For a brief period before the 1997 election, ‘the shareholder society’ was New Labour’s big economic idea.  Nothing came of it.   The failure to develop this idea was representative of a broader and continuing failure; the inability of the European left to find a coherent economic philosophy in the face of the collapse of central planning and the rise of market fundamentalism.

       Stakeholding meant different things to different people – and that was part of the problem.   But my interpretation of stake holding gave it, and continues to give it, the meaning which it has always carried in management theory (see Freeman 1984, Donaldson and Preston 1995, Kay and Silberston 1995). Stakeholding is the idea that the corporation is a social institution which evolves organically, rather than a temporary coalition of people who find it profitable to do business with each other.  The objective of the manager of the stakeholder company is to promote the development of the business in the interests of investors, employees, customers, suppliers and the broader community, rather than to maximise shareholder value.

       In 1996, in the transitory heyday of British attention to stakeholding, I described these issues at the annual conference of the CBI, the association of Britain’s leading businesses.  I illustrated the issue by reference to the changes between the 1980s and 1990s in the mission statement of ICI, for most of the last century Britain’s leading industrial company.

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“ICI aims to be the world’s leading chemical company, serving customers internationally through the innovative and responsible application of chemistry and related science.

Through achievement of our aim, we will enhance the wealth and well-being of our shareholders, our employees, our customers and the communities which we serve and in which we operate”.

ICI 1987

“Our objective is to maximise value for our shareholders by focusing on businesses where we have market leadership, a technological edge and a world competitive cost base”.

ICI 1994

       There are three obvious sources of difference between these accounts.  The older statement puts operations first – ‘the application of chemistry and related sciences’ – and finance second – ‘through achievement of our aim, we will enhance the wealth of our shareholders’.  The newer statement put financial objectives first – ‘our objective is to maximise value for our shareholders’. Operations are secondary, the means by which that goal is to be achieved. The older statement looks forward to new businesses – it emphasises innovation. The newer focuses on ‘businesses in which we (already) have cost leadership’.  The older statement expresses concern for shareholders, employees, customers and communities.  In the newer statement, only shareholders feature.

       The change at ICI can be directly traced to a period when the company believed – probably mistakenly – that it was vulnerable to a threat of takeover by the predatory Hanson Trust.  But similar shifts in focus were observed reproduced in many large companies over the same period, as the financial sector grew larger and more global, and came increasingly to dictate priorities in both business and economic policy.

       We now benefit from hindsight and can describe what happened before – and after.  The older ICI was a world leader in its industry from its formation in the 1920s (Pettigrew, 1985). The origins of the company were in explosives and dyestuffs, but in the inter war period the emphasis of the business shifted to petrochemicals and agricultural fertilisers.  After the Second World War, the ICI Board recognised, presciently, that the most important ‘responsible application of chemistry’ in future would be the nascent pharmaceutical business.  But ICI’s pharmaceutical division lost money for almost two decades until in the 1960’s the company discovered, under the direction of James Black, who would be the father of Britain’s continuing strong pharmaceutical industry, one of the early blockbuster drugs. Beta-blockers were the first effective anti-hypertensives.  In the quarter century that followed, pharmaceuticals would be the principal driver of ICI’s growth and source of its profit.

       The experience of the newer ICI was not such a happy one.  The stock market reacted favourably to the announcement of its changed objectives, but less favourably to the subsequent reality.  ICI’s share price peaked at almost £10 a few months after that CBI speech, its zenith coinciding with the election of a New Labour government   The decline thereafter was relentless, and in 2003 the share price dipped below £1.  In 2007 what remained of the once-great business was acquired by a Dutch company.  The company whose objective was solely ‘to maximise value for shareholders’ was not successful even in achieving that. 

       In this dispiriting experience for shareholders, ICI was also representative of wider trends.  In the fifteen years from 1984 to 1989, UK share prices rose more than fivefold; the FTSE all share index, below 600 in 1985, peaked in September 2000 at over 3000. The hope of shareholder value proved more rewarding than the reality. Today, the index has barely regained that 2000 level.

        The financial sector provides the most extreme examples. In a duet resonant of the transformation of ICI, the veteran banker John Reed briefly shared at the turn of the century the position of CEO of Citigroup with the newer upstart, Sandy Weil. The two men provided contrasting views of the future of the company for an American journalist.  ‘The model I have is of a global company that really helps the middle class with something they haven’t been served well by historically.  That’s my vision.  That’s my dream,’ said Reed.  ‘My goal is increasing shareholder value,’ Sandy (Weil) interjected, glancing frequently at a nearby computer monitor displaying Citigroup’s changing stock price’ (Langley, 2003, pp. 324-5). Weil soon ousted Reed to become sole CEO.  Within eight years, Citigroup’s share price would have lost almost all its value and the business would be rescued by the US government.

