On Tuesday morning one of our Treasury Ministers, Paul (Lord) Myners, remarked in a radio interview on the dangers inherent in ‘push button' computerised trading which now accounts for some 70% of all transactions in company shares in the U.S. and is a growing practice here in the U.K. Myners, a self-made man with a distinguished city career, was brought into the government by Gordon Brown to assist with the financial crisis in September 2008. The crisis has led to considerable, sometimes justified, finger-pointing at small sets of individuals and companies. Now Myners has raised a wider and deeper system issue and, predictably, this has received almost no public discussion. But it is just the kind of issue that demands wide debate. For Myners has raised the question of whether the fundamental relationship which he believes in between investors, especially institutional investors like pension funds, and the companies they invest in, will be destroyed by the spread of pre-programmed computers making buy or sell decisions.
Paul Myners has long argued that the best way to ensure that boards of directors manage effectively and with due regard to the social obligations of their companies is for shareholders to behave as responsible owners and play a stronger supervisory role in the companies in which they invest.
The trouble with this is that most institutional shareholders are disinclined to take on such a role. They have arguments on their side. They own shares in companies not the companies themselves. There are severe practical limits to the influence they can sensibly bring to bear on managers who know their businesses. And their own responsibilities to those whose funds they manage may be better discharged if they can take unrestrained advantage of the liquidity that a modern stock exchange affords them.
Moreover, it is simply not possible to plug the holes that the new computerised world has bored through the dyke: the old idea of joint stock companies - from which comes the notion of distributed ownership which Myners is talking about - is being swept away in the flood.
Nonetheless Myners has identified a serious structural problem. The boards of companies have great economic and social power. To put it at its lowest, it is in the interests of all of us that they are interrogated on how they use their power. If shareholders do not, who will?
The initial focus after the ‘credit crunch' was on the terrible risks that ‘the banks' exposed us all to. Soon this shifted to inquiry into the social usefulness of the activities that gave rise to those risks. Newspapers asked, ‘should people have been encouraged to borrow money they might not be able to repay?' Then, gradually, the question addressed to the banks became ‘Should businesses be more aware of and take into account the possible social consequences of what they do when they decide their business strategies?' This obviously applies also to the commercial community as a whole.
If they don't, the next question becomes, ‘Should they be regulated to do so?' This apparently simple idea brings us to a fundamental matter: the conflict between the advocates of state control on the one hand and of free enterprise on the other. That conflict is still alive. If the free enterprise side does not provide soon a convincing answer it will find itself on a very slippery slope. And that, I suspect, is a large part of what worries Paul Myners both as a Government Minister and, as I know him to be, a staunch supporter of free but responsible enterprise.
I believe that the ‘responsible owner' approach will not work as an answer - the investor horses will not drink at that water and, just like the pre-programmed computers, will continue to behave as if they own bearer shares in companies which can be dealt in as commodities. If I am right there is a need for another approach.
This lies in the way in which companies and their boards are organised. For many years I worked for a company whose issued share capital was in bearer form. There was no share register and the directors did not know in any formal sense who the shareholders were. That company resided in Holland, a country in which, partly as a consequence of wartime working together ‘underground' to defeat German occupation, there was a strong sense of social responsibility and mutual social obligation. The culture was reflected in the structure and responsibilities of Dutch boards. As in the case I knew, a management board runs the business and is responsible to a completely non-executive supervisory board. That supervisory board owes its duty solely to the company but the composition of its membership is required (by law) to reflect (not represent!) the interests of shareowners, employees and ‘the general interest'.
I had direct experience of the seriousness with which the supervisory board of my company discharged its duties, particularly with regard to that ‘general interest'. If only as a matter of enlightened self interest they understood the importance of social responsibility. They would never have been as blind to what their company was doing as the non-executive members of the Lehman Brothers board seem to have been, or, indeed, those of Enron .
Such a notion of responsibility for the general interest could fit perfectly well with the situation in our country, where there are only single boards containing executive and non-executive directors. The non-executive directors could play the same role as that played by the supervisory board in those countries which have the Dutch dual board system. That stands a far better chance of working than what Paul Myners is advocating. It fits far better with the realities of life.
The topics of the social role of companies, how far that goes and how it is reflected in their governance are urgent and important. They should be opened up for discussion and in public. Somebody, perhaps the highly respected A.B.I. (the Association of British Insurers) whose members invest a good portion of our national savings and which plays a leading role in matters of corporate governance, should do something about this. They could prove their value to all of us by promoting a public discussion in which all those with a contribution to make can participate. The issue Paul Myners is making will not go away. Our companies must be successful but also governed in a way that supports the wider good. This is not happening widely enough at the moment and he is right to ask questions about the system as a whole. He, and we, the people, need answers.
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