Pluralism vs Shareholder Primacy

In recent years, the debate between shareholder primacy and pluralism has become increasingly important in the UK. At the heart of this debate lies the question of who should be the focus of a company’s decision-making: should it be solely the shareholders, or should other stakeholders also be considered? The traditional view in the UK has been one of shareholder primacy, which holds that the interests of shareholders should be prioritised above all others. However, many now argue that this approach is outdated and fails to account for modern business's complex and interconnected nature. Instead, they advocate for a pluralist approach, which takes into account the interests of all stakeholders, including employees, customers, and the environment. In this blog, we will explore the arguments in favour of pluralism and why it may be the best way forward for UK company law.

With Great Power Comes Great Responsibility – The Company’s Role in Society

The traditional justifications for the retention of shareholder primacy are, it can be argued, almost entirely baseless and fundamentally problematic for any form of social equality. Under a pluralist approach, there is more of a detachment from the company and its shareholders, rather recognising the company as a “social institution … downplay[ing] the idea of it as a private, profit-oriented business”.

When discussing large companies in particular, Collins resultantly describes the “new organisational paradigm” with companies being a “productive organisation as a public institution” and as such it has “responsibilities which go beyond the residual claims” of shareholders. As such, it is necessary to draw the inference that companies, like all public institutions, must balance the needs of society at large (rather than focusing blindly on shareholder value).

As a result of a more liberal understanding of the companies’ role in modern society, countries with pluralist company law frameworks have significantly better social standards. Collison et al have accordingly held that:

“Anglo-American countries have a ‘case to answer’ in regard to their consistently poor measures of social well-being relative to those of other developed economies, which typically pursue a ‘stakeholder’, rather than a ‘shareholder’, model of capitalism”.

Attention will be given to two factors of primary importance - a further change of the UK company law framework would better address with the implementation of a pluralist approach.

Social Welfare – Benefits of Pluralism for Employees and Society at Large

A significant benefit of adopting the pluralist approach is that employees’ interests are better protected with less of a focus on short-term wealth increases, leading to less income inequality which has a notable effect on social welfare. There are countless studies that have identified income inequality as a primary driver of discrepancies in social welfare between developed countries, with epidemiologists citing significant evidence in support of this claim.

Income Inequality in Shareholder Primacy Frameworks

A symptom of company law frameworks that place almost exclusive focus on shareholder value is that income inequality rises. This can partially be attributed to directors receiving bonuses for hitting share value objectives (short-termism as a result of this). These same bonuses are of course not shared with employees more generally, with Froud et al noting that:

“the increases enjoyed by the CEO and other key senior managers are not shared by the majority of other employees in the giant firms”.

As a result, the ratio between the wages of employees generally in comparison with CEOs in the US (another country with a shareholder primacy-focused company law framework) has multiplied from a factor of 50 in 1980 all the way to a factor of 281 in 2002. In the UK, a similar trend was identified with the disparity between the groups’ wage increases from a multiple of 10 in 2008 to a multiple of 50 in 2002. Although moderate rises can also be seen in pluralist frameworks, income inequality can be confidently linked with shareholder primacy as “measures of income inequality are rising…faster in the most ‘financialized’ Anglo-Saxon economies”, where “median incomes stagnate while the top percentile, and especially the top permille make spectacular gains”.

The Effects of Income Inequality on Social Welfare

Evidently, pluralist company law frameworks contribute to significantly better wealth distribution within society. The extent of the positive impact on social welfare that adopting a pluralist company law framework, and thus better addressing the wage gap, could have on the UK is lucidly illustrated by Wilkinson and Pickett. In their 2009 publication, they demonstrate how the general population’s health in both the US and the UK would be different if their wage gap was to be similar to that in the most comparable countries adopting pluralist company law frameworks (these were Japan, Sweden, Norway, and Finland). They held, amongst other things, that in the US the percentage of the population suffering from obesity or mental illnesses would be predicted to decrease by almost 67%, and the number of people held in prison would decline by 75%. In the UK, the rate of homicide would likely decrease by 75% and “the government could be closing prisons all over the country”.

Wilkinson and Pickett’s findings in relation to the serious benefits pluralism could have for the UK have further been corroborated by a study on child mortality rates. In a paper for the Journal of Public Health, Collison et al carried out an analysis of UN-provided mortality figures in respect of children under the age of five years old. The figures that were compared were those of the wealthiest 24 countries in The Organisation for Economic Co-operation and Development (OECD).

The study’s findings can be divided into three key conclusions in respect of the question of shareholder primacy’s (and resultant income inequality) effect on child mortality. First of all, the six countries with the highest figures in relation to child mortality were the UK, the US, Canada, Australia, Ireland, and New Zealand. The six countries are of course, as recognised by Hall and Gingerich, countries that have company law frameworks based on shareholder primacy and ‘liberal markets’. Furthermore, the countries sitting at the top of the list for child mortality in 23^rd and 24th position were the UK and the US; countries which Hall and Gingerich categorised as adopting the most ‘pure’ version of shareholder primacy in which shareholder value was promoted to the utmost.

