From Shareholder to Stakeholder Capitalism?

Capitalism's leading lights are worried about the viability of the current model of capitalism – the Left must use the next crisis to offer real change to the structure of ownership that underpins it.

The leading lights of liberal capitalism have something on their minds. In September of 2019 the Financial Times launched a snazzy publicity campaign with the slogan ‘Capitalism. Time for a Rethink’. The campaign represents an attempt on the part of the FT to address the clear and present crises of contemporary capitalism and also to put itself on the front foot when it comes to advancing alternatives to populism. The ‘New Agenda’ that the FT is now urging business leaders to adopt – combining ‘profit with purpose’, in editor Lionel Barber’s words – urges changes to the current model of so-called ‘shareholder capitalism’ that has dominated in recent years. Amidst economic stagnation and political turmoil, the paper’s editorial board calls for a move away from maximisingshareholder value to a stakeholder model of capitalism. This would see corporate bosses and leading financial institutions take less of an interest in short-term returns to their shareholders in order to focus more on public (‘stakeholder’) needs. As the FT says in its editorial, they are not the only ones who have noticed a problem.

JP Morgan Chase CEO and chair of the US Business Roundtable Jamie Dimon called this year for companies to focus less on share buybacks (in which firms use retained earnings to buy up shares and increase the return on ownership to shareholders) and more on long-term investment. Billionaire investor and philanthropist Ray Dalio went further than Dimon, diagnosing a self-reinforcing dynamic of social inequality that was now inherent to capitalism and advancing a range of standard Keynesian measures to ameliorate it. If these concerns were not addressed, he worried ‘some kind of revolution’ would sweep capitalism away. The FT applauded both. Recent years have also seen the Bank of England’s chief economist Andy Haldane claim that the current model of shareholder capitalism is ‘eating itself.‘ What underlies these interventions by capitalism’s great and good is less a deep concern with the fundamental dynamics of the system, however, than a need to shore up their own position ahead of a possible future crisis.

The shareholder model of capitalism does indeed have a lot to answer for. Particularly in capitalist states such as the US and the UK, financial deregulation has allowed the trade in corporate shares on financial markets to assume a disproportionate significance in modern capitalism. The incentive for many managers is to increase the value of shares at the expense of raising productivity, investing in new technologies, increasing wages, or pursuing substantial material growth. As the power of capital over labour has increased over the last forty years, the structural incentives for business managers to pursue short term profits at the expense of long term investment have increased. No amount of earnest pleading with CEOs from their peers will change this incentive structure on its own. Some capitalists can see that the political fallout from a possible future crisis will be ugly. But the crisis-forming tendencies of contemporary capitalism can only be tackled by changing the fundamentals of the system itself. The Left needs to be ready to propose these necessary changes to the structure of ownership.

The Next Recession?

The Bank for International Settlements (BIS) has released its September 2019 Quarterly Review and it is full of bad omens: markets have responded erratically to trade and monetary policy signals, reflecting weak underlying economic performances of the major economies. A slowdown in business investment and lending by banks to non-financial firms – one of the backbones of the real economy – has seen activity shift to the safe haven of government debt and away from productive activity.

Worryingly, considering its central role in global supply chains, growth in China has fallen to its lowest since 1992 due to both trade war with the US and decreasing rates of domestic investment. Monetary policymakers have been forced to pursue more ‘accommodative’ measures, lowering interest rates in order to encourage lending in jittery markets. Of particular concern is something known as an ‘inverted yield curve’ on US government debt: when short term yields exceed long term yields in government debt markets, it is generally taken to mean a recession is on the way. This is because, during a boom, risk is perceived to be higher over the long run than in the short run due to the expectation of future market fluctuations. Higher yields (and lower prices) of short term bonds show that financial market actors anticipate a slow down and that immediate market expectations are low.

One signal that financial markets may be increasingly fractious came last month when the inter-bank money markets unexpectedly froze and the borrowing cost for short term funds (vital to sustain day-to-day lending between banks) skyrocketed. The New York Fed (which plays a central role in managing liquidity in New York financial markets) hastily injected liquidity into the system after months of attempting to move to a move hawkish interest rate position. The usual monetary tightening that one would expect at the peak of a boom has not fully materialised and instead central banks have been forced to maintain very low interest rates in the midst of a deeply fragile economic recovery since 2008. Now, it seems, we are approaching a return to the radical monetary policy measures that characterised the response to the Great Financial Crash. Moreover, the financial system has retained much of the systemic risk that helped drive the collapse of 2008. The _Financial Times _has recently noted darkly that banks continue to be exposed to non-banking financial institutions (such as insurance firms and private investment funds), some based in tax havens like the Cayman Islands.

