An introduction to Companionism

A radical re-appraisal of accepted decision making processes in corporate entities

Summary

Although there are a number of economic policies relating to wealth taxation, improvements in housing provision and investment in infrastructure which could have a significant effect on the quantum of the UK’s economic growth this paper will argue that the key problems lie at a deeper level and that the challenges of growth in the 21^st Century in the UK and elsewhere require a more radical approach to both the quantity and quality of growth.

The ‘radical plan’ that this paper proposes is based on the divergence and dissonance between governance principles in the political world and the corporate world.

In political/civic societies we aspire to the democratic principle of one person one vote.  In corporate societies we accept the principle of one pound one vote.  The reasons for this are historical and almost accidental, but vested interest and the status quo has resulted in a society where the interests of the individual are increasingly subordinated to corporate priorities, and the ability of governments to resist these have been significantly diminished.

The rise of populism in an age of austerity is a symptom of the fact that governments are increasingly unable to deliver what they feel obliged to promise in election campaigns, and that companies on which they rely to deliver their policies have become both larger and less tractable in an age of globalisation.  They have both different agendas than the governments that rely on them and in many cases they have the potential to hold governments to ransom in terms of their ability to move their operations to different jurisdictions and to arbitrage tax treatment.

The change in society and the nature of shareholders since the configuring of the corporate framework in the early to mid-nineteenth century means that current corporate management are essentially unaccountable.  Their accountability to shareholders is both outdated and ineffective, notwithstanding recent attempts by some shareholders in respect of e.g. non-binding votes to limit boardroom pay.

The purpose of this paper is to introduce the concept that employees, not shareholders, should have the voting rights in a company, and that these voting rights would be entirely disconnected and separate from the economic rights, which the shareholders would retain.  In this scenario the management would be accountable to the employees at a company’s Annual General Meeting in a similar way to a government being accountable to the electorate at an election.

The core of this policy proposal is that the voting rights currently exercisable at a company’s Annual General Meeting (AGM) by shareholders should be transferred to the employees.  In the case of a large company (defined as a company with more than 250 employees) all the voting rights would be in the hands of the employees.  The standard Articles for new companies would contain the requirement that voting rights would be transferred from the original shareholders to the employees in line with increases in the workforce, in 50 employee increments, so that when the size of the workforce reached 50 people 20% of the voting rights would transfer to the workforce and when the workforce reached 250 the entirety of the voting rights would have transferred to the employees.

For practical reasons this policy would not be introduced in one fell swoop, but in a series of steps.  However the direction of travel could be clearly indicated, and an immediate transfer of 20% of the voting rights of companies with more than 250 employees transferred to the employees, with the rest being transferred at well flagged intervals.

The accountability of the management to the employees following this change of governance would manifest itself in a number of ways, including greater transparency between management and workforce, effect on merger decisions, increased focus on productivity, and companies being more socially responsive.

It is likely, although by no means a given, that the environmental impact of a company’s policies would also become more important to management, since the individuals that make up the workforce will, in their daily lives, be more concerned about these issues than often distant and profit focused investors.

This radical plan would be a Copernican moment: currently companies are legally constructed so that their core is the financial assets of the shareholders, into which labour is invested to enable the capital to achieve a satisfactory return.  The effect of this new policy would be transform companies where their core is the individuals of the business with whom money is invested to enable the business to flourish and prosper albeit subject to receiving a satisfactory return.

Background and Problem

The IPPR is launched this question to economists in January “What would be your radical plan to force a step change in the quality and quantity of the UK’s economic growth?”   Sir Angus Deaton is currently conducting a long term research project for the Institute for Fiscal Studies on Inequality and the Future of Capitalism.  These are fundamental issues facing our society.

