"The New Capitalists"

by Stephen Davis, Jon Lukomnik, David Pitt-Watson (Harvard Business School Press, 2006)

Corporate governance came to prominence about the time when “Big Bang” exploded the cosy system which used to control the City of London and proper accountability was demanded from those involved. A series of scandals, culminating in the Maxwell debacle, had created an impulsion for change. Today company shares are owned not only by institutional investors but by pension funds and investment vehicles more directly accountable to individuals.

Personal wealth is growing and individual shareholders are becoming more demanding of performance from companies in which they invest their life savings. “The New Capitalists” reflects well this change of pattern and mood among investors. The days of “sell and forget” are past, since churning portfolios has been seen to be costly and ineffective. Shareholders are increasingly becoming active in company AGMs and in complaining about performance. This book is a helpful guide to shareholders who want to force company directors to recognise that they are agents for owners not proprietors themselves. The actions of Warren Buffet, Carl Icahn and other activist shareholders are inspiring smaller investors to press for better governance and performance from the boards of companies in which they hold shares.

The new capitalism has been facilitated both by moves to improve corporate governance and by media which have pilloried the excesses of certain “star” directors. Concern about pensions and greater longevity have made company performance a live issue for everybody. Failures such as Equitable Life hurt tealadies as much as judges. We are all ”The New Capitalists”. Fortunately the book shows us the forces working to counter executive abuse and how we can harness them.

Part One focuses on the “new capitalists”, showing how ownership has become more democratised and the ability of cliques to manipulate markets has gradually been reduced. “Citizen-owners” are now energised to work to ensure that their company operates in their interest and protects its reputation by being seen to further the cause of “civil society”. Governance is the key tool of “Citizen-owners” in making their company more sustainably successful. Accountability is a major lever for effecting change.

Part Two of the book explores the “New Capitalist Circle of Accountability”. It shows how to create a virtuous circle involving all stakeholders, in order to win acceptance for company policy. It promulgates a “New Capitalist Manifesto” with the rules for corporate boards to follow –

1. Be profitable – create value

2. Grow only where you can create value

3. Pay people fairly to do the right things

4. Don’t waste capital

5. Focus where your skills are strongest

6. Renew the organisation

7. Treat customers, suppliers, workers, and communities fairly

8. See regulations that ensure your operations do not cause collateral damage and your competitors do not gain unfair advantage

9. Stay clear of partisan politics

10. Communicate what you are doing and be accountable for it

The purpose of these rules is to build confidence and trust between stakeholders and improve company performance.

Part Three develops the “New Capitalist Ecosystem”, the wider world in which the company operates and with which it must come to terms. The life blood of this “ecosystem” is information and care is taken to identify the parties involved and to untangle the conflicts of interest which make the “ecosystem’s” relationship with the company suboptimal.

Part Four sets out the “New Capitalist Agenda”. It begins with the plea from corporate leaders of the G8 to Tony Blair for tougher emissions controls to protect their businesses’ future. This attitude is at the heart of New Capitalism which focuses on sustainability not short term gain. New Capitalism needs to operate in a “civil economy” in order to protect and develop the wealth creating businesses which we now all own, both individually and collectively.

This book is an invitation to a programme of hard work. It makes us aware that we are owners, and must therefore be actors not spectators in the process of creating wealth. It identifies the players who have a vested interest in secrecy, illicit control and manipulation and challenges “citizen owners” to reassert control over their property. The players who need to be “put in their place” are not often criminals; many are professional people and most believe that they are doing a good job. Too often that good job is for themselves, not for the owners nor for civil society.

Adrian Davies - 21 February 2007