Sunday, July 17, 2016

What is a Company for?

J&J Credo
The move by the PM to give Investors a binding say on pay and to get workers on boards has attracted a backlash. But it raises the issue quite forcibly: What is a Company For?  My friend Charles Handy gave an excellent talk about this over 20  years ago at the RSA which led to the Tomorrow's Company work.

One major cause of the lacklustre performance of UK companies and UK productivity over the last 10 years has been the unwillingness of British management to focus on growth, innovation and exports: it's much easier to cut costs and do transactions to boost Earnings per Share and bonuses. Growing EpS and the Share Price is NOT and must not be the purpose of a Public company. Indeed there is a strong case for making the priveleges and responsibilities of a Public Company more explicit.

For example, and I offer this only as a thought starter, a new Companies Act might stipulate that:
The purpose of a Public Limited Company is to benefit society by supplying goods/services to customers, treating their customers, suppliers, employees and the communities in which they live and work responsibily and providing a fair return to their shareholders.
Naturally this responsibility can be discharged directly or through subsidiaries This is explicitly modelled to a significant extent on the famous Johnson and Johnson Credo which says their (fourth and) "final responsibility is to our stockholders."  This philosophy of putting the shareholders last has resulted in 10-year share price growth of 103% - well ahead of the S&P 500 (71%) or their rivals Merck (61%) or Pfizer (55%). Depressingly AstraZeneca and GSK have shown returns of 1% and -23% over that period. On a 20-year view JNJ is +421% vs 229% for the S&P, 221% for Pfizer 164% for AZ, 96% for Merck and 62% for GSK.

A corollary of this is that less than 25% of the remuneration of CEOs should be dependent on the returns achieved by shareholders. CEOs should be encouraged to grow their business and invest in R&D, skills, innovation and new markets, products and services.

The move by the PM to get workers on boards should be embraced by industry and not resisted. We don't want Union Representatives but there needs to be a genuine feeling that the Employee Directors are accountable to the Employees. Perhaps the NomCo should provide at least two canadiates for each vacancy and it should then be decided by a vote of the Employees.

Much to discuss and an exciting time to be debating these matters.

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