Is maximising shareholder value and the application of rational economic theory the best way to organise the private sector in the 21st century?
The obvious answer would be yes, unless you believe in a state-controlled economy. But Colin Mayer, a professor at Oxford’s Saïd Business School, poses an interesting dilemma about following such an approach. His thinking will resonate with family businesses.
Mayer’s recent book, Firm Commitment: Why the corporation is failing us and how to restore trust in it, focuses on why textbook theories of organising capital markets and corporate sectors might actually be counterproductive to growth. He uses the UK as an example.
As he says: “The form of capitalism that has emerged in Britain is the textbook description of how to organise capital markets and the corporate sector… It is what many countries around the world aspire to, what economists recommend, and what international agencies such as the IMF and World Bank encourage developing and emerging economies around the world to adopt.” But, as Mayer argues, the application of this approach has delivered mediocre economic growth and led to discontent among many of the country’s citizens with their economic and social lot.
He goes on: “The downside [of an activist shareholder society], though, is that exemplary as a form of control the British financial system might be, it systematically extinguishes any sense of commitment — of investors to companies, of executives to employees, of employees to firms, of firms to their investors, of firms to communities, or of this generation to any subsequent or past one.”
Mayer doesn’t directly say this, but in the UK it’s easy enough to see the link with this lack of commitment and the fact that family businesses there have fared so badly – Britain has among the lowest number of family firms in Western Europe. Consider the case of Aspall’s, a UK cider-maker family business. The family’s attitude typifies the dialectic between capital markets and commitment that is so prevalent in the UK. As Barry Chevallier Guild, a member of the 8th generation, says: “[Friends who work in finance] all say, ‘When you are going to float? I want shares in your business.’ And I say, ‘Why would I want to do that?’ We have this fantastic legacy, this fantastic heritage.”
I suspect that this dialectic doesn’t exist to the same extent in Europe’s most successful economy, Germany, where more than 40% of GDP is generated by family businesses. This might also explain why many in Germany are so against adopting the aggressive shareholder activism prevalent in the UK and the US. The listed sector is less than a third of Germany’s GDP, compared with the UK and the US where it’s more than 100%.
There are, of course, many countries in Europe with big family business sectors whose economies are struggling. Italy is the obvious case in point. But enforcing textbook economics might not necessarily be the answer. Indeed, they might exacerbate existing problems and, at best, create a short-term solution to deep-seated problems.
As with so much in life, those who shout loudest get heard, hence the success of the textbook economists. But it’s about time that Mayer’s concepts of commitment in the corporate world are pushed up the agenda. Family businesses are crucial to ensure this happens.