Among the risks noted by the BIS is the growth in the collateralised loan obligation (CLO) market, a form of securitised lending that has replaced the now infamous collateralised debt obligations (CDOs) spun out of mortgage-backed securities (MBS), exposure to which helped drive the financial crisis. Whereas as CDOs were based on subprime mortgages, CLOs are based on the loans of highly indebted firms. The BIS reports that between 50 and 60% of the $1.4 trillion market in leveraged loans have been securitised as CLOs in recent years. The risk exposure of such securitised loans is highly complex and the uncertainty around the degree of exposure by banks to defaults by debtors could help spark a similar credit crunch to 2008.

Corporate debt has been rising rapidly in recent years and some market observers believe that rising loan defaults could imperil the financial system. Although the BIS notes that banks have less direct exposure to the riskiest of these assets than they did in 2008, the risk of indirect exposure via the type of unregulated large investment funds mentioned above remains high. Non-bank financial institutions such as private equity funds have reportedly increased their role in the leveraged (high yield) loan market in recent years.

In a complex financial system uncertainty about the future (especially with regards to expected returns) can drive a crash. With no one market player fully aware of the risks to which others are exposed, lending can quickly seize up. What has allowed the corporate sector to embark on an expansion of debt to a historical all-time high is the era of very low borrowing costs brought about by the low interest rates set by central banks. Part of this increase in debt has gone towards share buybacks to boost incomes for shareholders rather than funding any form of productive investment.

The current situation is an outcome of the long-term financialisation of the non-financial sector amidst a weak economy. This is made more problematic by the non-financial sectors over-reliance on productive growth occurring in emerging markets such as China, and only contributing to competition among Global North firms as a mediated indirect change in costs. With a general slowdown in growth, it is likely that defaults and bankruptcies in the corporate sector could drive a liquidity freeze in the financial sector. Advanced capitalist economies have not escaped the weaknesses - low investment, poor rates of productivity, and weak labour markets - that underlay the 2008 crisis. Furthermore, the Global South’s leading economies are starting to face issues as their reliance on core demand reaches limits due the effects of this on core economy consumption. Global capitalism is suffering from an accumulation of weaknesses due to a heavily indebted corporate sector that is driven by a short termist shareholder model.

Never Let A Crisis Go to Waste

Predicting the timing and severity of such a crisis is extremely difficult, yet it would be unwise for the left not to prepare for one. Moreover, any global crisis may disproportionately affect the highly concentrated, interconnected and homogenous UK financial sector. It is well known that capital never lets a crisis go to waste. But the left has not always taken this on board. 2008 was a seriously missed opportunity for the left: social democracy failed to respond adequately to the crash and there has been a rise in popularity of the radical and far right in its wake.

Consequently, some have argued that economic crises tend to benefit the right rather than the left. Yet this may only be circumstantially true and could be reversed under altered conditions. The parties of social democracy failed to respond to the scale of the last crisis, facing limits due to the centre left’s reliance on the doctrines of privatisation and financialisation for its strength in the so called long 90s that defined pre-crisis neoliberalism.

Another financial crisis could further discredit the current model of financialised growth as well as providing ample room to critique an unchanged economic orthodoxy that continues to inform government policy. The growth of new think tanks has helped to secure for the left a legitimate voice in public debates over the direction of the economy, even while it continues to lack a militant mass base. The left should leverage this strength in a crisis, using its public voice to propose an alternative system of public financing for investment. Indeed, another financial crisis could be the catalyst for widespread embrace of the idea of a socialised financial system.

Alongside an increasing role for socialised finance, the left should also argue for new models of democratic corporate ownership that would avoid short termism and indebtedness and pursue long term goals instead. At the time of the 2008 crisis there were few academic or policy research institutes of the left which were well-placed to make these radical arguments about the future of finance.

Reforming Finance And Investment From the Left

The weaknesses of the shareholder model of capitalism discussed above stem from its structure of ownership. Shareholders are separated from even the kinds of narrowly productive decisions sometimes made by managers to benefit the long-term profitability of firms. The rise of shareholder capitalism was made possible by neoliberal financial deregulation and the promotion of the idea that markets always knew best. Shareholder capitalism concentrates ownership in the hands of the very few. Through its focus on short term returns, it encourages speculative activity by shareholder-owned big banks and the taking on of excessive amounts of debt by non-financial corporate firms. The most effective way to unravel this system is to attack it at the root: to change the system of ownership and thus to change the incentive structure that drives its current investment decisions. The ambition of the left should not merely be to return to a more productive form of capitalism in which shareholders are marginalised and business managers are empowered to make longer-term investment decisions. This is no doubt what the Jamie Dimons of the world would like to see. But the only way to ensure that environmental and working-class concerns are centred in economic decisions is to give both ownership and control of both productive firms and the big financial firms to workers and other representatives of the community.

