Seeking a cure for capitalism
Modern market capitalism used to be heralded as the best way to run an economic system, especially after the collapse of the Soviet Union.
It was said that it promoted rapid growth and encouraged invention and enterprise; it offered freedom and opportunities for all, the advantages of competition, efficient use of finances, fairness and equality.
Increasingly, capitalism as practised in the West has come under attack for its ugly aspects, including greed and cronyism, the pernicious power of financiers and the evident failure of governments to remedy the deficiencies, even in cases where governments are not colluding with the modern robber barons.
Capitalism in the West is not only deficient and diseased but is not working. That is not merely a poor pun on the high levels of unemployment in the United States and Europe but refers to grave underlying problems.
Growth is sluggish where it is not stalling. Governments are up to their ears in debt and have no room for manoeuvre: if they try to boost growth they risk capital markets turning against them; if they choose austerity to get on top of the debt they risk sending growth plummeting and unemployment soaring.
Now there is more bad news. A carefully researched article in the latest issue of what might be subtitled the journal of modern capitalism, the Harvard Business Review, concludes that one of the pillars of capitalism, the vital role of shareholders in big corporations, is also badly diseased.
Justin Fox, who is editorial director of HBR Group, and Jay Lorsch, a professor at Harvard Business School, called their article 'What good are shareholders?' The answer, several thousand closely considered words later, is 'not much'.
The two authors paint a picture of deadlock and muddle when it comes to good corporate practice.
'Executives complain, with justification, that meddling and second-guessing from shareholders are making it harder for them to do their jobs effectively,' they say.
'Shareholders complain, with justification, of executives who pocket staggering pay cheques while delivering mediocre results.
'Boards are stuck in the middle - under increasing pressure to act as watchdogs and disciplinarians despite evidence that they're more effective as friendly advisers.'
The practice flies in the face of academic thinking from the 1970s, that shareholders are the centre of the corporate universe and managers and boards must orbit around them.
'Corporate reality, though, has proved stubbornly unco-operative,' Fox and Lorsch say.
'In legal terms, shareholders don't own the corporation (they own securities that give them a less-than-well-defined claim on its earnings). In law and practice, they don't have the final say over most big corporate decisions (boards of directors do). And although many top managers pledge fealty to shareholders, their actions and their pay packages often bespeak other loyalties.'
Some supporters of shareholders say if corporations did put shareholders first, capitalism would work much better. But Fox and Lorsch examine the essential roles of shareholders and say they are failing in each.
Shareholders in theory serve companies in three ways: they provide them with funds; they provide information through the pricing of the stock; and they supposedly provide discipline to errant management.
In practice, the authors say, most established corporations finance investments through retained earnings or debt rather than shareholders' funds, though start-ups that rely on venture capital are the exception.
The relationship between share value and the actual value of a corporation is even more problematic.
Fischer Black, the finance scholar, has estimated that 'at least 90 per cent' of the time, the market prices of a company are somewhere between 50 and 200 per cent of its actual worth.
A big problem is that shareholders have become more like renters than owners of a company's stock. This affects their ability to be enforcers of discipline.
In the 1950s, the average holding period for an equity traded on the New York Stock Exchange was seven years. Now it is six months and getting shorter as high-frequency trading becomes more dominant. High-frequency traders, who may hold a stock for milliseconds, account for 70 per cent of daily volume on the NYSE.
In 1950, households owned more than 90 per cent of the shares of US corporations. Today, if hedge funds and foreign owners are included, institutions hold up to 70 per cent.
Fox and Lorsch plead for 'finding roles for other players in the capitalist corporate drama - boards, customers, employees, lenders, regulators, non-profit groups'.
The hope would be for 'stakeholder capitalism - not as some sort of do-good imperative but as recognition that today's shareholders aren't quite up to making shareholder capitalism work'.
It's a weak, almost whingeing plea but typical of today's economic physicians arguing over how to cure the diseases of modern capitalism.
Unfortunately, the best medicine they have been able to devise is the equivalent of sticking plaster and aspirin for raging cancers.
The average holding period, in months, for an equity traded on the New York Stock Exchange. In the 1950s, it was seven years