A guest blog from Patrick Andrews, friend and colleague.
Patrick is an ex-corporate lawyer and co-founder of the Human Organising Project, which is exploring more human ways of organising. He is running a workshop in London on Friday 20th January entitled The Future of the Corporation. To find out more and book your place, go here.
It is a rare thing, to hear a Conservative Prime Minister call for more responsible capitalism. Theresa May’s remarks at the Conservative party conference last month are a sign that large corporations are breaking the unwritten contract they have with society.
The regular corporate scandals (most recently Sports Direct and BHS, but there’s a long list stretching back centuries) are just the tip of the iceberg. It’s the routine, day–to-day greedy and destructive behaviour that is most alarming; the tax dodging; the excessive executive salaries; the steadfast resistance to regulations designed to improve societal or environmental well-being. Most of all, it’s the remorseless urge for growth that drives a never-ending cycle of consume and throw away, leading to widespread societal and environmental dis-ease.
We can’t eliminate greed and selfishness from human behaviour. What we can do is design human systems to encourage people to behave more in line with the dictates of their conscience and less likely to strive to please their corporate masters or satisfy their own egoic desires. And company law, which governs every company in the UK, has a big role to play.
Company law has changed very little in its essentials since the 1850s, when the Limited Liability Act was passed. That was a very different age. English society was stratified by class and only a minority of men (and no women) could vote. The slave trade had only recently been abolished. Elsewhere in Europe, there were still serfdom, which was abolished in Russia as late as 1861. There have been many transformational changes in human society since the 1850s, such as the invention of cars, telephones and the Internet, splitting the atom and gay marriage. Yet the fundamental structure for a business hasn’t changed.
A company still comprises members with “limited liability” meaning no liability for the actions of the company. Every company also has a board with responsibility for the day-to-day activities of the company. Such a structure would have been familiar to the powerful men of that age, many of whom owned vast tracts of land. Often living far from their estates, they relied on local managers who were incentivised to pursue profit for their masters. In essence, it was a feudal system.
I learned in the very first tutorial of my law degree that British law is rooted in feudal thinking. This applies to property law (every bit of land in the UK ultimately belongs to the Crown) and even to human beings (we are subjects of the Queen, protected only by human “rights” that can be removed by Parliament). Likewise company law is based on feudal thinking, dividing the world into:
- an absolute authority (shareholders);
- subjects (staff) to be used (employed) in service to the ultimate authority; and
- overseers (the board) who watch over the subjects.
Because it’s lasted so long and has become so pervasive, it is tempting to think that the limited company represents a universal pattern that can’t be improved upon. Yet it a man-made, and relatively modern, contrivance and it’s ripe for change. It is time to start treating large companies not as the property of shareholders (a fiction that is used to justify a lot of the worst corporate excesses) but as institutions that exist to serve the common good.
To implement this, the following could be considered:
- Professionalise the role of a director of all public limited companies (plcs). There would be compulsory training and exams to be taken before anyone could be a director of a plc. This is not so radical – to become the company secretary of a plc (a far less powerful or responsible position), you need a formal qualification.
- Change the law to clarify that the ultimate duty of a director is to serve the common good. Directors of a plc should be treated as public servants, not as servants of shareholders. This idea of a higher duty is familiar in professional practice – for example, a barrister’s highest duty is to the court, not her client.
- Appointment of directors should be more transparent and participatory. This could be achieved by setting up a panel to approve appointments, with representation from different constituencies such as staff, customers, government etc.
- Task the company secretary to act as the “conscience” of the company, with the right to attend board meetings and to speak at the annual general meeting. The difficulty with this is that the secretary, who is appointed by the board, risks losing their job if they speak out – a significant dis-incentive. To safeguard the secretary’s integrity, we would require a government minister’s approval for their removal, mirroring the sort of constitutional arrangements commonly used to protect the integrity of the judiciary.
We would see lots of benefits from such innovations. I even believe, surprisingly perhaps, that they would have a positive impact on corporate profits. This may sound like wishful thinking. Yet the fixation on shareholder value that is characteristic of British companies, and embedded in section 172 of the Companies Act, has hardly turned British companies into world beaters. There is some evidence (for example from Scandinavian companies) that adopting a wider purpose that includes social and environmental well-being can lead to enhanced financial returns.
Ultimately, what is needed is a change of mindset. We need government to stop trying to control or lecture from above (itself a symptom of out-dated thinking) and instead to focus on enabling corporations to be truly self-regulating, for the common good. This would indeed be a revolution!
Footnote: the above is an edited version of a submission by the author, Patrick Andrews, to the UK Parliament’s Business, Innovation, and Skills Committee which is running a consultation on corporate governance.