Whose company is it anyway?
29 April 2019
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Brexit
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Economic Affairs
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Economic Theory
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The benefits of unprotected capitalism and unruly shareholders
Summary
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- Free-market capitalism requires creative destruction. It is important that poorly performing companies are allowed to go out of business or allowed to be taken over, and it is equally important that new companies are able to replace them.
- If company management is not maximising shareholder value, then the shareholders should be entitled to act. Government regulations should not protect a company’s management, executive board or supervisory board from shareholder disquiet.
- The UK remains Europe’s best protector of shareholder rights. Its governance and pro-shareholder approach is based on clear principles, unlike other major EU economies where regulation protects local companies and management from shareholder disquiet. The UK’s acceptance of hostile takeovers is a key discipline underpinning an approach to corporate governance which promotes the efficient deployment of capital.
- The UK should not protect so called ‘national corporate champions’ – to do so would require the government to pick winners by trying to decide which businesses should be protected. Instead, the government should let market forces decide.
- When governments support failing sectors or companies, they are also harming competitor companies, entrepreneurs and innovators, as well as the taxpayers and consumers who end up covering the additional costs of government protection.
- Participants in UK capital markets generally accept that there is a trade-off between the benefits of access to public capital through listed markets and the requirements of meeting the performance expectations of investors. Management has less incentive to maximise shareholder value when governments impose corporate structures that protect company executives from activist shareholders or takeovers. Companies should consider the negative implications of incorporating in countries where management is protected at the expense of the rights of shareholders.
- Increasing government subsidies in order to prop up failing companies or industries that are being superseded by innovation is never successful in the long run. Government subsidies, or regulatory protection, cannot stop the inevitable demise of a badly run company or an out-of-date industry. Equally, government regulations should not attempt to stop innovation that would make established companies obsolete.
- There are unintended consequences of government protection for inefficient management. When a government ‘protects’ companies for fear of short-term job losses, it typically hurts the wider economy, including poorer households which end up with a higher cost of living and/or an additional tax burden.
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