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If the labour movement was as ruthlessly well organised as capital, chief executives would receive bonuses on the basis of the increase in the number of employment opportunities created during the year and not on the basis of an increase in shareholder value.
Capital, as represented by equity investors, can of course breathe a sigh of relief. There is little chance that labour, in this country or anywhere on the globe, is ever going to be sufficiently well organised – or just not unorganised – to threaten the hold over defining “corporate purpose” that has been enjoyed by capital for the past 40 or so years.
When companies were held by one or a few shareholders, who were involved in its management, the issue of “corporate purpose” was not a controversial matter.
As US academic Lynn Stout argues, in that situation the purpose of the company was whatever the controlling shareholder wanted it to be. But as companies became bigger and involved hundreds or even thousands of shareholders, things became a little fuzzier.
Such has been the hold of the owners of equity capital in this matter that everybody now takes for granted that the purpose of every company, except non-governmental organisations and state-owned entities, is to maximise returns to shareholders. This belief, like many religious beliefs, is strongly held despite the lack of substantial supporting justification.
It is impossible to find a memorandum of incorporation that states as the company’s purpose “the maximisation of shareholder returns”.
Our new Companies Act doesn’t dwell on the issue much other than to note that one of the purposes of the act is to “reaffirm the concept of the company as a means of achieving economic and social benefits”; no mention of who should be receiving the “economic” benefits.
One of the huge attractions of the shareholder supremacy approach to corporate purpose is that it makes things seem quite simple and straightforward. It takes an extremely complex entity, which often employs thousands of people and uses billions of rands of assets to provide products or services, and reduces it to one unambiguous figure.
The push for simplicity at any cost is also evident in the fact that it not only treats all shareholders of a firm as though they were like-minded in their investment requirements but also assumes they are all focused on the same short term.
One of the responses to this simplicity has been the introduction of a plethora of corporate governance recommendations. These are designed to give all other stakeholders, such as employees, customers, communities and suppliers, the impression that the corporate purpose is not to ride roughshod over them in the chase for increased short-term shareholder returns.
For corporate executives an even bigger attraction of the shareholder supremacy approach is that it generates enormous profits for them personally. When the purpose of a company is to maximise returns for shareholders, the executives who are running companies as agents for the owners have to be incentivised in line with this purpose. This means that share price appreciation and dividend payments become the primary focus of management’s energies. And the rewards for boosting shareholder returns, even in a bull market where there has been weak operational performance, are enormous.
In the past 10 or 15 years, and in particular in the lead-up to the 2008 financial crash, the shareholder supremacy approach was taken to extreme lengths as firms outsourced their labour requirements, sold assets and bought back billions of dollars of their own shares.
Stout argues that not only is there limited evidence to support the contention that an increasing share price indicates an enhancement of economic performance but that the chase for increased share price performance could have a damaging effect on sustainable economic performance. She likens the focus on share price to fishermen using dynamite to catch fish: those who use dynamite catch and kill far more fish than those using worms.
Stout challenges the notion that a company’s shareholders are homogenous, pointing out that some may be invested for the long term while others, such as hedge funds, are looking for short-term gains. Sadly, it seems it is short-term investors – who are fishing with dynamite in global equity markets – who are most effective in determining the “corporate purpose”.