Who owns a company? is a speech delivered by Andrew Haldane, Chief Economist of the Bank of England. The speech focuses on the long-standing concept of shareholder primacy in modern companies and highlights the need for fundamental changes in corporate governance laws.

Haldane defines corporate governance as a set of arrangements that determine a company’s objectives, binding rights, obligations, and decisions among its stakeholders. He highlights concerns regarding excessive remuneration, unethical practices, monopoly and oligopoly powers, and short-termism, which have strengthened in modern times, and proposes a fundamental re-rooting of company law.

History of corporate governance

Haldane tracks the origins of today’s company model to at least Rome in 700 BC, with corporate entities codified in the Western world since the sixth century AD. The introduction of limited liability in the mid-19th century marked a significant shift, separating ownership and control and potentially diluting incentives for responsible corporate behaviour. The banking sector, due to its unique structure, has been particularly susceptible to these incentive problems.

The evolution of company law and corporate governance

Haldane discusses how company law has involved a legislative path, highlighting the importance of contextual factors in shaping corporate governance models. He notes that most advanced economies have used a shareholder-centric model, defining the director’s duties to serve the interests of shareholders, but also having regard to the wider interests of employees, customers, suppliers, and the wider community. He proposes broadening these wider interests to align more fully with environmental, societal, and governance (ESG) goals.

The microeconomics of companies

Haldane identifies several incentive problems among stakeholders in modern companies. These include:

• Principal/agent problems: Management may prioritise personal interests over shareholder value, as seen in excessive executive remuneration.
• Collective action problems: Dispersed shareholders may struggle to effectively oversee management.
• Short-termism: The prevalence of investors with short holding periods can lead to a focus on immediate returns at the expense of long-term investment.
• Risk-shifting: Shareholders may encourage excessive risk-taking, transferring the burden to creditors and society.

Remuneration structures

Haldane discusses the need for remuneration structures that align with ESG goals and address short-termism. He notes that most remuneration structures are skewed towards equity, with limited signs of a shift towards debt, and proposes mechanisms to defer payouts for periods, so incentives to risk-shift through time are reduced.

Public policy action

Haldane calls for a fundamental re-grounding of company law and proposes that ESG goals be a part of it. These include regulatory capital reforms to reduce risk-taking incentives and changes to executive remuneration practices to promote long-term stability. However, further action may be needed, such as reconsidering the balance of control rights within companies and potentially modifying company law to better align corporate objectives with societal interests.