It would be foolish to ignore the current political malaise which is affecting many developed countries and which is both a reflection of the lack of current effective economic growth and an inhibitor of future growth.  As inequality, and concern about inequality, are reflected by the rise of populism, faith in democratic institutions and the political nostrums that have long held sway in the developed world is being increasingly undermined, and the ability of capitalism to provide equitable and effective solutions increasingly questioned, while the ability of the state to impose preferred solutions has been weakened.  At the same time concern about climate change considerably complicates the policy initiatives that can be considered to boost growth.  Without addressing these issues implementation of traditional growth strategies will become increasingly difficult.

What is often ignored when looking at these issues is the fundamental divergence in the principles underlying governance in the corporate sphere and governance in the political sphere.  It is so embedded that it is scarcely discussed, or even acknowledged.  In the political sphere in most modern advanced economies governments owe their legitimacy to the democratic principle of one person one vote, a system of governance that has not been achieved without a great deal of struggle and sacrifice.  The corporate sphere, however, has not been nearly so subject to the winds of change.  The fundamental structure of a typical company has not really changed since the middle of the nineteenth century.  Then, as now, the governance principle for companies was one pound one vote – the purest form of plutocracy ever devised by mankind.

When the structure of modern UK joint stock companies was formed in the middle of the 19^th Century, particularly with the Companies Act of 1856, their structure concerned itself only with the capital invested, not with the individuals employed.

The divergence in these different systems of governance emerged during the late 18^th and early 19^th century.  In 1776 when Adam Smith was writing the ‘The Wealth of Nations’ (and indeed throughout his entire life) there were scarcely any limited liability companies (the passage of the Bubble Act[1] in 1720 prohibited the formation of joint-stock companies except by Royal Charter, and this was only repealed in 1825), but the most prominent company of the day, the East India Company attracted his particular ire, where he claimed that shareholders could not hold the management to account effectively.[2]  In Adam Smith’s day business was personal not corporate and the decisions made by those individual business leaders reflected not only their interest in financial returns, but their standing in their local community.

It should be noted that it is anomalous that shareholders as providers of finance have voting rights in a company.  No other providers of finance, such as bank lenders or bondholders, have such rights except when the company is in serious difficulties, and those rights are specifically negotiated contractual rights, rather than intrinsic in the relationship.  This is a hangover from the time when shareholders had unlimited liability, and therefore needed the vote to protect their entire fortune, and when they were very largely involved in the running of the business or knew personally the people who were.

One of the key questions of modern society is to whom are the management of large companies responsible in practice.  The framework within which they operate was designed for a different era and different circumstances, and the reality is that despite worthy attempts such as the Cadbury Report in 1992 and a number of others since, companies are still locked in a system reflecting nineteenth century mores, with the maximisation of profit being their sole goal, except as constrained by legislation.

The use of non-executive directors, and the splitting of the roles of Chairman and Chief Executive in the UK, for example, has recognised the issue of the concentration of power without addressing its root cause.  Historically the interests of labour in a business enterprise has been most effectively represented by collective action and unionisation.  This has tended to breed an antagonistic approach between the interests of capital and labour, and does not lend itself to a continuous balancing of the two.  The unions themselves do not necessarily reflect the different strands of opinion of their membership, and constitute a rather blunt negotiating instrument.  After a period where the size and influence of unions has diminished considerably it is high time to consider more effective ways in which the interests of labour can be most effectively combined with the requirements of capital.

In their book ‘Why Nations Fail’[3] Acemoglu and Robinson analyse the vital importance of political and legal institutions in underpinning economic growth.  However not enough attention has been paid to the governance of corporate institutions and the way in which the plutocratic system of accountability is both out-dated, ineffective and inefficient.

Not only is the principle of one pound one vote difficult to justify in the modern era (there have been no large street demonstrations in support of one pound one vote), but it is also ineffective in practice.  The expression ‘shareholder democracy’ is a complete misnomer, and a very misleading description of ‘shareholder plutocracy’.  The contrast is usually made between share ownership on the one hand and worker ownership and/or a variety of co-operative models on the other.  However this is to confuse ownership with control.  All these types of ownership have their place, but the issue, irrespective of where ownership lies, is where control lies.  Whilst not providing employee control, the German company Bertelsmann for example issues Profit Participation Certificates and the Robert Bosch Stiftung holds 92% of the shares of Robert Bosch, but no voting rights, while the Robert Bosch Industrietreuhand has 93% of the votes but no shares.  Similarly companies such as GM and Roche have issued non-voting equity.

