The Rights and Wrongs of Shareholder Rights

The company is a legal structure designed to bring together the different parties of a firm—its employees, investors, customers, and suppliers—in the delivery of its corporate purpose. Corporations were established as institutions with autonomous lives—self-standing, legal entities independent of those who worked, financed, and managed them. They were devices to ensure long-term commitment to shared goals and risks, with reciprocal obligations on those engaged in them. A company had to declare its purpose before earning a licence to trade. For example, the East India Company, England’s earliest public company, to issue shares to the public as permanent capital, was given the monopoly for English trade in Asia with reciprocal obligations to protect trade along its routes. There was a mutual relationship between the company and society and a mutual benefit to both. This was carried through to the eighteenth and nineteenth centuries, with canal and railway companies operating under charter to deliver on a public purpose. It was with freedom of incorporation in the middle of the nineteenth century that the focus on public purpose gave way to private interest. Nevertheless, public benefit remained at the heart of many private companies, with the families who owned them, such as Cadbury and Rowntree’s, having an interest in wider social purpose beyond pure financial gain. However, to meet the needs for growth in industrial firms in the twentieth century, equity was issued for internal investment and acquisition that diluted these families to the point that they lost control of their companies. Public markets provided capital that promoted economic development and brought transparency to what were previously opaque private firms. However, this came at a price in the separation of ownership from the control of firms. With the separation of ownership and control came a concern, expressed most forcefully by Adolf Berle and Gardiner Means in The Modern Corporation and Private Property, about the need for shareholders to reassert their authority over corporations to ensure that they were run in the interest of their owners, not the self-interest of their managers. The truth, largely forgotten, is that this argument was embedded in a larger vision that wanted economic and political power, in all its guises, to be exercised to benefit the community at large. This pluralist frame of reference subsequently fell out of view, with consequences that reverberate today. So was born what has become a preoccupation ever since with the “agency problem” in the modern corporation of aligning the interests of managers with those of their shareholders to avoid unprofitable growth or undue complacency