In the UK and most common law systems, we are accustomed to viewing shareholders as the most important actors in a private sector company. Boards are encouraged by section 172 of the Companies Act to pay regard to other stakeholders – but ultimately the company’s success is seen as synonymous with benefiting shareholders.
However, this crisis is providing a stark demonstration that shareholders are no longer the stakeholders that matter most. They have been usurped in this position of primacy by government - which is seeking to assume the role of economic saviour - closely followed by companies themselves and employees.
This conclusion is being reinforced by a growing body of announcements.
For example, this afternoon the German government announced that any listed company seeking financial assistance from the state in the form of loans or guarantees will be prohibited from paying dividends to shareholders. Funds should be used to maintain the survival of the company and safeguard employment levels, not to benefit shareholders. This follows a similar measure recently announced in France.
The European Central Bank has demanded that eurozone banks should not make dividend payouts or undertake share buybacks, but should retain their earnings as a means of sustaining capital levels and increasing their capacity to lend to companies and individuals.
In the UK, key players in the City of London are considering if investors’ pre-emption rights – which protect shareholders from potential dilution during the raising of fresh capital – should be suspended in order to make it easier for companies to improve their finances.
Creditors aren't faring much better. Yesterday they learned that their ability to exert control over the directors of insolvent companies was being eroded – the UK Government announced that directors would be exempted from prosecution for wrongful trading for the duration of the crisis.
The purpose of this insolvency-related measure was to encourage distressed companies to keep going, albeit at the expense of facilitating the ability of creditors to recover their funds from a troubled company.
In my view, most of these emergency measures are justifiable as a pragmatic means of sustaining our economies in these exceptional times. And most of them will quite properly be removed when the crisis subsides, and we try to recreate some kind of normality.
However, I suspect that things may never return entirely back to the status quo ante. We have received a stark demonstration of which stakeholders really matter in our economy, and this may exert a long-lasting impact on their relative importance within our overall corporate governance system.
When this is all over, we may find ourselves living within a different kind of capitalist system.
Roger Barker, Head of Corporate Governance
Roger previously served as the IoD’s Director of Corporate Governance and Professional Standards between 2008 and 2016. He is a UK Member of the European Economic and Social Committee (the EU advisory body), Honorary Associate at the Centre for Ethics and Law at University College London and a visiting lecturer at Saïd Business School, Oxford, and Cass Business School, London.
Roger is the holder of a doctorate from Oxford University and the author of numerous books and articles on corporate governance and board effectiveness, including: ‘Corporate Governance and Investment Management: The Promises and Limitations of the New Financial Economy’ (Edward Elgar, 2017), ‘The Effective Board: Building Individual and Board Success’ (Kogan Page, 2010), and ‘Corporate Governance, Competition, and Political Parties: Explaining Corporate Governance Change in Europe’ (Oxford University Press, 2010). A former investment banker, Dr. Barker spent almost 15 years in a variety of equity research and senior management roles at UBS and Bank Vontobel, both in the UK and Switzerland.