“In whose interests should companies be run?” is a question that people have grappled with for years. A small company owner (who also owns its shares) will usually run it in their own interest. And this is usually fine provided the owner remembers the company is a separate legal entity and that they own the shares and not the company assets.
The 2006 UK Companies Act tried to clarify the matter, stating that the interests of a company and a director who owns all its shares are essentially the same.
The Act outlines the other interests that an owner must take into account such as employees and the environment. This could be taken to mean that a company should not ruthlessly exploit its stakeholders.
But, only shareholders can enforce this clause. In fact this piece of legislation was intended to protect directors who “act in good faith” rather than to force them to do so.
Most directors do not need reminding that a company is more likely to be successful in the long term if they do have regard for these matters.
All this is common sense. But there is a problem with listed companies. Institutional shareholders and directors of listed companies seem compelled to focus on the short term.
In practice this means that many directors of listed companies feel their overriding duty is to maximise share price in the short term, even if this is at the expense of the company and its shareholders in the longer term.
This may benefit executives whose remuneration is linked to share price especially if they think they may not be doing the job for long. It does not really benefit anyone else apart from providers of share dealing services. The irony then is that our larger listed companies can be run in nobody’s long term interest. We should not be surprised that many people are not happy with capitalism.
On 20 October as OccupyLondon protesters were camping on the steps of St Paul’s cathedral another meeting took place. This was the launch at Millbank Tower of the ‘Next Generation Vision’ sponsored by TheCityUK. This is a vision developed by a group of young men and women in the City who are making rapid progress up the career ladders of their respective employers. They are the leaders of tomorrow.
Their vision is for UK financial services to be part of society not apart from it so that it works in society’s interest so that we all benefit, not just a small group. This is no modest ambition. To achieve it will require many changes but it is a good start and we should support them. We should look forward to hearing about their successes and more about how financial services contributes to society, as of course capitalism should.