What would it take to implement Mayer’s vision of a corporation that is more than just a slave to its shareholders’ demand for profit? Here I will describe some of what he has to say about corporate ownership, governance, and the measurement of performance.
Henry Ford’s first two corporations, the Detroit Automobile Company and the Henry Ford Company, did not work out very well. In both cases, investors wanted him to bring an automobile to market before he thought it was good enough. He learned his lesson and retained more family control in his third effort, the Ford Motor Company. “This time, with no outside investor interference, Ford transformed his ideas for car design and production into one of the great corporate success stories of all time.”
Here’s the lesson Mayer draws from this: “Where ownership coincides with vision…, vision is supported not extinguished by ownership.” The danger of public stock ownership is “the mundane views of investors stifling and snubbing the spark of creative inspiration.”
Widely dispersed ownership is especially common in Mayer’s United Kingdom. It has the advantage of expanding the available supply of capital, making capital cheaper. It allows small investors to get an average market return on investment without incurring excessive risk, assuming they have a diversified portfolio. But it has the disadvantage of undermining “the ability of entrepreneurs and innovators to pursue idiosyncratic value that the market does not immediately recognize.”
In many parts of the world, such as Asia, South America and continental Europe (especially Germany), family control remains common. In the United States, family businesses have declined but other forms of block ownership are more common than in the UK. Mayer hopes that large institutional investors like pension funds will invest less for short-term financial returns and more for long-term social benefits. Unlike the UK, the US also allows dual-class share structures, where the shares of company founders and top executives carry more voting rights than shares offered publicly. In theory, this also gives visionary leaders some protection from short-term financial demands.
Mayer sees three main aspects of good governance–“purpose, practice, and performance. You have to want to do it, you have to bring others along in doing it, and you have to demonstrate you have done it.”
Mayer links purpose both with corporate cultural values and with the various types of capital and their constituencies:
One way of determining a company’s purpose is to answer the question what is its value proposition? What value is it seeking to create for whom over what period of time? Is it predominantly looking to enhance or maximize shareholder value, or consumer value, or the human capital of its employees, the social capital of its communities and societies, or the natural capital it owns and in its supply chain?
Mayer’s first principle of management is, “Corporate control should be exercised and value maximized by scarce capitals.” That is, control should be shared with those who represent the kind of capital the corporation is most trying to grow. If a company is dedicated to growing its human capital, then it should share control with its workers.
Natural capital poses a special problem for governance, since its human representatives are not obvious, but some people may represent it better than others:
There are therefore two possible solutions to the protection of natural capital. The first is to allocate control rights predominantly to younger generations of owners and require them to relinquish control to their successors as they age. The second is to put natural capital ownership in trust of older generations whose concern about their reputation will make them take their role as custodians seriously….
“The long-run growth of the firm requires the balanced growth of all its capitals not just material and financial capital.” If a company cares about its impact on other forms of capital, it must find ways to measure that impact in its profit-loss accounting.
To take an obvious example, corporations should not just cut down a forest or pay wages too low to live on, and then count their financial gains as profits while leaving the societal costs to be borne by someone else. Technically, sustainable corporate activity must address the problem of “externalities,” which are “benefits [or costs] that accrue to one party from activities undertaken by another without the latter being rewarded [or penalized] for the former.”
The theoretical solution is to internalize the externalities. The corporation should shoulder the costs of depleting natural capital or human capital, and receive some benefit from growing them. It should count all forms of capital investment as costs, and subtract all those costs when calculating profits. Failure to do so makes corporations seem more profitable than they are. Oil companies aren’t actually worth as much as they would be if their activities were sustainable. It also leads corporations to misallocate resources, devoting too many to the kinds of capital growth–material and financial–that are customarily accounted for.
National accounting is similarly distorted. National accounts overstate national income and growth by ignoring the deterioration of natural capital. The nation also misallocates resources by counting money spent on education, infrastructure and the environment as a cost, but having no comprehensive system for measuring the benefits. Thus public spending appears more wasteful than it is, while a corporate tax cut appears more profitable than it is.
Mayer acknowledges that “it is much harder to measure such nebulous concepts as human well-being, social capital, and natural capital, or at least to attach monetary values to them with the same precision as profit.” Nevertheless, some progress is being made. Several international agencies have cooperated to produce the System of Environmental-Economic Accounting (SEEA), which has provided measures of natural capital for twenty countries.
Individual corporations do not have to put a monetary value on their environments, but just reckon the costs of both acquiring and replenishing natural resources before claiming a profit. They need a similar approach for growing and sustaining other forms of wealth.