But under the current shareholder-centric model, these wider stakeholders are not given any control rights over management. This constrains their ability to rein in managerial excesses, even though their incentives to do so may be sharpest. In other words, the standard corporate governance model may be predicated on a misclassification of risk and, as a result, a misalignment between these risks and control rights, with potentially adverse implications for corporate risk-taking. Companies and society (a)  Externalities and systemic risk  At least for some types of firms, their actions can have an impact beyond internal stakeholders – shareholders, creditors, employees, customers and clients. They impose social externalities on the economy and wider society. If companies’ objectives are shareholder-centric, these externalities are unlikely to be internalised fully within firms’ decision-making. In other words, there is a potential disconnect between company and societal incentives. These externalities can be both good and bad. For example, many companies are in the business of creating public or quasi-public goods – for example, health, education, transport and utilities. And that is why, historically, their corporate governance structures have typically tended to weigh broader stakeholder and societal interests. In other cases, these social externalities may be negative – the creation of public “bads”. The classic example is environmental pollution. But these social externalities can also arise in more subtle ways – the mistreatment of customers and clients through delayed payment or mis-selling, exploitation of employees through inadequate working practices, or attempts to avoid paying sufficient tax to government.

Experience in the run-up to the crisis suggests, if anything, the opposite. Paying in equity appears to have increased the probability of failure. Among US bank CEOs pre-crisis, the top five equity stakes were held by Dick Fuld (Lehman Brothers), Jimmy Cayne (Bear Stearns), Stan O’Neill (Merrill Lynch), John Mack (Morgan Stanley) and Angelo BIS central bankers’ speeches  7  Mozilo (Countrywide). This is not a random sample. 16 It also suggests the macro-economic costs of this principal/agent problem may have been non-trivial. (b)  Collective action problems: the “ownerless corporation”  A second stakeholder friction arises because a diffuse and dispersed set of shareholders are likely to find it difficult to corral management (Shleifer and Vishny (1986)). There is a coordination problem among shareholders. Moreover, most individual shareholders tend to have modest amounts of skin in the game. This reduces their incentives to exercise corporate control in the first place. This shareholder collective action problem is not new. It lay at the heart of Berle and Mean’s concern about “ownerless corporations” in the 1930s. But there are good reasons for believing this problem may have become more acute since then, as the shareholder base has become more fragmented and diffuse and shareholder co-ordination more difficult (Kay (2012)). One reason is that the role of institutional investors has changed. They have tended historically to play an important stewardship role. But this role has waned. As recently as 1990, pension funds and insurance companies held more than half of UK equities.