News Column

Business Analysis: Corporate governance: Expect stiff resistance to a more egalitarian system

May 30, 2014

Larry Elliott

Britain's model of corporate governance is doggedly short-termist. Nothing new about that. There have been calls for decades for the UK to copy the German model, with its supportive investors and long-termist banks.

What, though, if the way our companies are run is contributing to inequality? That was the suggestion made by the Bank of England'sAndy Haldane, when he said there was a case for firms looking after all stakeholders rather than just shareholders.

Haldane's argument goes as follows. Humans have problems deferring gratification. That goes for consumers, but it also goes for company bosses. And if power resides with this group, what you get is widening inequality, because the fruits of a company's growth go disproportionately into raising executive pay and dividends, rather than into higher real earnings and investment.

Haldane says there is a case for reform that would provide a different set of incentives and skew companies towards delivering long-term value for a broader range of stakeholders.

It's hard to quibble with that. The way companies are run does seem to be a factor in the widening gap between rich and poor. The decline of collective bargaining means trade unions are less able to act as a counterweight to shareholder power. What's more, other countries have managed to move to a model biased towards investing rather than distributing.

What Haldane doesn't do is explain how this change will come about. History suggests the resistance will be stiff.

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Source: Guardian (UK)