Corporate Governance: Accountability in the Market Place by Elaine Sternberg (IEA 1998 and 2004)

This is a book, published by the Institute of Economic Affairs, which takes a very conservative stance on the role of corporate governance. Its basic premise is that companies are owned by shareholders and that control vests in shareholders unless they wish to delegate it. For Elaine Sternberg the fundamental problem of corporate governance is that shareholders have relinquished control over the years so that other parties - directors, employees, customers, etc, have usurped the role of shareholders in varying degrees. The development of "stakeholder" theory has, in her view, weakened the focus of direction in companies and contributed to poorer performance in many cases. The agency role of directors has not been enforced by shareholders, so that directors increasingly see themselves as "stakeholders" in the business, and through share options and ownership feel empowered to act as owners.

For Elaine Sternberg corporate governance is about is about "ways of ensuring that corporate actions, agents and assets are directed at achieving the corporate objectives established by the corporation's shareholders". In modern times shareholders do not usually decide corporate objectives - even institutional shareholders are largely passive and alert only to obvious opportunities or threats. As the title of the book suggests, Elaine Sternberg sees the solution to the present dilemmas of corporate governance in the market place. Section 4 of the book details a number of "market improvements", based on the premise that improving the "Anglo-Saxon system" is the way forward, not adopting German, Japanese or other models. Capitalism needs to be more capitalistic in order to succeed. The author recommends a "market for corporate control" which would bring competition which already impacts externally on companies into their mechanisms of corporate governance. This competition would be driven by shareholder activism and involvement in all strategic and operational decisions. This might be a model of "reverse audit" perhaps, so that decisions were subject to shareholder review before not afterimplementation.

Elaine Sternberg examines the processes used by CalPERS to compare performance of companies before and after their intervention, the use of league tables to "name and shame". She concludes that these processes are suboptimised because shareholders remain observers not participants. A number of "competitive mechanisms" are examined, including making company objectives the focus of all decisions, making voting at meetings easier, making directors independent of management by having them nominated by shareholders and having a majority of non-executive directors on the board, introducing governance audits and a governance committee of the board to monitor and enforce compliance. The need for critical information systems is emphasised to ensure that information is channelled to those who need it, without editing and delay.

These ideas are interesting and the majority of non-executive directors is a requirement now of the Higgs Report. This provides a platform for the governance committee to be effective. Suggestions which require shareholder involvement may be made difficult to implement since it is far from certain that most shareholders wish to be more actively involved in the companies in which they invest. The idea of opening up the flow of information and forcing directors and managers to face reality and share it with owners is promising but too narrow. Corporate governance is likely to be more effective if all stakeholders are involved in facing issues and if all are empowered to help. Elaine Sternberg is wanting to build a two dimensional world, involving only shareholders and directors - the real world is multidimensional and corporate governance is accountable far beyond the market place

Adrian Davies - 7th January 2005