Company law as another beggar-my-neighbour policy?

Jan Cremers:  Since the introduction of the European internal market, company law has been increasingly judged in terms of its impact on ‘competitiveness’.  This has led to some worrying developments.

The modern company: too important to be left to the shareholders alone?

James Wickham:  Is there only one way to run a company?  If any group of people get together for a common economic activity, must they organise themselves as if they were a private limited company?

TASC has started a project 'Everyone's Business: Employee voice and the modern company'  to explore these questions.

Within Ireland it is usually taken for granted that the purpose of a company is solely to create the maximum possible value for its shareholders.   Such a model assumes that employees are simply resources for the company to use or discard as it sees fit; it assumes that employees have no independent voice; it posits that other possible stakeholders (customers, suppliers, the local community…) have a purely financial and contractual relation to the company.

Dominance of  shareholder value

Yet this ‘shareholder value’ understanding of the company is relatively new and is certainly not the only possible form of economic organisation within a market economy.  Indeed, the dominance of shareholder value is often seen as contributing to the recent expansion of economic inequality and job insecurity.

The dominance of shareholder value models now goes way beyond the private sector.  First of all, state-owned companies appear to be increasingly managed as if they were privately-owned – by shareholders.  Even more bizarrely, the governance systems of charities, NGOs and even housing associations and co-operatives are increasingly copied from the private sector – and a very particular private sector at that.

Alternative traditions

Elsewhere in the European Union there is a long tradition of employee representation within companies. For example in countries such as Germany employees are directly represented on the company’s supervisory board; in many more countries employees have representation at enterprise level through various forms of works councils.  By contrast in the UK employee voice is effectively limited to employee share-holding.  Some other European countries also facilitate co-operative forms of organisation which ensure the democratic participation of all involved.

In Ireland there is a strong tradition of co-operative enterprises within the. agri-food sector.  Nonetheless Ireland has become increasingly dominated by the ‘Anglo-Saxon’ shareholder value model of the enterprise, despite some experiments with workplace ‘partnership’ in the 2000s.  There is however one exception.  The Worker Participation in State Enterprises (1977) enabled the election of worker directors to the boards of state-owned companies. 

Thinking about employee voice

In 2012 the National Worker Directors’ Group commissioned a report from TASC on the effectiveness of worker directors on state company boards1.  Our new project firstly updates that report through a study of the current experience of worker directors in Ireland; secondly it places the Irish experience in the European context of other forms of employee representation.  The project aims to facilitate public discussion of forms of economic governance that can facilitate employee voice.

TASC Discussions on Employee Voice

Central to the project is a series of TASC Discussion events:

• Saturday 25 February 2017  ‘What would you do for work’  Public discussion of workers’ rights after screening of the film ‘7 Minutes’ as part of the Dublin International Film Festival.  Cineworld, Parnell Centre, Dublin 1, 14.00 - 16.30. 

• Thursday 23 March 2017 ‘Shareholders or Stakeholders? Enlightened corporate governance for our times.’ Expert discussion, ESB HQ, Fitzwilliam Street, Dublin 2, 18.00 - 20.30

• 11 May 2017 ‘No one way: Forms of employee voice in Europe.’ Expert discussion, GPO O'Connell Street, Dublin 1, 18.30 - 20.00

• September 2017 Report launch: ‘Everyone’s Business: Employee voice and the modern company’

TASC’s project is not about putting forward any one simple solution – it’s about making public the different experiences of company organisation and it’s about imagining different ways of organising firms in the  modern world.

James Wickham is Director of TASC.

Corporate governance: We cannot afford business as usual

Paul Sweeney: Listening to the anger, frustration and loss of the shareholders of AIB and Irish Nationwide, can anyone believe any more in the bull about the centrality of shareholders in modern capitalism?

The exposure of the failure of the governance system where shareholders “elect” directors to represent them on the boards of the companies they own must lead to a total reform of that system. Yet we are not even having a debate about it. I wrote a previous post on this, as well as a piece in the Irish Times last week.

For a long while now, I have held the view that the supremacy of “shareholder value model” of governance and of the shareholder’s role is a joke. It is welcome, if too late for so many, to see it so exposed here and internationally. But it has happened before. Remember Enron and the other big corporate scandals? It will happen again, but maybe we can try to change the rules to a stakeholder model of governance. In Ireland, a small economy which is so open, I believe that we have to lead and not lag on this reform. Our reputation is already in tatters, thanks to a few enterprise leaders and government inaction on regulation.

