Firm Commitment: Why the Corporation is Failing us, by Colin Mayer - review

To regain trust and profitability, corporations must reinvent themselves. Reviewer Neil Hedges enjoys an original thinker's insights.

by Neil Hedges
Last Updated: 09 Oct 2013

Colin Mayer is well equipped to write a book of this kind. As well as being a leading academic at Oxford University's Said Business School, he co-founded Oxera, the well-regarded European economics consultancy.

The combination of theory and its commercial application comes through in this thoughtful study of the corporation.

The analysis is quality, but the suggested solutions require leaps of faith in most leaders' ability to look beyond the next quarterly announcement. And his paean to long-termism flies in the face of the average term of today's CEO - fast becoming equal to that of a Chelsea FC manager.

The book is, in Mayer's own words, 'a critique and celebration of the corporation'.

The good things that the corporation has given us - prosperity, employment, savings and consumption - are given a quick nod before the author embarks on his portrayal of an institution that he likens to Frankenstein (sic) in its uncontrollability and potentially malignant impact.

The argument starts with the premise that most relationships are based on trust. Shareholders have no contract with the company they put their money in.

Instead, they place their trust in its directors to manage their money in their best interests. If the company does well, they do well; if it does badly, they lose out. It is this argument that has led to the justification of shareholder value and supremacy for over a century.

Mayer challenges this view. He believes that shareholders gain disproportionate benefits from how companies are run, and other stakeholders, in particular the employees, get a raw deal because their rights are only derivative.

This idea is not entirely new. For the past 20 years or so, companies have embarked on CSR campaigns and, more recently, on customer-centric missions to show that their commitment goes beyond the shareholder.

Lord Hanson's public declaration that his duty was to shareholders, customers and employees in that order seems to belong to another age. But the world has changed and business needs to explain and participate, not preach and preen when it comes to its fundamental purpose.

Thankfully, Mayer recognises this. CSR and the like are given short shrift. Corporate governance doesn't fare much better. The point is made that the financial institutions that took the greatest risks and performed the worst in the financial crisis were those with the best corporate governance.

Not surprisingly, strengthening shareholders' rights is not seen as the solution. Echoing last year's Kay Review, Mayer observes that, as a result of dispersed ownership, there's no incentive for individual shareholders to spend time monitoring performance.

Professor Mayer doesn't support Government-imposed regulation to correct this imbalance, as governments acting in haste in response to financial failure is rarely a good idea. Corporations' regulatory departments are, in his view, concerned more with avoidance than compliance.

So what is to be done?

Picking up on the book's title, a distinction is drawn between the commitment of long-term shareholders and that of those who might hold their shares for only a few milliseconds.

The latter would be free to hold and trade non-voting shares, while the former should be able to register the period for which they intend to hold shares and be rewarded with voting powers.

This principle of representation with commitment would, Mayer believes, help to overcome the so-called 'Cadbury treatment', in which the interests of short-term investors triumphed over those with a longer-term horizon, and the book gives a good account of Kraft's takeover of Cadbury.

Mayer is good on the importance of values in an organisation. Values, he says, 'need to inflict pain on those who abuse them and gain on those who do not'. The upholder of these values, he believes, is best managed by a board of trustees, who would be more independent.

To the author's credit, he recognises that different structures and solutions will suit different corporations, and he urges captains of industry to be bold and implement novel arrangements.

A laudable challenge, but I for one am not holding my breath.

Neil Hedges is a partner at Headland Consultancy

BOOK

Firm Commitment: Why the corporation is failing us and how to restore
trust in it
Colin Mayer
OUP, £16.99

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