||The mystery about capitalism|
Ushio - April 2008
I have been a financial journalist—among other things—for more than 25 years. Most of the time I have concluded that although finance can seem complicated, in fact the underlying issues in finance are quite simple. Money is always money, after all, regardless of whether it is expressed in complex securities or just as plain old bank loans; and the human incentives and emotions surrounding money are always basically the same. But there is one thing that has always puzzled me. This is that different countries and different companies can have such utterly different opinions about a person or institution that is fundamental to finance and to capitalism: the shareholder.
Capitalism has existed for as long as humans have existed. They have always traded and accumulated wealth, using the assets they own as collateral against which they can borrow more money, to make even greater wealth. The shareholder is a more recent invention, dating from the time in the 17th and 18th centuries when the modern company was invented, in which ownership could be divided between a number of investors, each of which would have a legally defined claim to a share of the profits of the company, paid as a dividend. The shareholder is the ultimate owner of a slice of the assets of the company. Or is he? The puzzle is that people disagree about this seemingly fundamental point.
The disagreement is seen most starkly when you cross international borders. In Japan recently, for example, Takao Kitabata, the top official at the Ministry of Economy, Trade and Industry, was recently heard to say that he thought companies should have the right to choose their own shareholders, because shareholders are "irresponsible and greedy". He must by definition be right that they are greedy: after all, they have invested money in the hope of making some sort of a profit. But why should be say that they are irresponsible?
In America, by contrast, it is said that the duty of a company board is strictly a responsibility to the shareholders, and what the board must focus on is "shareholder value", by which is meant a focus on making the shares worth more both in capital value and income, in a sustainable way. It is the directors and managers who are considered "irresponsible" if they do not serve the shareholders´ needs.
In my own country, Britain, we believe in something of a compromise between these two extremes. We have laws that require all shareholders to be treated equally and that ensure that shareholders have the power to vote on many important corporate issues, yet we also have a strong culturally based interest in the responsibility of companies to society.
So who is right? I began to think harder about this question recently as I sat in a seminar in London about the role of board directors and the duties of company boards. The conclusion I came to is that there is no correct answer. The reason for that is not just dependent on different national cultures even though such differences between America, Japan, Britain and others do exist and are important. The reason why there is no correct answer is that a company is a complex creation and that its needs and relationships with financiers, employees, customers and government all depend on what circumstances it finds itself in.
The role of the shareholder, depends, in particular, on how much the company needs capital. If a company can borrow money easily and cheaply from banks, or has plenty of cash of its own thanks to its low debts and high earnings, then it does not need to be nice to shareholders in order to persuade them to invest more money. In Japan during the 1960s and 1970s companies depended more on banks than on investors. In the 1980s, during the bubble, they built up such huge cash surpluses of their own that they did not have to care very much about either bankers or shareholders.
Things did begin to change during the 1990s. Many companies fell deeply into debt. Access to finance, whether from banks, debt markets or shareholders became more important. Now, however, most companies have reduced their debts and again have big cash surpluses. So they feel they can afford to try to keep shareholders at a distance again, protecting themselves against attempts by some investors to get higher dividends or to influence management strategy.
What this issue comes down to, however, is a question of discipline. Where does the discipline come from that ensures that managers do a good job, building a profitable, sustainable business? In America it comes from competitors, primarily, but that is supplemented by the threat that shareholders might accept a takeover bid and throw out the existing managers. In Britain it comes both from the takeover threat and from laws and practices that make the board of directors responsible for enforcing discipline. In America, boards are weak, usually with a powerful chief executive just surrounded on the board by his golfing pals. That is not the way we do it in Britain.
Whenever there is a debate in Japan about this issue of shareholders and capitalism, someone who is taking part in the argument is almost guaranteed to shout that Japan must not become like America. That idea is probably what lay behind the comment I quoted earlier from METI´s Mr Kitabata: it is Americans who have the reputation of being "irresponsible and greedy", after all. But I would argue that America is not the only alternative approach, if Japanese companies need discipline but do not want cut-throat capitalism in order to provide it.
Britain offers another way, with laws that give the board of directors of a company the power and the responsibility to provide that discipline. They are required by law, I learned in my seminar, to act in the long-term interests of the company. That means that they should also act in the interests of shareholders. But that does not mean they must do whatever a particular group of shareholders demands at a particular time. It means that they should act in the interests of shareholders in general, which means in the interests of tomorrow´s shareholders as well as today´s. It sounds like a hard job.