These issues – low growth and high risk – are the bread and butter of central banking. These costs are not the fault of any party, whether businesses or investors or other stakeholders. Rather they are the result of the incentives embodied within the current structure of companies. These frictions are not just multiple, but potentially interact in important ways. When framing policy choices, that means heeding the “theory of the second best”, in the sense of Lipsey and Lancaster (1956)): with multiple frictions, taking measures to address a friction in one place need not necessarily lead to an improvement in social welfare in aggregate. As one example of that in a corporate governance context, the shift to equity-based compensation practices in the 1980s and 1990s addressed one incentive friction – the principal/agent problem between shareholders and managers. But it may have done so at the expense of amplifying other incentives frictions – for example, it may have amplified riskshifting incentives from shareholders to creditors and to wider society. In some areas, there has been considerable progress in tackling some of these incentive frictions since the crisis, especially among banking firms. One prominent example is regulatory capital reform. Significant increases in banks’ equity and loss-absorbing capital have been put in place or are planned. This is likely to have reduced the incentives of shareholders to engage in risk-shifting, either to creditors or to wider society, thereby lowering the macro-economic costs of these activities.

That the public company has been a success historically is not subject to serious dispute. It was no coincidence that its arrival in a number of advanced economies, in the middle of the 19th century, marked the dawn of mass industrialisation. The public company was a key ingredient in this second industrial revolution. Perhaps for that reason, the public company is, in many people’s eyes, the very fulcrum of capitalist economies. Yet despite its durability and success, across countries and across time, this corporate model has not gone unquestioned. Recently, these questions have come thick and fast, with a rising tide of criticism of companies’ behaviour, from excessive executive remuneration, to unethical practices, to monopoly or oligopoly powers, to short-termism. These concerns appear to be both strongly-felt and widely-held. Among the general public, surveys suggest a majority do not trust public companies, especially big companies. 1 Among professional investors, sentiment is well-encapsulated by the following quote from Larry Fink, CEO of Blackrock – the world’s largest asset manager – in a letter sent to the Chairmen and CEOs of the top 500 US companies earlier this year: 2 “[M]ore and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases, while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.” Among academics, John Kay’s UK government-initiated review into short-termism in equity markets and their effect on listed companies (Kay (2012)), Colin Mayer’s Firm Commitment  1  2015 Edelman TrustBarometer.