Handing out subsidies to protect poorly performing businesses, or increasing regulation to protect a company’s management from shareholder influence typically fails to stop the inevitable demise of a badly run company or an out-of-date industry – and comes with many consequences.
Following the publication of the government’s white paper on proposed reforms in this area, this new briefing from the IEA’s Financial Services Unit highlights how, if the government were to pick corporate winners in such a way, it would harm competitor companies and the work of entrepreneurs and innovators. On top of this, taxpayers and consumers will end up covering the costs of additional government protection, resulting in higher living costs and poorer households, hurting the wider UK economy.
Author of the briefing, senior economist at the IEA Catherine McBride argues that the UK should maintain a relatively hands-off approach towards corporate governance, as it promotes efficient deployment of capital, encourages poorly performing companies to improve (or fail), and allows new companies to replace them.
The briefing examines to what extent the UK’s financial markets and corporate regulatory environment allow financial natural selection to occur and compares the UK to countries with more protectionist economic strategies.
- UK financial markets have been successful over the long term because they enable financial natural selection to take place.
- It is important that non-performing countries go out of business; it is equally important that new companies are able to replace them.
- The market must allow the weakest companies, or companies with the least adaptive management, to be taken over and absorbed by a rival company.
- For new companies to be able to replace them, it is important capital is released and new capital is pooled.
- Regulators should not place too many obstacles in the way of start-up and innovative businesses.
- If company management is not maximizing shareholder value, the shareholders should be entitled to act – regulations must not protect management from this.
- Government involvement in this process would result in politicians picking winners. When they do so they are also picking losers as well.
- Even when a government ‘protects’ companies for fear of short-term job losses, the impact usually hurts poorer families who end up with a higher cost of living or an additional tax burden.
- When government interferes with value creation and innovation, there are real costs to the wider economy.
Commenting on the report, author and Senior Economist at the IEA’s International Trade and Competition Unit Catherine McBride, said:
“Protectionist regulations and government interventions in private business are more likely to lead to entrenched management and inefficient use of capital. Investors would be less likely to risk their capital in equity investments which would then have a knock-on effect on the general economy and cost taxpayers and consumers dearly.
“Politicians would be best advised not to intervene in investments and the business of private companies. Restricting market forces such as activist shareholders and takeovers will result in harming the economy and hitting the pockets of taxpayers and consumers.”
Notes to Editors:
For media enquiries please contact Nerissa Chesterfield, Head of Communications: [email protected] 07791 390 268 or Emma Revell, Communications Manager: [email protected] 07931 698 246.
To download the IEA’s briefing “Whose company is it anyway?: The benefits of unprotected capitalism and unruly shareholders” click here.
The IEA Financial Services Unit is the focal point for IEA research and education, discussions and events, media commentary and outreach in the field of banking and financial services.
Its core aims are to improve the understanding of the role and purpose of the financial services sector; scrutinize regulation and study the impact of financial innovation.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems and seeks to provide analysis in order to improve the public understanding of economics.
The IEA is a registered educational charity and independent of all political parties.