This is the second part of a two part essay by Douglas Carswell, who – until recently – was a Member of the House of Commons. The first part explored what has gone wrong. Today: some solutions.
It’s time to change corporate law
A century or so ago, Ida Tarbell and the Progressive movement in America launched a crusade to reform the kind of ‘robber baron’ capitalism that had emerged out of late nineteenth century American industrialisation (Liam Halligan has written about the “crusading journalist” for UnHerd, and you can access his twenty-two minute film about her life below).
Team Tarbell was remarkably successful, partly thanks to ensuring more state intervention. Anti-trust legislation was created to break up the octopus-like monopolies and rules were introduced to protect consumer interests.
Often overlooked, but as important, were also the Progressive-era reforms that ensured that managers of big businesses were made more accountable – not to officialdom – but to those who actually owned the companies. Directors were given greater powers to oversee the CEO, making companies more than the private fiefdom of a ‘robber baron’ boss. In the UK, statutory audits were introduced in 1900. After 1907, public firms were required to file a balance sheet for the first time. From 1928, shareholders could insist on seeing a copy of audited accounts.
Alas, over the intervening century or so, a series of court cases have helped ensure that those running big firms have been able to evade the sort of scrutiny they ought to be subject to.
It is not a coincidence, for example, that six out of ten Fortune 500 firms in America are registered in Maryland – one of the smallest states in the Union. Why? Because corporate case law in Maryland has, since the 1930s, tended to interpret the rights and duties of board members and shareholders in ways that favour the board members – enabling them to act with less oversight.1
A century of favourable court cases, coupled with the increasingly depersonalised nature of savings and investments, means we need a new round of reforms to ensure that once again the capitalists have more control over their capital.
“We pretend that the shareholders still possess powers that they effectively lost long ago”, wrote Ferdinand Mount recently, “and we imagine that the behaviour of the corporation is disciplined by an array of checks and balances that are often no more than decorative today”.2 Without change, shareholders cannot have meaningful control over the companies they supposedly own.
Here are some specific changes that a 21st century version of the Progressive movement could implement right away:
- Require the directors of investment trusts and pension funds to be made legally accountable, on a personal basis, for the proper exercise of their votes as shareholders.
- Redefine director responsibilities in law, so that they side unequivocally with the shareholder. The law should not be ambivalent about the fact that directors are there to represent shareholders to the board, not the board to the shareholders. Directors are, after all, supposed to be appointed, as proxies, by those that own the business to oversee it on their behalf.
Tilting back control towards those that own private capital is genuinely capitalist. To deliver this, corporate law should be amended such that:
- Existing board members are no longer able to decide who gets to join them on the board. A mini-industry has grown up to find suitable placemen and women to join the club. For all the talk about boardroom diversity, little has been done to ensure diversity of opinion amongst boardrooms that are, otherwise, full of group-think. Shareholders should have greater power to nominate new non-executive board members, if necessary irrespective of the views of existing board members. This will deliver the kind of unherding in boardroom thinking that this site exists to promote in business – and beyond.
- Shareholders have the power to veto executive pay packages. Successive governments have toyed with changes, but watered them down to meaninglessness (the UK government’s recent proposal for a register of high pay offenders is a classic example). Shareholder votes should be binding.
- Key decisions about executive pay are no longer farmed out to supposedly “independent advisors”. Again, a mini-industry of such advisors has sprung up to give supposedly impartial advice, but one which seems to have a vested interest in recommending what executives want to hear. Those that own the company should determine the pay of those who run it. At the same time, there is a good case to be made for excluding executive members from remuneration committees that determine… yes, executive pay.
- Executives are no longer able to deploy proxy votes at their discretion. The interests of those that own the business and those that run it are different. The latter cannot exercise votes on behalf of the former.
When Britain leaves the European Single Market, rather than replicate on this side of the Channel a model of rule-making from Brussels, we could try something rather different: regulation based on Mutual Standard Recognition.
We need to change the way we regulate
When US progressives wanted to reign in ‘robber baron’ corporations, they looked to regulation to end restrictive practices. But, of course, over the intervening years, big business has learnt to use red tape to enable restrictive practices – as discussed in yesterday’s article, for example, with VW, diesel and the European automotive sector.
Ruth Davidson recognised this in her recent UnHerd essay on rebooting capitalism, noting how producer interests often have more muscle than consumer interests when shaping regulations.
What can we do to ensure that we get the sort of regulation we need – which prevents restrictive practices – but not the kind that tilts things in favour of the producer?
How can we have a regulatory system that is effective, yet prevents the big business interests, and their armies of lobbyists, from rigging the system?
Actually, there is a great opportunity to do precisely that.
Ruth and those that voted to Remain in the EU might be little slow to see it, but Britain’s decision to leave the European Union means that we can reboot the way we regulate.
Over the past half century, a system of regulation has grown up within western economies that is supposed to facilitate trade between nations by imposing a single set of uniform standards. Markets that are notionally free, like the European Single Market, have in fact become permission-based markets. Unless a business produces in compliance with specified rules, they are unable to produce and sell.
When Britain leaves the European Single Market, rather than replicate a model of rule-making from Brussels, we could try something different: regulation based on Mutual Standard Recognition.
British trade policy should be to accept EU or US standards for use in Britain – preferably, or though not necessarily, with the EU and US reciprocating. Rather than requiring businesses selling in the UK to conform with a uniform UK standard, producers would be free to produce and sell – provided they complied with EU, US or UK standards.
“But wouldn’t consumers suffer?”, some will ask. “Won’t there be risks?”
When you go on a family holiday to France or Florida, you drive in a hire car from the airport that has been approved by an EU and US regulator. When you eat out on holiday, the food will have been produced in accordance with rules laid down by an EU or US agency. Should you or your family fall ill, the medicine from a pharmacist or drug store has been approved by the European Medicines Agency or the US Food and Drug Administration.
Why should the UK government outlaw you from accessing any of those things when you return home?
“But there will be a race to the bottom!” some will shriek.
Allowing competition between different regulators will not mean an end of regulation but it might tackle excessive regulation – and encourage some regulatory agencies, such as the US’ FDA, which has been notoriously slow to approve new drug treatments, to focus on what is important to the patient.
And a little bit of competition between regulatory systems is just what we need to prevent narrow vested interests from getting control over the rule-making process and running it to stifle competitors. Under a system of Mutual Standard Recognition, the customer interest would come first.
It would mean that big businesses based in the UK would be able to focus on what their customers wanted, rather than using political graft to grow. The power of producers to rig markets would be curtailed – making Britain a more attractive place for capital, and more freely capitalist.
“This sort of trade arrangement would have to be mutual, though” some will say. “And how do you know that even if this system worked, that the EU or US would agree to it?”
I don’t. New trade arrangements based on a system of Mutual Standard Recognition are certainly possible with the EU and the US, and even likely with Australia and others. But this is the beauty of this idea. Even if no other country was prepared to allow products to be sold in their jurisdictions that they had not specifically approved by their regulatory agencies, it would still be in Britain’s interest to go ahead and accept others’ standards unilaterally. Think of it as the UK’s Unilateral Recognition of Standards.
It would mean that big businesses based in the UK would be able to focus on what their customers wanted, rather than using political graft to grow. The power of producers to rig markets would be curtailed – making Britain a more attractive place for capital, and more genuinely free market.
Thirty years ago, Britain led the world with a privatisation programme that redefined what it meant to have a modern market economy. We need to lead the world again by redefining, and rescuing, free market capitalism.
- For more on this see The New Few, Ferdinand Mount, Simon and Schuster, 2012