Alternatives within corporate ‘ownership’.

Abstract

Institutional investors have long played a central role in corporate governance but no more so than since the financial crisis of 2007-09. To counteract short-termism, the UK Stewardship Code (Financial Reporting Council, 2010) encouraged investors to engage with the companies in which they invest came first and develop a sense of ownership. France (Commission Europe, 2010; ORSE, 2011) and Germany (discussed in Roth, 2012) took similar actions. The European Union (European Commission, 2011, 2013) included investor engagement in its review of corporate governance, while in the US the Dodd-Frank Act (Library of Congress, 2010) gave shareholders new voting powers and made it easier to raise shareholder resolutions. Some funds that favour this approach now call themselves “shareowners” rather than “shareholders” (Butler & Wong, 2011). This approach assumes shareholders are able to prevent corporate excess and might want to. But obstacles arise from the changing structure and power balances in institutional investment: hedge funds, funds-of-funds, sovereign wealth, and the revival of shareholder activism. This paper takes its cue from a parallel debate about changes in structure and power in corporations. In his paper “After the corporation”, Davis (2013) provocatively argues that scholarship on organizations and industrial policy are based on an outdated conceptualization of the corporation. He describes how companies including Apple, Google, Facebook and Amazon are now giants in the eyes and portfolios of institutional investors. They are giants by market capitalization, but pigmies by employment. The disaggregation of production functions across industries makes the corporation of yore a relic of a previous industrial age. In the US at least, the old giants made up a large part of the social structure and services that has held society together. What happens to the structure of society “after the corporation”, he asks? This paper turns that spotlight on investors. The policy push towards stewardship evokes both a bygone era of family-owned enterprises and corporations controlled by grand financiers. But the patient capital of Warren Buffett is a model few follow, or could. New money from end-investors flows instead into funds-of-funds, detaching the end beneficiary even further from control. Setting public policy to make finance serve the whole economy as envisaged in the “universal owner” (Hawley & Williams, 2007; Urwin, 2011) - modelled – on the large pension fund seems a laudable goal. The economic interests of these investors lie more in long-term social advances than short-term trading profits. But such policy prescriptions may privilege a dying class of investor against other more vibrant ones. Moreover, they may legitimate shareholder primacy at a time when scholars and the rest of the policy framework question it (Armour, Deakin, & Konzelmann, 2003; Bainbridge, 2010; Stout, 2013). We – scholars, policymakers and practitioners alike – need to consider alternatives. Within the system of wealth creation and like the corporation, the traditional investor – that is, the universal owner – remains an important economic force. But what alternatives within the system will work as these investors decline as a social force? What alternatives arise “after the owner”?