The FT published a report last week that commented on an important issue. That is the collapse of shareholder capitalism.
The issue is a simple one to summarise. Apparently about two thirds of all private owners of quoted shares in the UK now own their shares through nominee pooled funds. As such they are not recorded as the legal owners of these shares. They have no voting rights. And no right to attend shareholder meetings. They don't even have the right to accounts. And they have given an institution, who does not own the shares in reality, the right to exercise their vote in the company.
This matters for a number of reasons.
First, this makes a mockery of shareholder capitalism. The company has no idea who its shareholders are. And it is wholly unaccountable to them. The idea that somehow shareholders are at the centre of corporate concern is shown to be a sham, yet again, by this.
Second, this undermines audit. Bizarrely, audit reports are still addressed to shareholders. What is apparent is that many do not get them. No wonder auditing is becoming so removed from reality.
Third, this breaks down any pretence that there is effective corporate governance. There cannot be when many company members are disenfranchised.
Fourth, the concentration of power in the hands of passive nominee owners reinforces the control of a small ruling elite in quoted businesses, who are insulated by this arrangement from any real accountability whilst being able to pretend that it exists.
Fifth, this means tax fraud can be much more easily disguised.
And lastly, it shows the owners of shares just don't care and so are not the custodians for business that we need.
In essence, we have a form of capitalism that claims to be for shareholders and yet that is clearly a sham. No wonder it is not working.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
“No wonder it is not working.”
How could it be otherwise?
Every contradiction laid-out for all to see, but none to touch and fix.
Incisive reading of the Law Commission report. Many thanks Richard
An important take-away from this post is that shareholder capitalism is a scam and has been for some 40 years or so, the years dominated first by monetarism and then by neoliberalism, two names for basically the same thing. Market indexes like the S&P 500 can go up but it isn’t clear who is benefitting. Certainly not anyone from the general public or, as Richard points out, the shareholders. What a ridiculous system. But how can it be fixed? And who is prepared to do it?
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
Hello again Richard. Do you have an opinion on Employee Share Ownership? Not on the scale of John Lewis Partnership but for small and medium sized companies.
At the turn of the century, I tried ESO and it was moderately successful… until GB’s economy crashed (v2008).
Together with most of the Shareholders from OldCo, I’ve since been rebuilding NewCo to become a phoenix co-op.
I feel a ‘we try harder’ attitude, engendered by our ESO plan (even though it ultimately failed) has been a major contribution towards growth of Accolade Office Supplies. (shameless plug).
You’ll probably block me for even mentioning HMRC’s Enterprise Investment Scheme, but again, (on a small scale) I think it has merits. If rigorously policed to prevent exploitation by tax evaders, do you believe the reputation of EIS can be restored?
p.s. I’m looking forward to hearing you speak about Green New Deal in Glasgow on 29th August. (equally shameless plug for GND & CommonSpace)
Ron
I support employee ownership
But I do not think EIS is the route to it
I believe there are better options
Richard
Thanks Richard. Because I respect your writing so much, I’m delighted to know that you support Employee Share Ownership. Over the next couple of decades, my Staff will let you know how Accolade’s ESO plan fares.
But… I’m hoping that an Enterprise Investment Scheme may be a way OUT of ESO for Staff.
At some time, they will want to cash-in their ‘investment’ (i.e. time and effort helping to build a business). An EIS is one way to introduce external funds into a small business that may have cash-flow constraints due to constant expansion.
Dividend earnings are key, both to motivating Employee Shareholders AND to attracting investors. But without tax-reliefs, I think few people would think about investing in a small business. Do you consider such EIS tax-saving opportunities to be a legitimate incentive?
Ron
I think you need to take very careful advice on this
Do your plans align with EIS conditions?
Richard
“The company has no idea who its shareholders are. And it is wholly unaccountable to them”
Then how the hell do they keep sending me dividend cheques?
You are a silly old fool
With respect, no I am not