The reality is that most large investors do not value their voting rights very highly, and indeed the skill sets of institutional investment managers are far more focused on a company’s financial results than they are on monitoring its corporate governance.  To the extent that many funds are traded using algorithms with limited human intervention, and EDFs and tracking funds constitute an increasing part of the universe of investment funds, often owned or managed by distant institutional investors or state wealth funds, the relationship between such shareholders and the companies in which they invest is tenuous at best.  Shareholder unhappiness with management generally results in disinvestment rather than an attempt to change management.

It should also be noted that there is a double lack of representation in the corporate structure.  Many shares are now owned by large institutional investors, pension funds and so on, who are themselves agents for their beneficiaries, the pensioners, individual investors etc. But these institutional investors are essentially unanswerable to the people on whose behalf they are investing money in respect of the votes they are entitled to cast at AGMs.  Although there are a number of entities that try to take a more interventionist approach to voting it is far from clear to whom they themselves are responsible in terms of the voting decisions they decide to take.

As companies have become larger, more powerful and more international it is the plutocratic form of governance that more nearly affects many people’s lives, with companies, rather than democratic governments, setting the agenda.  We have come to accept that it is normal for companies to behave in the way that they do, rather than asking whether their form of governance drives/permits certain behaviours which can be anti-social and economically sub-optimal, and whether a different form of governance would lead to different outcomes.  Even worse, as pointed out by Adam Smith, ineffective plutocratic governance results in self-enrichment, and a lack of accountability of management[4].  The relatively untrammelled mechanism of the limited liability company has also resulted in the almost perfect instrument for the concentration of wealth on a wider scale.  This coupled with the globalisation of trading has meant that companies have significantly increased their negotiating strength as compared to governments, the recent actions of the Trump administration notwithstanding.

A radical alternative

The radical policy that this paper proposes is to change the underlying principles of corporate governance and introduce representative democratic principles into corporate governance.  In order to distinguish this approach from just a variant of the argument as to the desirability of employee ownership, it requires a new term – ‘Companionism’.  As described above Capitalism is an inherently undemocratic system as currently constituted, based on a financial electorate, while socialism often has resort to centralised control mechanisms, such as nationalised industries, which can be inimical to democratic accountability.  Companionism, by contrast, is the concept that voting rights in a large corporate structure should, in essence, be similar to those in a political structure – i.e. belong to the members of that community, and that it is the employees not the shareholders, both in principle and in practice who should and could call the management to account by having the right to vote at the AGM (in this context the term ‘stakeholder’ is meaningless –no customer who can take their business to another company from one day to the next can be regarded as a stakeholder in the vendor’s enterprise).  This name reflects the fact that the origin of the word company comes from ‘cum pane’ meaning to share bread together, and that all the ‘companions’ work together for the successful outcome of the venture, whether financial or otherwise.  The word ‘companion’ retains this connotation, while the word ‘company’ in its commercial sense has become completely devoid of this meaning.

The core of this policy proposal is that the voting rights currently exercisable at a company’s AGM by shareholders should be transferred to the employees over time.

One thing that it is essential to emphasise is that the policy of separating voting rights from shares does not imply in any way the transfer of the economic benefit from the shares.  To this extent it does not suppose that the worker ownership model or the co-operative are the only alternatives to the current corporate model.  On the contrary it pre-supposes that the economic interest of investors in companies remains unchanged apart from the voting rights, i.e. the separation of ownership from control.  There are many examples of companies which issue non-voting shares, but usually on the basis that there is an underlying class of voting stock.  This policy proposes a fundamental change by making this the norm rather than the exception.

