The shareholder model
The shareholder model, also known as the shareholder primacy, agency or simply the standard model, asserts that social welfare is best served if corporate managers are encouraged to pursue shareholder interests, notably by aligning their own interests with them. Thus, “ultimate control over the corporation should rest with the shareholder class”. Corporate managers should be accountable to shareholders alone, as agents to principals, and “charged with the obligation to manage the corporation in the interests of its shareholders; other corporate constituencies, such as creditors, employees, suppliers, and customers, should have their interests protected by contractual and regulatory means rather than through participation in corporate governance”. Minority shareholders should be protected and “the market value of the publicly traded corporation’s shares is the principal measure of its shareholders’ interests”. [14]
The trusteeship model
Kay and Silberston proposed a trusteeship model in 1995. On this model, there is a duty to sustain the corporation’s assets, both tangible and intangible, including “the skills of its employees, the expectations of customers and suppliers, and the company’s reputation in the community” and “to balance the conflicting interests of current stakeholders and additionally to weigh the interests of present and future stakeholders”. [15]
The dominant objective would be “to give executive management the greatest possible freedom to develop the business over a period of years in whatever way they think fit, while holding them rigorously responsible to all the parties involved in the business for their performance in the long run”. According to Kay and Silberston, “All this is not very different from what many well-managed companies currently do – or what others would like to do. It would, nevertheless, have a profound effect on corporate behaviour”. [16]
Some of these models have lost momentum. The managerialist model was eventually discredited, mainly by the widespread failure of the conglomerate movement in the 1970s and 1980s, since when the prevailing view has developed that managers “tend to serve disproportionately their own interests, however well-intentioned”. [17] Enthusiasm for the labour-oriented model waned with the realisation that effective governance by the workforce becomes difficult and costly in the many cases where there are conflicting interests within the workforce. The state-oriented model also lost its appeal through the advent of Thatcherism in Britain, the reduction in state ownership in France, the collapse of communism in the 1990s, and the poor performance of state corporatist economies in Japan and other Asian countries.
The prevailing models of governance
Liberal market economies such as the USA, Canada, Britain and Australia tend to adopt the shareholder model of corporate governance, under which managers focus on the maximisation of shareholder value as the primary goal. In contrast, co-ordinated market economies such as Germany and Japan tend to adopt the stakeholder model, under which managers seek to balance the interests of all the firm’s constituencies, including employees, customers, suppliers and local communities, as well as investors.
Kay and Silberston also point to major differences in the nature of the corporation in continental Europe and Japan on the one hand, where it is seen as “an institution with personality, character and aspirations of its own”; and in the USA and Britain on the other, where “the corporation is a private rather than a public body, defined by a set of relationships between principal and agent”, and where “Shareholder-owners, too busy and too numerous to undertake the responsibility themselves, hire salaried executives to manage their affairs”. [18]
Thus, while British and American managers seek to maximise shareholder value, their counterparts in continental Europe and Japan seek to develop the company, reflecting, for example, “the German conception of the company as a social institution; a community in itself and an organisation in turn embedded in a community”. [19] Accordingly, German managers are charged with sustaining the interests of all stakeholder groups, not just one, and this fundamentally affects their behaviour.
There is, however, a danger of generalisation. In Britain and the USA, for example, the shares of publicly quoted companies are traded like commodities and therefore on markets which require standard products, but there is also a substantial unquoted company sector with much more variety in the role of the shareholder.
The dominant model
According to Hansmann and Kraakman, the shareholder model has become the standard by out-competing the main alternative models. [20] They cited “widespread disenchantment with a privileged role for managers, employees, or the state in corporate affairs” [21] and predicted that most law and practice will converge with this standard throughout the developed world. [22]
There is also a convergence of interests in this outcome among investors and managers. Not only are investors generally in the best position to supply capital and bear risk, but also they are often the most efficient owners. Further, leading investment institutions, understandably, may prefer to invest in companies which address their interests by adopting the shareholder model. For their part, the managers of major public companies are generally happy to align their own interest, as agents, with those of their principals, the shareholder-investors.
The influence of this model extends beyond large-scale enterprise. Thus, as Hansmann and Kraakman noted, “small- and medium-sized firms in every jurisdiction are organized under legal regimes consistent with the standard model”, [23] while, for example, even start-ups can secure financing more readily if there are markets which provide an exit for initial investors.
These co-inciding interests have led to a consensus in influential academic, business and government circles on the merits of the shareholder model, which has become entrenched. As a result, some of the multitude of enterprises, of all shapes and sizes, currently run in many different ways under many different forms of ownership, will aspire to that coveted public company status, aided by investment bankers, private equity firms, lawyers, accountants, consultants and the like, and will feed into that system. These may include private companies, government enterprises awaiting privatisation, building societies, even clubs and associations, either looking to float themselves or to become part of a large listed group.
A long line of British enterprises have already followed this path over the last 30 years, including:
the floated private companies BSkyB, Reuters and Orange,
Vodafone and Zeneca, which were spun out or demerged from their previous groups,
the privatised British Telecom (BT), British Gas, British Airways (BA) and British Airports Authority (BAA),
the demutualised former building society Abbey National, now part of the Spanish banking group Santander, and
operations of associations or clubs like the Royal Automobile Club, which became part of major quoted companies.
Endnotes
1 H. Hansmann and R. Kraakman ‘The End of History for Corporate Law’, The Georgetown Law Journal, vol. 89 (2001), p. 441. [return