The Labour Party should look to radically reform UK finance by introducing new public institutions that incorporate different models of ownership. The UK has a highly concentrated financial system which is dominated by a small group of ‘universal’ (that is, combining commercial and investment operations) shareholder-owned banks. Since shareholders only lose what they put in (due to limited liability), the incentive for shareholder-owned banks is to increase the number of loans they make relative to their equity base. This encourages banks to make more loans and to pursue short term profits in order to maximise returns to shareholders. A ‘stakeholder’ model of bank ownership would remove this incentive. Unlike the do-gooder capitalist mentioned above, however, the left is in a position to argue for new models of ownership that reflect broader public needs.

An alternative has already been proposed to the Labour Party and will hopefully form part of a forthcoming election manifesto. The creation of a Post Bank from existing Post Office banking services would form a break with the dominant mode of bank ownership and control in the UK. Instead of a corporate boards that pander to profit-hungry shareholders, a Board of Trustees would be elected from public representatives, formal and informal (movementist) politics, business representatives, financial experts, and postmaster representatives. The Post Bank would undertake typical commercial banking services such as deposit taking and loan making at a lower cost than the major banks, while adopting a public service mandate that would encourage it to make long term, patient investments in small and medium enterprises (SMEs). It would also be a primary ‘on-lending’ partner to a new, publicly-controlled National Investment Bank (NIB). The latter would be tasked with funding not only infrastructure projects, but also enterprise and innovation. Whereas previous attempts to build public financing bodies failed because they were easily privatised, these institutions would be taken out of the hands of politicians in Westminster and given over to genuine stakeholders. When Labour talks about a ‘fundamental and irreversible shift’ in wealth and power, this is what is entailed: a resilient form of public, democratically-accountable ownership and control that cannot easily be dismantled by future Westminster governments. This would be easy to sell to the public in the midst of another crisis of financialised capitalism: let’s take ownership and control of the financial system from the hands of the elites and give them to representatives of the community.

The second branch of this democratisation of ownership has been suggested by the Labour Party’s pamphlet on alternative models of ownership. Here the virtues of different forms of public ownership - from conventional nationalisation to cooperatively owned firms to municipal and locally-owned companies - were explored and policies to incentivise their adoption as ownership models put forward. Arguably the Labour Party’s most radical foray into the structure of corporate ownership has been its proposal to create worker-owned share funds in larger companies that would eventually amount to a ten per cent ownership stake for workers.

Contrary to much reporting of the policy, the redistributive effects of these funds will be less significant than the impact on investment decisions brought about by the introduction of some degree of worker control. The ownership stake itself would be overseen by elected representatives and it would be given a say in company decision making. By making worker ownership a permanent feature of the corporate sector, the growth of private shareholder power and secondary equity markets would be checked. A significant degree of democratic control over the private sector could gradually be introduced. The balance in the economy between capital and labour could be shifted in favour of labour. The policy marks a break with European postwar social democracy. Instead of focusing solely on redistribution of wealth via taxation and welfare, the policy sets out to fundamentally alter the structure of ownership of corporate capital and lays out a potential path towards a democratic-socialist economy.

Labour has a plan, then, to begin the democratisation of the UK economy. The wider left has learned many times of the risks of electing a government with a radical programme that backs down on many of its commitments. The UK trade union movement remains historically weak. Social movements and less formalised worker action in the so-called gig economy are fragmented. However, an impending crisis of the current model of financialised capitalism provides an opening to Labour. The discrediting of financialised capitalism and the healthy policy research and development processes behind Corbynite Labour could help build the intellectual basis for a programme that, if implemented, would help empower more worker-led movements. As a line of thinking on Labour’s ‘institutional turn’ attempts to show, the reform and reorganisation of the economy could become the basis for the strengthening of the popular social layers that support a Corbyn government. The historical peculiarity of Corbynism may be that it comes to power without the support of a militant labour movement, but plays a role in government in the creation of one. As prominent sections of capital realise that the game is up for extractive, short-termist, finance-led capitalism, it will be up to Labour to exploit their weakened hegemony in the wake of a future crisis.