What's the issue?

Corporate governance is the system through which productive assets are owned, controlled and managed. At the moment, those who manage assets in the corporate sector will be accountable to shareholders, rather than workers, customers or citizens. Most of the UK economy is run like this because, since the 1980s, many state assets have been privatised, and organisations like mutual societies – responsible for the vast majority of home loans – have also been transferred to shareholder control.

This expansion of the corporate sector brought a strengthening of the rights (and therefore the potential influence) of shareholders, through changes to both company law and the ‘soft law’ codes governing things such as board membership, shareholder ‘stewardship’ (a euphemism for investor control) and takeover bids. This has undermined the interests of other stakeholders – like employees and UK citizens, generally.

Analysis

The shifting of control to shareholders effectively empowered collective capital, in the form of pension funds, hedge funds and sovereign wealth funds.

UK pension funds are financed by contributions from workers and employers; they are subsidised by the state, which also provides some protection to members, in the event of insolvency. Partly because of regulation and partly because of the need for stable returns over the long term, pension funds are usually relatively risk-averse in their investments.

Hedge funds, on the other hand, look for high returns over shorter periods of time, but through higher-risk activities, like arbitrage-based trading. Some specialise in pressuring the boards of cash-rich firms to ‘unlock’ capital by selling assets, with the proceeds being used for dividends and share buybacks. They mostly represent wealthy individuals and families.

Sovereign wealth funds represent the interests of national governments and ultimately, to some extent, their citizens. Like pension funds, they can take a longer-term view, but they are less restricted by prudential regulation and can respond to market opportunities. The proportion of the returns that gets used for public benefits, like infrastructure, or lower taxes, varies from country to country.