24 April 2019
There is a deceptive certainty in the idea that businesses are given a licence to operate by society - and if they breach the terms of this licence they will not able to function.
Having a licence implies a degree of certainty and predictability about outcomes which do not actually exist. It fails to capture how fickle the public is in its judgements and how some things rouse the public mood while other worse things do not. Notably, even when the public and politicians are roused, the ‘licence’ is seldom revoked so that the business fails. If a company and its chief executive are thick skinned, they can ride out most storms.
This ideal has been put in a wider context by Mark Carney, Governor of the Bank of England, and emerges as being central to the continued health of capitalism. At a conference organised by the Financial Times, Carney said that inclusive capitalism was about ‘delivering a basic social contract comprised of relative equality of outcomes; equality of opportunity; and fairness across generations’.
Societies aspire to these three things, he said, because there is evidence that equality is good for growth; there is correlation between the amount of equality in a society and happiness and wellbeing. The idea appeals to a fundamental sense of justice. The challenge this presents is that the pursuit of shareholder value to the exclusion of everything else is not compatible with preserving social capital. Giving primacy to the interests of one group will inevitably undermine others, sometimes imperceptibly but at other times by a massive degree. Though this problem may always be with us, it is only in the last decade that it has become acute, Carney believes. However, he also says that the market fundamentalism we have seen in recent years has eroded this social capital. ‘Capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith’, he said. ‘Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.’
‘Market fundamentalism – in the form of light touch regulation, the belief that bubbles cannot be identified and that markets always clear – contributed directly to the financial crisis and the associated erosion of social capital.’
His conclusion is blunt. ‘Prosperity requires not just investment in economic capital, but investment in social capital … and … it is necessary to rebuild social capital to make markets work.’
Andy Haldane, one of the Governor’s senior colleagues at the Bank of England linked this to corporate governance. He postulated that inequality was a major factor in people not reaching their potential, which impacts the ability of an economy to grow. He said that corporate governance has a role in this because it defines decision making in firms. Company law gives primacy to the interests of shareholders when defining the objectives of company decision making. The rights of broader stakeholders – employees, suppliers, wider society – tend to be secondary.
If power rests with one set of shareholders who are short-termist, we might expect high distribution of profits to this cohort at the expense of ploughing back these profits as investment or distributing them as wages. This matches the outline facts on inequality of increased executive pay and shareholder returns and faltering real wage growth. ‘The shareholder model may, ironically, have contributed to unfair shares’, Haldane said. To help redress this and make society more efficient, he suggests that there could be further corporate governance reform. ‘A set of corporate incentives, which has as its fulcrum, long-term company value and which more fully reflects the interests of a wider set of stakeholders, might help rebalance the scales.
‘Inequality and corporate governance are deep structural issues’ he concludes. ‘There is a collective public policy interest in getting them right.’
Anthony Hilton IS FINANCIAL EDITOR OF THE LONDON EVENING STANDARD