6  BIS central bankers’ speeches  was left open to interpretation. Meanwhile, for the first time in history, shareholder primacy had been hard-wired into companies’ statutory purposes. The microeconomics of companies Given this corporate structure, what incentive problems might arise among stakeholders? It is worth noting up front that the existence of these frictions is not, in of itself, a criticism of the current corporate model. All corporate governance models embody these frictions to some degree. A set of fully state-contingent contracts among all stakeholders could eliminate them. But this first-best is infeasible (Hart (1995)). So the aim of any corporate governance model is to minimise these frictions, rather than eliminate them, in a second-best or worse world. In identifying incentive frictions within a company, it is useful to consider three distinct sets of stakeholder relationships: •  First, between shareholders and managers. •  Second, between shareholders/managers and other company stakeholders (bondholders, depositors, borrowers and employees). •  Third, between the firm’s internal stakeholders and external stakeholders (regulators, government and wider society). Shareholders and managers In a modern public company, shareholders and managers are distinct and serve distinct roles. This separation has a micro-economic rationale. From Fama and Jensen (1983), it generates gains from specialisation, with risk/return monitoring undertaken by the board of Directors (acting on behalf of shareholders) and risk/return decision-making by management. The micro-economic question is at what cost this separation is achieved.

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.