June 5, 2014 Opening up the governance debate
At the Bristol Festival of Ideas, Andrew Haldane, the Bank of England’s executive director, financial stability, suggested that it may be time for a shake up in the way in which we perceive corporate governance. The speech, entitled “unfair shares” highlighted the way in which inequality has emerged from comparative business obscurity to become a global public policy trend.
Starting off by theorising that inequality is not perceived as being within the remit of a central bank, Andrew Haldane went on to review the ways in which the measures taken by the Bank in resolving the crisis may have actually impacted on the distribution of wealth and the growth of inequality. He theorised that, if left unchecked, inequality could have a detrimental effect on stability of the financial system and growth in the economy. According to Mr Haldane “This means that, even if they cannot influence it, central banks have a strong vested interest in inequality issues too.”
Moving onwards, Andrew Haldane explored the link between growth and inequality and the psychological impact of financial circumstances on decision making. As part of this he reviewed the way in which wealth inequality may in fact lead to organisations looking more towards the short term and failing to invest in the capital and skills which they will need for long term growth. This can lead on to shareholders and managers looking to boost their own reward at the expense of long term stability.
One of the drivers of this inequality is the way in which corporate governance has in the past been driven by shareholders rather than by a wider set of stakeholders. Corporate governance defines decision-making within firms – how much to invest, how much to distribute, and to whom. Andrew Haldane referenced Mayer (2013) when he said that with company law in the UK giving primacy to shareholders, the objectives and rights of a broader set of stakeholders, including workers, suppliers and wider society, tend to be secondary. So in the interests of driving equality and therefore increased profitability it may be worth giving consideration towards widening the governance remit.
Mr Haldane concluded by saying “Inequality and corporate governance are deep, structural issues. Central banks do not have many, perhaps any, of the solutions to these problems. But the stakes – a more stable, faster-growing, fairer society – could not be higher.”