       There was an economic philosophy of sorts during New Labour’s term of office from 1997 – 2010, but it was not stakeholding, The 2006 Companies Act does lean towards a stakeholder interpretation, requiring directors to promote the success of the company for the benefit of its members – a formulation clearly closer to old ICI than new. But few directors see it that way. The mood of the times was very different, and so was the economics of New Labour in government (Balls et al., 2004). Their philosophy is best described with the two phrases ‘the market failure doctrine’, and ‘redistributive market liberalism’.   The market failure doctrine adopts the premise that market outcomes are broadly efficient, save for a limited class of ‘market failures’.  The concept of market failure derives from the startling premise that a failure of a particular economic model of markets to conform to reality reflects a failure of the market rather than a failure of the model (Kay, 2007). Yet the grip the notion of market failure holds on the thinking that underpins modern economic policymaking is hard to exaggerate. It has been, and remains, difficult to make a case for collective intervention in economic affairs except by reference to ‘market failure’.

       ‘Redistributive market liberalism’ develops the market failure approach by broadly accepting market outcomes while ameliorating the consequences through tax and benefits. Redistributive market liberalism is capitalism with a human face. Thus redistributive market liberals are untroubled, even enthused, by the devotion of companies to shareholder value and by the financialisation of the business sector. Redistributive market liberals, although to the left of the political spectrum in their views on social policy, favour ‘light touch’ regulation, believing that government should generally stay out of productive activity unless such activity is characterised by ‘market failure’ (Kay, 2003).

       Redistributive market liberalism requires us to make a sharp distinction between our economic lives and our civic values.  In commerce, we may – even must – pursue our self-interest.   We then vote for high taxes so that the proceeds of our self-interest can be fairly redistributed to be a beast in business and a concerned citizen at the ballot box.   Except we don’t. The individualism which is central to redistributive market liberalism’s economic philosophy undermines the solidarity on which its approach to social policy depends.

       Redistributive market liberalism can never provide an economic basis for the politics of the left because it concedes, mistakenly, the validity of the simplistic model of the market economy espoused by the new right. The implied distinction between economic process and social outcomes is untenable.  How could we ever hope to frame rules and institutions except in the light of knowledge of the practical consequences of these rules and institutional arrangements?   Markets (and here I mean real markets for goods and services rather than markets for securities) are social institutions, not mechanical contrivances. Corporations are organisations embedded in communities and possess character and values of their own; they are not just a transitory association of contracting parties. The weaknesses of the underlying economic theory go far beyond the conventional list of “market failures’.

       Market fundamentalists espoused a model of the market economy that was simultaneously repulsive and false.  The central lesson of the financial crisis is that an organisation of financial markets which applauds greed and emphasises anonymous trading over trust relationships does not work even in its own terms.  The corporation (Bear Stearns) which famously proclaimed that it made nothing but money proved, in the end, incapable even of that.  The ICI managers who pushed shareholder value ended up destroying it.

       Markets work, in the long run, because they are the economic expression of the disciplined pluralism which is the basis of a democratic society.  They facilitate experiment and innovation.  Markets and corporations serve citizens when, and only when, they are embedded in the societies of which they are part.  With proper recognition that successful market economies are necessarily embedded in a social context, it is time to return to the stakeholder debate.

References

Balls, E., Grice, J., and O’Donnell G. (eds.), 2004, Microeconomic Reform in Britain: Delivering Enterprise and Fairness: Delivering Opportunities for All, London, Palgrave Macmillan.

Donaldson, T., and Preston, L. E., 1995, ’The Stakeholder Theory of the Corporation: Concepts, Evidence and Implications’, The Academy of Management Review, 20 (1), Jan, 65-91.

Freeman, R. E., 1984, Strategic Management: A Stakeholder Approach, Boston,Pitman.

Kay, J., 2003, The Truth about Markets, London, Penguin. 

Kay, J., 2007, ’The Failure of Market Failure’, Prospect, 1 August.

Kay, J., and Silberston, A., 1995, ’Corporate Governance’, National Institute Economic Review, August, 84-96.

Langley, M., 2003, Tearing Down the Walls, New York, Simon and Schuster.

Pettigrew, A. M., 1985, The Awakening Giant: Continuity and Change in Imperial Chemical Industries, Oxford, Blackwell.