We are converging on the plc as the only form of economic organisation in the modern world. But this is not without costs – and it is because we are not giving viable alternatives any legal encouragement.
The government has promised new rules to regulate building societies. But with building societies rapidly turning themselves into banks, it is not clear that there will be much left to regulate by the time the rules are in place. Corporate investors are taking over from rich individuals – (less rich than they were) as the source of capital for Lloyds of London. KMPG has become the first, but certainly not the last, accountancy partnership to place its audit functions into a limited company. The nation’s railway lines, proud creation of Victorian engineers and financiers, are again about to be floated on the London stock exchange.
Behind these apparently unconnected events there is a single theme and a single cause. The theme is convergence on the plc as the only form of economic organisation in the modern world. The cause is that we have not allowed any other form of economic organisation to achieve the combination of robustness to external challenge and flexibility in changing circumstances that we have given the plc.
For mutual businesses, it seems to be a problem either to have too little capital, or too much. Among building societies, it is the strongest who are at the front of the queue to convert, over-supplied with capital, and able to use it to deliver value to their members and develop the range of their businesses. Among life insurance companies, it is mostly the weaker companies who see conversion as the only means to sufficient capital to support their growth. If the money box is too full, you must convert to let some out: if it is too empty, you need to convert to attract more in.
Lloyds has an historic structure that is simply too idiosyncratic to survive. That is part of its litigation problem: imagine if all the legal questions you could raise about the structure and governance of a company were the subject of cases against a single firm. That company would find itself preoccupied with litigation and beleaguered by legal expenses, and something not very different is happening here. So Lloyds management increasingly comes to resemble the management structure of an ordinary company, and so does its capital base.
And no one would be keen to work for BP or BT if every case of an incompetent tanker captain or a wrong connection involved a risk that you would have to sell your house and take up residence in cardboard city. The partners of the big accountancy firms don’t much like that kind of risk either. Who wouldn’t rather be a company director, with a safe salary, share options, and a company funded policy to cover directors’ liabilities, errors and omissions? So that is what they plan to be.
And yet there is a cost to this loss of variety of organisational form. British mutual financial institutions were extraordinarily successful in their day. Building societies invented the residential mortgage, and captured most of the retail savings markets before the complacent, cartellised banking industry got round to noticing. Money Management’s life insurance performance tables consistently show mutual companies at the top. The very distinctive character of Lloyds gave it a flexibility and a capacity to exchange and process information which was central to London’s pre-eminence in the world insurance market for over a century. And the partnership structure is a legal form which mirrors exactly the business relationships which exist within an effective professional services firm.
So we made a mistake when we decided, partly by default and partly by conscious choice, that we would not give these alternatives any encouragement. The watershed was when the government decided that it was anomalous that the assets of the TSB were not owned by anyone, and transferred them to the custody of the board of a plc, which promptly threw them all away. That might have been a reminder that the plc was not a perfect structure, but no such lesson was learnt. Auditors got a dusty answer when they sought more legal protection for their partnership structure: building societies were made vulnerable to take-over but denied the opportunity to turn themselves into mutual banks.
But sooner or later we will have to revisit the issue. We will have to revisit it because we want to have schools and hospitals that are free of direct political control and able to raise private finance; but there will never be a popular appetite for passing responsibility for education to Dotheby’s Hall plc. We will have to revisit it because we have not yet got right the ways we run and regulate monopoly utilities. And we will have to revisit it because one of the features of a vibrant society, socially and economically, is the variety and range of its institutions.
When the limited liability company was invented a century and a half ago, many critics thought the institution would never prosper because no one would trade with such an irresponsible organisation. The critics were not completely wrong. The plc is far from the ideal form of organisation for every substantial business. It is just that, at the moment, it is the only viable form we have.