What is a company for?

Directors should understand the answer even if it might surprise...

"Financial Times":  29 October 2015   A debate at Cass Business School - orchestrated by PM Bob Garratt and sponsored by WCoMC

"Sometimes the simplest questions can provoke the most interesting answers. What is a company for? We might say that companies exist to provide goods and services, and employment, and to do so profitably. But in law a company is a distinct entity. It has a legal personality. It owns property. In this sense the purpose of a company is to protect and develop its assets.

Getting back to fundamentals is necessary because in the post-crisis world, the legitimacy of business is being questioned more fiercely than ever before. If boards are to have constructive discussions about governance they need to understand what they are really there to do.

A vigorous debate which I chaired [i.e. Stefan Stern - Director of the High Pay Centre] at Cass Business School in London last week confirmed both the level of interest in these issues and the range of views that exist. There was healthy agreement on a few points. For example, after more than 20 years of debate and reform in UK governance, compliance looms too large. “The box-ticking approach promised too much and delivered too little,” in the words of one participant.

While scandal, corruption and corporate failures had inevitably led to the desire for tougher regulation, precautionary instincts had produced unintended consequences: “If you want to stop people ticking boxes stop building boxes,” as another speaker commented.

There was an understanding that shareholders do not own companies. Stockholders have economic rights in relation to their ownership of shares and an opportunity to influence the governance of the corporation, as Professor Hugh Willmott explained.

Professor Bob Garratt argued that the usefulness of governance codes had expired. He pointed to the explicit duties of directors as set out in the Companies Act of 2006 as having more relevance and practical purpose.

And he had some pretty persuasive evidence to support his case — a letter,  sent to him by  the late Sir Adrian Cadbury just a few months before he died. Sir Adrian had been the father of corporate governance reform. His eponymous report of 1992 had set this whole two-decade process in motion. But by the end of his life he, too, felt that the codes had done their job and had indeed gone too far.

In this compliance-heavy world directors could claim that they were obliged to focus on “shareholder value” to the exclusion of other concerns. But, Sir Adrian wrote to Prof Garratt: “Too many boards have adopted a policy of putting shareholder satisfaction first and neglecting their legal duty to ensure their decisions are in the company’s interest.”

Directing a company to long-term success, that is what boards are for.

Past Master Bob Garratt

Stefan Stern [who chaired the debate] is director of the High Pay Centre, a think-tank that monitors pay at the top of the income scale