In Germany, the stakeholder or Co-Determination model allows workers to elect half of the supervisory board’s members, and the shareholder “elects” the other half. It is the strategic board, which sits above the management board.

Of course, it is not just PLCs which need deep reform. Michael Fingleton’s Irish Nationwide is supposed to be owned by its members, as a “mutual” building society. There is something rotten there with the massive losses due to so much lending to the politically-connected property elite and its staggering pension plan for Fingleton. It was governed by a self-appointed and compliant board of directors, overseen by former chairman, Michael Walsh.

Where are the leading academics on this issue? Has nearly every business and economics academic in Ireland been tipped out of the same mould?

Again, I fear that after this crisis is over, we will revert to business as usual, to our cost.

Economic impact of radical reform of 'shareholder value' in company law

Paul Sweeney: A couple of weeks ago, David Jacobson raised the issue of the conflicts which the auditing profession can have, and how its role can be conflicted when it acts on other business matters for the same firms which it audits.

With the economic crisis, important microeconomic issues can be neglected. Reform of these issues a decade ago could have contributed to a much reduced economic crisis today. For example, it is widely recognised that the lack of control by the boards of major financial companies of their own top executives, led to the crisis (in this regard, today's piece in the Financial Times, on the manner in which mutual funds have contributed to excessive executive pay in the States by voting in favour of compensation plans, is of interest). Yet this vital issue of corporate governance is little discussed in Ireland.

A key debate now has to be to question the fundamental basis of company law in Ireland (and in the UK and US). The Anglo-Saxon model is based on shareholder value, almost exclusively. To focus exclusively on shareholder value leads to managements’ interests dominating, especially where shareholders are diffused. It also leads to short-termism. But all is not lost. Things are changing, and radically. However, in Ireland, we have hardly noticed.

On 12 March, the “Father of Shareholder Value”, Jack Welch, admitted that the whole basis of company law, based on shareholder value was wrong. He had espoused this narrow view everywhere in his syndicated columns, and as the domineering CEO of the huge conglomerate GE.

Welch did not just recant. He said that the shareholder value was “a dumb idea”. He had promoted “shareholder value” since he made an influential speech in 1981. Now, he says “shareholder value is the dumbest idea in the world”. Today, he admits that it is a result and not a strategy. He now admits that employees, customers and products matter!

It is essential that there is a debate on this important micro-economic area by economists, academics and business-people. It seems obvious after the economic debacle that the broader “stakeholder interests” should now be rooted in Irish company law, and the sooner the better. This would also help ameliorate Ireland’s tarnished enterprise reputation.

Even with the existing narrow standards of Irish company governance, much of which is based on voluntary codes of practice, it is still poorly executed by companies. A recent Grant Thornton Governance review on the extent of compliance with the Combined Code by Irish Companies found approximately 50% of Stock Exchange companies non-compliant. It concluded that the voluntary approach to the Code has failed, and that the only acceptable solution is to incorporate governance principles into legislation. The report pointed out that too many Irish companies are lacking in their standards of practice and adherence to the Combined Code or core principles of transparency and independence.

The government must ensure that it enacts legislation to enforce existing corporate governance measures, otherwise it will be difficult to restore international confidence in Ireland as a suitable place to invest and to do business. But just as importantly, the balance of power is too narrowly vested in top executives under the shareholder value dominated Irish company law. This must be radically reformed.

Ireland has a Company Law Review Group but, to my knowledge, it is not even debating this vital issue. The government should ask the Group to conduct a review of the area, and to recommend fundamental changes in the basis of company law. The corporate governance laws must be broadened out to give certain rights in law to all other stakeholders in companies, from suppliers, customers and employees to the community, the environment etc. However, noting the conservative composition of the CLRG, this won’t happen unless the Group itself is changed to reflect society’s interest, and not largely those of what is perceived to be business interests.

The best way to demolish Cosy Irish Capitalism, as the too oft-quoted “Financial Times” editorial called our economic governance system, is to shift power from shareholders only (usually including the top executives) to all stakeholders. Let’s try and have a debate.