169
See also: Public companies 38 ■ Free market economics 54–61 ■
The competitive market 126–29 ■ Institutions in economics 206–07
WAR AND DEPRESSIONS
larger shareholding or galvanize a
sufficient number of shareholders
to force through a change. As a
result, the owners of companies
have a smaller and smaller
influence in the running of their
companies. This is not a problem
when management interests
coincide with those of the
shareholders. However, if we
assume that management are
acting in a self-interested way and
seeking their own personal profit,
their interests will be very different
from those of the owners.
Berle and Means argued for a
change in corporate law that would
return power to shareholders over
the corporations. They insisted that
shareholders should be given rights
to hire and fire management and to
hold regular general meetings.
When their book was first
published, US corporate law did not
generally include such measures,
and Berle and Means were
instrumental in the founding of the
modern corporate legal system.Corporate failures
Today, the failure of corporate
governance is the focus of popular
discontent with capitalism. Since
taxpayers have become majority
owners in some large corporations,
corporate leadership is in the
spotlight, revealing the self-interest
of some chief executives who are
awarded ever increasing pay and
bonuses. Many feel that shareholders
remain powerless in the face of the
corporate machine. ■Executive pay
Berle and Means warned of
the dangers of self-interested
executives in 1932, but some
people argue that the problem
has become worse in the US
and Europe in the last 20
years. Shareholders vote to
choose the board of directors,
but executive pay is set by a
remuneration committee
composed of other high-
earners. They keep pay high
to enforce a “market rate,”
and they can then look forward
to receiving a large pay raise
due to “market forces.”
Shareholders have the power
to dismiss the board, but this
would not be well received by
the markets—which, in turn,
could cause share prices to fall.
The problem is worsened
by the fact that many shares
are held by hedge funds
(speculative investment firms)
with no long-term interest in
the company. Fund managers
aim to receive large pay
increases in line with chief
executive officers (CEOs),
so it is not in their interest
to vote against high
remuneration packages.... diluting the
ownership of
the company.... giving the
management more
money to spend.Management is
not held responsible by
investors, who are apathetic
and have little power.Management’s priority
is self-enrichment,
not the advancement
of the company.Managers go for
perks, not their
company’s profits.More and more
individuals start to buy
into companies on the
stock market...Today, a merry-go-round of
remuneration committee members
sets corporate pay. Legislation that
would allow shareholders a voice in
these committees seems likely.