Good Ownership

The tone, objectives and culture of any firm is set by its owners. So one of the first places to act upon to change the world of work is not the labour market itself, but the forces that shape the market and, in particular, the priorities of firms' owners.

One eccentric aspect of British capitalism is how poorly its business owners discharge their responsibilities. The ultimate owners of most British companies are individuals committing their life savings to pensions and insurance schemes.

There has been a dramatic shift in share ownership over the past twenty years. These new owners...you and me...want the companies they invest in to be patient and long-term in their strategies. But by law we are compelled to delegate the job of managing our ownership rights to professional investment managers.

These professional managers define their responsibility as being not to the company in which they invest, but to the savers who have entrusted to them their savings...whose assets they need to maximise over the shortest possible period in order to make their own business as investment managers prosper. This priority thus becomes the priority of the directors and managers of the companies in which they invest.

Worse, the structure of institutional share ownership is such that no one investment manager can ever take responsibility for the fate of any particular British company or group of companies. They are not large enough to be committed owner-anchors, nor small enough not to matter. The result is to create the takeover culture. Note once again how size is a critical variable in the equation.

So fund managers are locked in a classic example of how an efficient contract between contracting parties - between them and their savers - has a disastrous spillover effects for the operation of the system as a whole. Unless the funds they manage keep up with or beat the stock market indices, they can lose the entire account to a new firm of managers. The contract can be switched with little notice, and billions of pounds of shares can suddenly be managed by someone else.

Because the firms want to keep the business and win business from others, they are forced into a position in which everyone is trying to do better than the average, which is obviously impossible. The resulting instability helps to generate uncommitted, disengaged owners.

Will Hutton's proposal is to treat investment managers the same way as the government treats franchise holders and their railways and media monopolies. Go for fixed term contracts, a term of five years being Hutton's suggestion.

But Sweden it seems has been blessed with patriotic owners willing to take the long view. The Wallenbergs in particular have always believed in active ownership. And, at least with hindsight, can be seen to have been impressively competent. They have acted much as 'the good government' would have acted. Perhaps it was sheer luck - a few lucky bets.
 
Certainly there is nothing intrinsic to private ownership that implies competence...nor in public ownership that implies incompetence. But yet government intervention seems to be a much more hazardous undertaking, with an impressive catalogue of failures littering the economic textbooks and only a few successes balancing 'the social score-card' of public ownership.