'Corporations are important in modern economy'

Oxford professor Colin Mayer says corporations must be redefined to suit modern economy.

Colin Mayer 370 (photo credit: Courtesy Oxford University Said Business School)
Colin Mayer 370
(photo credit: Courtesy Oxford University Said Business School)
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 Tuesday.
Prof. Colin Mayer, the Peter Moores professor of management studies at Oxford University’s Said Business School, is the author of Firm Commitment, 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 getting worse.
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 capital.
“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 is critical.”
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 milliseconds.”
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 areas.
Regulation is designed to encourage a more ethical approach, Mayer said, but all it does in practice is encourage corporations to find ways around those regulations.
“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 said.
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 said.
“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.
Mayer 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.”