The corporation must be redefined if we are to avoid future financial crises, as
regulation does not provide a complete solution, one of Britain’s leading
experts on corporate governance told reporters in Tel Aviv on
Prof. Colin Mayer, the Peter Moores professor of management
studies at Oxford University’s Said Business School, is the author of Firm
, scheduled for release in hardback in February.
In his book,
Mayer presents the corporation as one of the most important organizations in the
modern economy – one that houses, feeds, clothes and employs us. But he also
demonstrates how it has become a source of poverty, deprivation and
environmental disasters, and he argues that in many respects these problems are
Covering the litany of corporate failures this century,
from the Enron scandal to the global financial crisis and the Fukushima and Gulf
of Mexico disasters, Mayer suggests that there is a common underlying problem
and a common set of solutions to fix them.
“That common problem is the
corporation,” he said Tuesday, “and what is required is to fix the corporation
and not everything around it.”
“The notion that the corporation is
essentially an organization that is there to further the interests of
shareholders ignores the fundamental role they should be playing,” Mayer said.
“What a corporation is about is producing goods and services that benefit the
customers, societies and nations in which they operate, and in the process of
doing that, they utilize a variety of different inputs such as employees and
“The critical element is they have to balance the interests of
different parties – of the employees, of the customers, of the local communities
– alongside the interests of their shareholders, and getting that balance right
According to Mayer, the major problem of the past two to
three decades has been the “hijacking” of corporations by shareholders – and in
particular short-term shareholders.
In the 1940s, institutions held
shares in corporations for an average of eight years, he said, but today this is
no longer the case, thanks in part to the “emergence of high-frequency traders
and arbitragers, who hold shares for matters of months, days, hours, seconds or
Mayer proposes a 10-point approach in his book, which he
previewed on Tuesday. The first point is that tougher regulation is needed in
areas where companies abuse the law – such as bribery, corruption or
environmental damage – but that less intrusive regulation is needed in other
Regulation is designed to encourage a more ethical approach, Mayer
said, but all it does in practice is encourage corporations to find ways around
“Compliance departments” often end up as “avoidance
departments,” whose sole job is to find ways of minimizing the costs of
regulation, he said.
Beyond regulation, society must impose greater
expectations on corporations to declare a set of principles that values the
interests of different parties and not only of shareholders, Mayer
Institutional investors such as pension funds and life-insurance
companies must be encouraged to take a long-term interest in how corporations
are run, through providing them incentives, such as voting rights, to engage in
corporate governance, he said.
These principles must also be taught at
business schools if long-term change is to be achieved, Mayer
“Business-school education was not the cause of the financial
crisis,” he said, “but business-school education can do much more in terms of
ensuring that the way in which corporations are run is in the interests of
society, customers and employees, not where they are simply focused on
maximizing the returns of their shareholders.”
Mayer led opposition to
attempts to implement an academic boycott of Israel when he was dean of the Said
Business School in 2005-11. He is a frequent visitor to Israel.
offered some advice to Israeli policy makers.
“It is critical that Israel
develops a large corporate sector that can sustain internationally operating
organizations that play a central role at the international level in terms of
trade and foreign investment,” he said.
“One cannot simply rely on the
development of small entrepreneurial firms. They are important; they provide a
lot of vibrancy in the economy. But one needs to have large corporations
that are innovative, competitive and are able to really sustain their position
in the international economy. Therefore, sorting out the governance of large
companies in Israel is critically important.”