16

Beyond Shareholder Value

CHAPTER 1

Finding a place for

shareholders and stakeholders
in the modern corporation
Dr Roger Barker

he invention of the joint stock limited

liability company was one of the great
innovations of the nineteenth century.
Despite suspicion and criticism over the years,
the company has proved uniquely successful
in harnessing human and financial resources
in the undertaking of economic activity. In this
article, we argue that shareholders distinctive
role in its corporate governance should not be
lightly jettisoned, although a significant new
role is needed for other corporate stakeholders.
The basic concept of a limited liability company
is simple but ingenious. Shareholders invest
in the enterprise but are not held liable for
the companys debts (a wonderful means of
encouraging investment). The companys
existence is independent of the shareholders and
shares can be sold. Nevertheless, shareholders
retain significant power over the company and
its objectives. They have the right to appoint
and dismiss the directors and hold them to
account for the success (or otherwise) of the
company. Although in large public companies
the company may be run by the CEO, ultimate
shareholder power ensures that the companys
activities remain aligned with shareholders.

Unfortunately, in many UK and US listed

corporations this idealised conception
of governance with a clear chain of
accountability from shareholders to boards
and management has become distorted
(although it lives on to a much greater extent
in privately held enterprises). The growing
complexity of modern corporations, and the
fragmentation of listed company ownership
across large numbers of shareholders, has
effectively shifted power from shareholders
towards executive management. In their
ground-breaking study in the 1930s, Adolf Berle
and Gardiner Means (1932) already recognised
that a dispersed ownership structure worked
in the interests of the CEO and key executives
in the power structure of the company.
This insight is ref lected in the lack of
shareholder influence over widely held public,
listed companies today. Institutional investors
from the UK and overseas own a significant
proportion of the UK equity market. But they
lack the incentive to devote significant time
and resources to governance due both to their
small percentage ownership stakes and fear
that competing investors would free ride on