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Business Times
12-05-2025
- Business
- Business Times
DEI may not survive. But shareholder activism will
BUSINESS corporations are, simultaneously, the world's most wonderful organisations and the most terrifying. Wonderful because they produce an unprecedented profusion of life's necessities and luxuries. Terrifying because they are so powerful and relentless. The 18th century British Lord Chancellor Edward Thurlow once remarked: 'Corporations have neither bodies to be punished, nor souls to be condemned, they therefore do as they like.' How can we bring out the best in these Janus-faced creatures? One answer is to create a responsible managerial cadre through a mixture of education and professional ethics. A second is to use the government to regulate companies, and otherwise to chivy them to do the right thing. A third is to empower all the 'stakeholders' in the capitalist enterprise (workers, suppliers and shareholders) to ensure social balance. Nobody's in charge All these ideas have produced problems. Managerialism suffers from the defect identified by Adam Smith back in 1776 that hired managers will fail to exercise the vigilance in managing other people's money they would accord to their own: 'Negligence and profusion, therefore, must always prevail…in the management of the affairs of such a company.' Government regulation favours insiders over outsiders and, in the hands of strongmen leaders who are so common in today's world, including America, can degenerate into cronyism. And stakeholder capitalism suffers from the problem that when everybody is in charge, nobody is in charge. Which leaves one final form of control: Adam Smith's 'vigilant owners'. The entrepreneurs who forged the great modern corporations such as Carnegie Steel and Standard Oil were almost always paragons of vigilance who planned every move and monitored every penny. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up Owner managers were eventually sidelined by their own success: companies grew so big that they needed a cadre of professional managers to run them and so hungry for capital that they had to turn to public markets. By the 1920s, most companies were 'owned' by millions of small investors who were too dispersed and deferential to exercise control. It looked as if the 'vigilance' of owners was gone forever, and managerial 'profusion' had won the day. But then two things happened as a consequence of mass affluence. Vast pools of capital began to accumulate as citizens ventured into the stock market and governments encouraged them to put some of their savings into shares. And institutional investors, particularly mutual funds and pension funds, began to flex their muscles. In The Unseen Revolution (1976), the management guru Peter Drucker described the new phase of capitalism as 'pension fund socialism' but it would have been better described as popular capitalism in which, for the first time ever, regular investors got a chance to act like owners. Some of the most interesting business figures of the 1970s recognised the possibilities of Drucker's 'unseen revolution'. T Boone Pickens and his fellow corporate raiders used these pools of capital to take over (and asset strip) underperforming companies. Warren Buffett turned Berkshire Hathaway into an investment goliath (and thousands of small investors into millionaires) by taking long-term positions in promising companies and helping them to perform better. Michael Jensen argued that managers would become more entrepreneurial if they were given stock in the companies they managed. But perhaps the most ambitious of all these prophets of ownership was Robert Monks, who died in his home state of Maine on Apr 29. Monks saw popular ownership as the key to creating nothing less than a new form of responsible capitalism: a form in which a mass of 'vigilant owners' obliged companies to improve their performance, starting with the way they ran themselves ('corporate governance') and extending to the wider society. Monks' campaign for responsible ownership was initially met with a combination of hostility from corporate managers (who were doing fabulously from the existing regime) and indifference from institutional investors (who believed that their job was to 'shuffle shares' regardless of the fact they were often the biggest shareholders in companies). But the naysayers reckoned without Monks' unique qualities. Monks' ceaseless activity eventually revolutionised the corporate landscape in America and beyond. Once decried as 'parsley on the fish', corporate governance became the main course. Both the New York Stock Exchange and Nasdaq now demand that a majority of directors are independent, and directors undergo professional training in business schools (including one that Monks endowed at Cambridge's Judge Business School). The list of CEOs who have fallen foul of their boards includes some of the most powerful people in business such as Philip Purcell of Morgan Stanley, Franklin Raines at Fannie Mae, Michael Eisner at Walt Disney, Hank Greenberg at American International Group. ISS now has more than 4,000 clients and is valued at US$2.3 billion. The shareholder activism revolution has arguably solidified into an orthodoxy in recent years. Institutional investors have taken on the characteristics of the incumbent managers that Monks decried. And routine box-ticking has taken the place of 'vigilant management'. Recent fads Institutional investors have leapt unthinkingly on recent fads such as diversity, equity and inclusion, even going so far as to blacklist investment in armaments. Monks once wrote a book called Watching the Watchers. The watchers that he created need to be watched more carefully lest they themselves turn into interest groups. But the ownership revolution that Monks foresaw is nevertheless here to stay, and rightly so. There is no better way of providing for people's retirements than investments in financial markets. And there is no greater duty for the guardians of the world's capital than to ensure that regular people's savings are properly invested and managed. Adam Smith was right: There is no 'vigilance' like the vigilance of ownership, and the more ownership we have, the better. BLOOMBERG
Bloomberg
09-05-2025
- Business
- Bloomberg
DEI May Not Survive. But Shareholder Activism Will.
Business corporations are, simultaneously, the world's most wonderful organizations and the most terrifying. Wonderful because they produce an unprecedented profusion of life's necessities and luxuries. Terrifying because they are so powerful and relentless. 'Corporations have neither bodies to be punished, nor souls to be condemned,' the 18th century British Lord Chancellor Edward Thurlow once remarked, 'they therefore do as they like.' How can we bring out the best in these Janus-faced creatures? One answer is to create a responsible managerial cadre through a mixture of education and professional ethics. A second is to use the government to regulate companies, and otherwise to chivy them to do the right thing. A third is to empower all the 'stakeholders' in the capitalist enterprise (workers, suppliers and shareholders) to ensure social balance.