Secondly, although the ‘pure shareholder primacy’ frameworks of the UK and the US had the highest rates of child mortality across 2001-2004, a few decades prior to this they were in fact amongst the best-performing nations of the 24. Although child mortality has of course improved in the interim (primarily due to advancements in medical technology), it is no coincidence that the UK and US had worsened systematically during this time period in comparison with their pluralist counterparts. As can be seen from Froud’s analysis above, this coincided with the increase in financialisation and the concomitant emphasis on shareholder value.

Last of all, based on numerous factors Collison et al claim there to be overwhelming evidence that these mortality rates can be directly linked to increasing income inequality. Evidently, if the UK were to use the 2006 Act as a stepping stone to progress to a pluralist company law framework, the general population would see a significant bettering of social welfare.

Economic Justification

It should also be noted that where non-shareholder constituents feel their interests are more valued and protected, “non-shareholder contributors to the wealth-creating process will be more inclined to make the commitments needed for success of the company in the long term” and, ergo, the company will find and obtain more human capital (a scarce resource in the current climate).

Environmental Objectives – The Cost of Global Warming

Another benefit of adopting a pluralist approach is that environmental objectives can be better incorporated into the operation of companies. This is of major significance after findings in a 2017 study, which linked in excess of 70% of worldwide greenhouse gas emissions to only 100 companies globally. Lucidly illustrating that, if companies better consider the environment, it could have huge effects.

Environmental Objectives – The Trade-Off

It is noted that under a shareholder value (or enlightened shareholder value) approach, environmental objectives may often be taken into account as a source of competitive advantage. However, one cannot presuppose the consistent compatibility of these economic and environmental objectives as this would be in ignorance of business decisions in which either profit or environmental sustainability diverge.

To demonstrate the difference in outcomes of shareholder primacy and pluralist approaches, Bradshaw puts forward the example of food waste within the retail industry. Although this may seem to be another instance of correlating economic and environmental objectives (minimal food waste requires less demand for natural resources as well as increased profits for companies as there is increased efficiency), in practice it is not as simple as that. Thyberg and Tonjes clarify that as supermarkets’ success is measured by the quantity of food that is sold, their business model is not compatible with any policies that may discourage customers from buying things on impulse or over-consuming. Resultantly, there are adverse environmental effects due to the “quest for growth and profit at all costs”.

This is but a crude illustration of how shareholder primacy as opposed to a pluralist approach can affect the environment (pluralism would allow for the balancing of the long-term environmental significance with short-term profit), however, company law should be considered an important avenue towards environmental security with many trade-offs being made in favour of profit maximisation in day to day business.

Economic Justification

With the United Nations’ Intergovernmental Panel on Climate Change publishing a document on the catastrophic projected impact that an increase in global temperature of 1.5 degrees Celsius would have, the need for small sacrifices in profit to be made for environmental objectives can be seen as more than just socially beneficial. After all, if there is no planet on which companies can operate then their long-term profits will be nil. Shorter term, companies will soon be adversely impacted by the effect of climate changes such as extreme weather which could damage crops, factories, or other assets. These findings and this perspective have more than justified the inclusion of the environment, which has been traditionally dealt with in mutual isolation from company law, into the company law framework. By transitioning to a pluralist company law framework, greater significance can be placed on the ever-increasing environmental crisis.

Evidently, by adopting a pluralist company law framework, social welfare, and broader societal objectives will be furthered. Although understandably not as fruitful economically, the economic justifications highlighted above show that a pluralist approach still has a place in a capitalist society. It could even be argued that, in most circumstances, adopting a pluralist framework would not even prioritise social/environment factors over financial performance, but primarily shift the short-termism so prevalent within the UK. The majority of times, organisations are prioritising current shareholders even over the future of the organisation and country.

Conclusion

Summarising this, pluralism could improve child mortality rates and the overall health of the general public – both of which would reduce pressure on our beloved NHS. Moreover, improving the health of our workforce is absolutely essential, as whilst our life expectancies are growing the percentage of our lives spent unwell is also growing. This has increased the pressure on NHS, and social care, forcing many into early retirement and others into economic inactivity due to caring responsibilities. Studies have concluded it would also reduce the number of homicides and lead to prisons shutting, once again saving precious public funds, which could be reinvested elsewhere. Not to mention, the clear economic advantage organisations prioritising their employees enjoy.

In an environmental context, pluralism may very well have the power to save our planet. One can only imagine the impact of incorporating the environment into directors’ decision-making and holding them to account given the vast majority of carbon emissions stem from a handful of organisations. Moving away from profits over the environment is absolutely fundamental to saving our planet and future generations of business.

Given that all of this information is readily available, it begs the question as to why pluralism wasn’t introduced a decade ago. Perhaps the answer is very simple. Whilst shareholder primacy only benefits a very small percentage of the population, due to the power and money these people possess they are incredibly keen to protect their interests.

Whilst we can’t change the law, we can change how we run our own organisations. Get in touch to learn how to create a culture that values long-term value for stakeholders, not just the short-term profits of shareholders. 

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