In the case of a large company (defined as a company with more than 250 employees) all the voting rights would be in the hands of the employees.  The standard Articles for new companies should contain the requirement that voting rights would be transferred from the original shareholders to the employees in line with increases in the workforce, in 50 employee increments, so that when the size of the workforce reached 50 people 20% of the voting rights would transfer to the workforce and when the workforce reached 250 the entirety of the voting rights would have transferred to the employees.

Companies are some of the most important instruments through which governments seek to influence markets and change the growth characteristics of the economy, both directly and indirectly.  From this point of view their management are not just unaccountable from a general point of view, more particularly they can be unaccountable instruments of government policy and they are often the unaccountable formulators of government priorities.  From a broader macro-economic perspective there is therefore a need to review the governance principles of companies, these vital vectors of both economic and social goods.

Implementation

It is clear that a policy to transfer voting rights in companies could not be introduced overnight.  But the direction of travel could be clearly indicated, and an immediate transfer of 20% of the voting rights of companies with more than 250 employees transferred to the employees.  This would not involve any transfer of the economic interest in the shareholdings, but it would mean that the employees as a whole would be a very important part of the ‘electorate’ that the management would have to convince in respect of their own stewardship, and the company’s performance.  This factor alone would drive a very different relationship between the management and the employees.  Companionism could be introduced as follows:

1. When a company is started each share (or ordinary share if there were different classes of shares) would have a vote as currently. However, when a company’s workforce reached 50 (employees or ‘workers’) then 20% of the voting rights at the next AGM would transfer to the workforce.  Their votes would be taken into account by the Company Registrar as if they were individual shareholders, and apportioned across the 20% of the voting control they were then entitled to.  For each increase in 50 in the workforce a further 20% of the voting rights would be transferred until when a company acquired 250 employees all the voting rights would rest with the workforce.
2. With regard to existing companies with over 250 employees there would be a requirement that 20% of the voting rights would be transferred to the workforce immediately, so that the existing shareholders would retain 80% of the voting rights, with the remaining voting rights transferred at, say, 7 yearly intervals thereafter. This would provide a long period of adjustment, while at the same time introducing the importance of the management keeping the workforce as well as the shareholders informed as to the state of the company.  It should be emphasised yet again that the transfer of the voting rights would not involve the transfer of any economic benefits in terms of dividends, which would remain with the shareholders.  It would be the voting rights alone which were transferred.
3. Those companies which were subsidiaries of holding companies including overseas holding companies would require particular attention, in that as wholly owned subsidiaries even a transfer of 20% of the voting rights would not be adequate to impel a change in behaviour. It would therefore be required that voting rights in those companies should be over 50% unless their ultimate parent company had a diversified shareholding structure where 20% of the voting rights had been allocated to the employees – this would probably require a transitional period to implement.
4. Provisions would need to be put into place to clarify the definition of who would be an employee, both to allow for the greater turnover in employment and for the changing employment types, such as ‘worker’ as well as part time employees, as it will undoubtedly be the case that companies will seek to restrict the categories of those entitled to vote.

Impact

This radical yet simple policy would be transformative in a number of different areas which are dealt with below, but over and above the immediate effects of a change in control, or in its early years anticipated change of control, this policy would also result in a commercially consultative society where disclosure and transparency would be enhanced.  It is undoubtedly the case that even in a democracy governments try to keep a lot of their actions confidential, often with good reason, but in the commercial context the ‘electorate’ will in practice often be comparatively better informed than the political electorate since they will have daily experience of at least part of the operation they are voting about.

It would not be unfair to suggest that there is an implicit assumption in some policy making circles that allowing the employees to vote would likely result in them voting themselves higher wages and rapidly pricing themselves out of a job.  Such a suggestion would imply that many years of mandatory education of the UK population have been inadequate, and is not dissimilar to the concerns voiced when universal suffrage was advanced as an appropriate form of civic governance in the UK in the nineteenth century.  However in practice the pay structure would be a matter for the management to decide, and they would then have to justify this at the AGM.  This line of responsibility would engender a more open dialogue as to the competitive position of the company and its salary structure (including that of management).

