15 December 2000, page 10)

The two-fingered salute given to the UK government by Ford, BMW and Barclays Bank is a stark reminder of the absence of an effective industrial, corporate and employment policy. Each episode shows that in pursuit of short-term profits and ever rising share prices, corporations care little about the welfare of societies. Almost without notice, they have been able to sack workers and close local banking networks.

Before the 1997 general election, Labour promised that it would promote ‘stakeholder’ interests in companies. However, the ‘S’ word has now been abandoned. The clearest evidence of this is to be found in the recent Company Law Review document issued by the Department of Trade and Industry (DTI). It does not require companies to consult trade unions, employees, consumers, suppliers and  local communities on any major decision. Instead, the government would require companies to make some selected ex-post disclosures in their annual reports. The disclosures are no substitute for proper rights and sound corporate governance arrangements. No amount of ex-post disclosures ever prevented Maxwell frauds, BCCI scams or the dismemberment of Rover and Ford.

It is noticeable that a considerable amount of the Labour government’s energies have been devoted to restoring confidence in the financial world. For example, new regulatory bodies, such as the Financial Services Authority (FSA) have been created. Insurance companies are being persuaded to compensate the victims of the pensions mis-selling debacles. In contrast, there is little concern about any long-term employment, corporate or industrial policy. The loss of jobs in the fishing, shipping, textile, steel and agricultural industries arouses little press and government concerns. The localised loss of jobs at Ford and Rover has, however, been large enough to arouse the media interest. But it has not encouraged any sustained analysis of the gaps in government policies.

The loss of jobs at Rover is a story of globalisation and two competing models of capitalism: the ‘shareholder capitalism’ model privileged in the UK and the ‘stakeholder capitalism’ promoted in Germany. Unlike the UK, German companies have two-tier boards made up of executive and non-executive directors. Trade unions, consumers, employees and other stakeholder groups are represented on the board. Works councils are in place whilst the UK is trying to get out of the relevant European Directives.

The German model requires continuous monitoring of managers by other stakeholders. Workers have rights to receive information and even demand their own independent financial audits. Major divestment decisions cannot be made without their approval.  The Works Councils need to be consulted. The executive board has to give at least three months notice for any major plant closures. Under the German model, BMW could not have dismembered the Rover Group so easily and quickly. The social settlement between capital and society is such that any business exiting Germany has to meet higher redundancy, (re)training and other costs. Thus businesses in Germany are likely to go for gradual restructuring of businesses. In contrast, the cost of exiting from the UK is low. For example,  British workers are entitled to a maximum statutory redundancy payment of only £6,900. Companies have no obligation to retrain workers or to contribute to any local regeneration fund.

For the last five decades, the UK governments have been promoting ‘shareholder capitalism’. This model is rooted in short-term objectives of the markets. Instead of the two-tier board, the UK has a unitary board of executive directors. The directors are concerned primarily with short-term profits, market shares and shareholder gains rather than the welfare of all the stakeholders. On average, the chief executive of a  FTSE500 company holds office for only 4 years. S/he has little incentive to think about the long-term consequences of corporate actions. Workers, consumers and suppliers have to think about the long-term, but are specifically excluded from the decision-making apparatuses. Individual shareholders are either too weak or disinclined to influence management. They buy and sell shares to make quick gains and in the process drive the share price up or down. The resulting share price movement, rather than any explicit partnership with stakeholders, provides the signals for resource allocation and judging management performance. The interests of other stakeholders are not explicitly considered. There is no framework for consultation with workers. With little notice companies can threaten to abandon their employees and local communities.

For years, the UK governments have courted international corporations. According to influential voices, as long as they produced cars, it did not matter whether their management or shareholders were American, Japanese or German. But major corporations also demand a change to the role of the state and a new social settlement with the people. They demand low taxes, weakening of trade unions, cheapening of labour, deregulation, subsidies, free flow of capital, easy repatriation of profits and dismantlement of social welfare - all in the name of laissez-faire economics. The UK government has been reduced to the role of a recruiting sergeant for major corporations. Its education, health and social role is now expected to promote the policies that are conducive to the global mobility of capital rather than the needs of communities. Such policies have produced an industrial wasteland.

A new industrial policy with ‘stakeholder’ interests at its core is needed. Failure to do so will create even more job insecurity and social inequalities.