Regulatory turn made explicit

I've written quite a bit over the past few years that I think that the idea that shareholders 'own' companies, and therefore should be entitled to certain rights, is increasingly under threat. In particular, if you look at what has happened, and is proposed, in the financial sector, it is increasingly difficult to make the argument that shareholders are ultimately in control. They have clearly been supplanted by financial regulators and other elements of the state on issues ranging from board appointments to pay to takeovers and so on.

The Parliamentary Commission on Banking Standards is clearly sceptical about the positive role that shareholders can plan in respect of governance and standards at the banks. But it pushes things on quite a bit by arguing that Company Law should be redrawn to remove shareholder primacy in relation to the banks. This is, I would argue, rather a big deal. It will, obviously, draw a sharp response from the mainstream corporate governance community. But the important point really is that the PCBS is only making explicit what is already implicit, and not just in the UK.

The Commission recommends that the Government consult on a proposal to amend section 172 of the Companies Act 2006 to remove shareholder primacy in respect of banks, requiring directors of banks to ensure the financial safety and soundness of the company ahead of the interests of its members.

One final aside - the idea of amending the Companies Act to redefine directors' duties in response to the failures during the financial crisis has been floated before, and by the head of the FSA!

I would strongly advocate intervention in the UK through changing the Companies Act framework for directors, for example. The current requirement for directors is to promote the success of the company. This is often interpreted in terms of shareholder value. Whilst this does include the need, for example, to ‘have regard to’ the impact on the community, I do not believe that is sufficient. There must be a stronger and more explicit obligation to wider society. There must be clear recognition of the need for institutions to contribute to the common good.