Adonis Pegasiou explains why corporate governance reform must not cease to be part of the public debate, and why the proposals that Labour put forward during the 2019 election campaign should not be overlooked.
The 2019 election will be remembered in the annals of the UK’s political history for how Brexit managed to reshape the party-political landscape. The Conservative Party focused its campaign almost entirely on ‘Getting Brexit Done’, managing to overshadow critical domestic issues. On the other hand, Labour suffered a historic loss, having failed to take a clear stance on Brexit as well as to convince voters that its manifesto was neither too radical nor unrealistic.
Even so, Jeremy Corbyn did manage to introduce and highlight certain issues that are now part of the public debate and cannot be easily overlooked. These include the failure of private enterprises to efficiently manage public utilities, the increasing number of people made homeless or living in poverty, the effects of climate change, and the need to tax the more affluent classes of society if certain changes and state initiatives are to be introduced, even though more attention should have been placed on how to improve the efficiency and effectiveness of public spending.
In addition to these, Labour presented a comprehensive position on the functioning of private companies through ‘Rewriting the Rules: Labour’s Vision for Corporate Governance, Accountability, and Regulation’. In this, the party highlighted the need to shift to a corporate governance model that involves a more active participation by all relevant stakeholders rather than just shareholders. This approach is more like a Coordinated Market Economies (CMEs) model used in Germany. The UK, according to the dualistic approach of Hall and Soskice, is a classic example of Liberal Market Economies (LMEs), identified by neoliberal policies and defined by market-driven relationships in which the shareholder value is of primary (if not sole) importance. On the contrary, the CME model foresees social and political institutions engaging directly in shaping economic action, while some of the model’s key characteristics include corporatist wage setting, strongly regulated labour markets, and corporate financing through long-term commitments by banks. Investment in firms is not contained by the pressing need to produce short-term returns but is instead seen as some form of ‘patient capital’ which focuses on the long-term development of the firm. Employees are also involved in decisionmaking, which may result in a time-consuming process yet one with more reliable outcomes.
Specifically, Labour, by vouching to rewrite the Companies Act, aimed to ensure that companies are oriented towards the long-term and take a wider stakeholder approach. Directors would owe a duty to promote the success of the company for the benefit not only of shareholders, but of employees, customers, the environment and the wider public. This is of particular significance for the UK population, given its diminishing presence in the ownership structures of large corporations. According to the New Economics Foundation, more than half of UK company equity is owned abroad and only just over 12% by individuals (reflecting a failure to establish a share-owning democracy).
Furthermore, Labour was committed to secure the participation of employees in the Boards of large companies by giving them the choice of adopting a two-tier board structure (like in Germany), where there is both a management board and a supervisory board that includes employees. In addition, key Labour proposals included a commitment to initiate a review of the need for additional legislative action to encourage longer-term shareholding; respond more actively to the existential threat of climate change by adopting new instruments of regulatory enforcement, such as delisting companies from the London Stock Exchange when they fail to take adequate steps to tackle the climate emergency; structurally separate audit and accounting activities in major auditing firms; and carry out an overhaul of the regulatory architecture to secure that regulatory authorities are not captured by corporate giants.
Coming from Corbyn’s Labour, the above suggestions had been portrayed by some as socialist fantasies. Nevertheless, a more cool-headed approach, backed by research, would reveal that this is not the case. In fact, Theresa May had adopted some of these proposals in her 2016 campaign for the Conservative leadership. Back then, Mrs May commented that ‘If I’m prime minister, we’re going to have not just consumers represented on company boards but workers as well’. The ‘shareholder-first’ mantra has also been openly questioned by US top corporate leaders. During the latest meeting of the Business Roundtable in August 2019, top US executives proposed a modern standard for corporate responsibility where the key principles would be: delivering value to the customers, investing in employees by compensating them fairly and providing important benefits, dealing fairly and ethically with the suppliers, supporting the communities in which companies operate by respecting the local population and protecting the environment by embracing sustainable practices across businesses.
To the disappointment of those who trace a need for change in corporate governance, Theresa May, once in office, abandoned her plans for substantial corporate governance reform, amidst pressures from business groups. In its latest electoral campaign, the Conservative Party made no reference to the issue and did not commit to any similar policies, thus limiting the chances of significant changes occurring in the years ahead.
Nevertheless, even if prospects of change are grim, corporate governance reform must not cease to be part of the public debate. Even if a few years ago one could rather confidently argue that the prevalent corporate model would be that of LMEs with globalisation acting as the driving force for a convergence to neoliberalism, following the 2008 financial crisis this approach has been challenged. In fact, unregulated free-market capitalism and laissez-faire liberalism that solely highlight shareholder profits as the key objective for corporations have been losing ground. The doubts casted over the orthodoxy of neoliberalism should form the basis of future debates that seek to reform corporate governance by introducing a stakeholder approach that highlights the importance of sustainability. The Labour Party’s proposals could prove to be a valid contribution to this debate.
Adonis Pegasiou is the Academic Director of the European Institute of Management and Finance in Cyprus.
All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science. Featured image credit: Drew Beamer on Unsplash.