It is inevitable that some will claim that investors will be substantially dissuaded from investing in companies with such arrangements, but the reality is that a number of analyses have concluded[5] that there can be a fairly marginal pricing differential between shares which have voting rights and those that do not, but that voting rights have a significant effect on how smaller firms are run, particularly family firms[6].  On the contrary the difficulty has usually been to persuade institutional investors to vote at AGMs, when their interest in an investment is purely economic.

This policy, while not re-allocating property rights, will nevertheless have an impact on the sense of disempowerment felt by many, and will make the democratic process more relevant.  It will also enable wider issues to be discussed within the corporate framework, including a trade-off between hours worked and pay, flexibility in working practices, the environmental impact of a company’s operations etc.  Whilst this would not usually fall within the matters discussed at an AGM currently, it is easy to envisage that the scope for a broader dialogue would be enabled by this simple change.  This is by no means to assert that the employees would be altruistic in their behaviour, but it would provide the forum for discussion of different and divergent views as to what a company’s priorities should be while carrying out its business.  It is unrealistic to expect companies to act in socially responsible ways except by coercion from an outside body, given the current system.  As early as the 18^th century Lord Thurlow[7] pithily remarked “Did you ever expect a corporation to have a conscience when it has no soul to be damned, and no body to be kicked?”

In some senses, it could be argued that this policy is not radical enough, given that 99% of all enterprises in the European Union employ fewer than 250 people, and some 94% of those enterprises are independent.  But in these enterprises too part of the voting right would be with the employees, and these figures do not reflect that the small number of large enterprises are precisely those which not only employ large numbers of people but are immensely influential.[8]

The growth outcome of this change is difficult to quantify, as the ramifications are substantial; but it would constitute a massively improved mechanism for discussing and achieving the quality of growth, the way in which it is delivered, the macro-economic effect of large companies, and the potential for productivity improvement in SMEs, which as the OECD has pointed out ‘are central to the collective goal of increasing productive potential, reducing inequality and ensuring that the benefits from increased globalisation and technological progress are shared’.[9]  It would also increase the responsiveness and resilience of the SME sector, which is key to future growth prospects.[10]

The first impact would be on public expectations.  Although for new companies starting up the effect would be minimal at first, for those larger companies affected by the initial grant of a partial voting right (20%) the signalling of the intent to transfer voting rights over a period of time would be a powerful mechanism in its own right to change behaviour and to make management consider to what extent they need to keep their employees informed of some of the key decisions of the company.

A fundamental change in corporate decision making processes would significantly change the way in which management and employees interact, changing the dynamic of the way in which business is conducted, and the social as well as economic outcomes of their activities.  This would include:

1. Greater transparency or at the very least communication, as the directors will feel obliged to keep their employees informed about the progress of the company since they will be held to account.
2. Mergers and acquisitions would need to obtain the agreement of the workforce. This would temper the temptation to enter into ambitious takeover activity, which, it is widely acknowledged, can often be value destructive[11].  This would mean that companies would have to consider much more carefully not only the commercial impact of such a decision, but the employment impact as well.
3. In recent years there has been a secular trend in the increase in the size of executive remuneration packages, with substantial shareholder votes against their acceptance. As the saying goes ‘no man is a hero to his valet’ and it would undoubtedly be more difficult for management to justify these packages to their workforce than to the shareholders.[12]
4. The greater flow of information is likely to lead to better management and potentially more innovation and cost saving as bottlenecks and improvements are more readily identified, as employees actually carrying out the relevant tasks will feel more emboldened to make suggestions.
5. Earlier signalling of opportunities and threats to the company’s business to the employees will assist their implementation of strategies in either scenario. To the extent that the company may wish to improve its competitive position through capital investment which may make a number of workers redundant, it will undoubtedly make this decision more difficult, but if it provides a better balance between a short term financial decision and longer term staff retention advantages, then this may be preferable in the longer term.
6. There will be likely be a tendency to keep companies smaller, as there will probably be an inherent desire of management to retain control at the same time as a wish to expand the business. This may increase the desire to achieve growth through productivity rather than through a concomitant increase in staff numbers, although SMEs are vital in the both the creation and the ‘churn’ of new jobs[13].  To the extent that there was not a turnover parameter there would doubtless be a tendency to increase productivity to achieve profit rather than add more staff.  This might not necessarily favour high employment, but it would favour growth per capita and deal with some of the issues identified in recent reports[14] in respect of SME productivity.  In current demographic circumstances it might well favour productivity gains with the need for less immigration, an issue that has caused such friction in so many countries
7. It will potentially make companies more responsive to their social as well as their financial obligations. There is a degree of asymmetry in the costs companies bear with regard to the social implications of their actions; they expect the state to provide well educated and qualified people for them to employ, and mechanisms such as the Apprenticeship Levy in the UK are felt necessary to try to ensure that at least part of this expense in respect of work oriented training is borne by the companies themselves.  However when they fire people, although there are redundancy expenses, companies by no means absorb the full economic, much less social, cost of their actions.  In towns where there is a dominant steel or car making company for example the decision to close a plant can be more devastating for the community than it is for the company itself.  Although the analogy should not be pushed too far, it is somewhat reminiscent of the corporate sector not being willing to accept the environmental cost of their activities; typically companies have only been willing to accept the minimum social responsibilities consistent with maximising shareholder profit.
8. It should be noted that those employees working for a nationalised industry, or for the Civil Service, would not have the right to vote since they would already be working for a directly elected democratic entity. This fact would however highlight the issue as to whether entities carrying out a public mission should be publicly owned or in the private sector, and also act as a touchstone as to how accountability should be implemented in e.g. the National Health Service.

The above provides a brief summary of a different way in which the nexus of labour and capital can operate in a complex modern democratic society.  Without radical change management will continue to be unaccountable, and increasingly so.  At the same time the attrition of trust and faith in democratic institutions will also increase as the ability of democratically elected governments to provide the policy solutions expected of them continues to diminish

[1] 1720 (6 Geo I, c 18)

[2] ‘The Wealth of Nations, Book IV, Chapter vii

[3] Why Nations Fail, Daron Acemoglu and James Robinson, Crown Business, 2012

[4] The Wealth of Nations, Book IV, Chapter vii   “the inhabitants of England    must have paid     “for all the extraordinary waste which the fraud and abuse, inseparable from the management of the affairs of so great a company, must necessarily have occasioned”

[5] E.g. https://www.stout.com/insights/article/price-differentials-between-voting-and-nonvoting-stock, http://www.econ.mpg.de/files/2008/lectures/esi_20080205_Why_Votes_have_a_Value.pdf

[6] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2832077

[7]Lord Thurlow, Lord Chancellor 1731 – 1806

[8] https://ec.europa.eu/eurostat/statistics-explained/index.php/Statistics_on_small_and_medium-sized_enterprises

[9] https://www.oecd.org/cfe/smes/ministerial/documents/2018-SME-Ministerial-Conference-Key-Issues.pdf

[10] https://ec.europa.eu/growth/sites/growth/files/docs/body/do-smes-create-more-and-better-jobs_en.pdf

[11]https://warwick.ac.uk/fac/soc/wbs/subjects/accountinggroup/eventsandseminars/richard_taffler_paper.pdf

[12] The recent report of the High Pay Centre, http://highpaycentre.org/blog/its-fatcat-friday-ceo-pay-for-2019-surpasses-the-amount-the-average-uk-work, and its 2018 report http://highpaycentre.org/pubs/high-pay-centre-cipd-executive-pay-survey-2018.

[13] https://www.nottingham.ac.uk/gep/documents/press-releases/2010/small-firms-and-job-creation-17-03-10.pdf

[14] Cf: https://www.enterpriseresearch.ac.uk/wp-content/uploads/2015/11/Internationalisation-and-Innovation-Report-web-pages-.pdf