The world financial crisis is challenging conventional thinking. So what could, and should, organisations change to reflect today’s realities? Take executive pay, for example. In many countries, significant proportion of the population believes the metric by which executive remuneration is determined has become increasingly detached from the performance of the company. They feel corrective action needs to be taken. The question is how.
Most companies have democratic decision structure. In theory, this allows shareholders to determine company policy in general meetings. However, this democratic structure is flawed in that each share has one vote. In practice, it means institutional shareholders control general meetings.
A simple institutional reform, such as limiting the voting structure to one vote per shareholder, could re-establish the connection between the wider body of shareholders and directors. It would give harder edge to realigning company performance and executive pay.
In essence, the need is to reconnect the control of the corporation with its ownership. This could represent step along much longer path of reform. Further along the road, it could be argued that companies need to reconnect with their workforces and with the communities they serve.
Thinking around the very purpose that corporations serve is also in flux at the moment. Just as the recession has called into question the usefulness of neo-classical economics, so it also has called into question whether the primary purpose of the corporation is simply to make money.
Some argue that the corporation serves much wider social purpose and has responsibility not only to its customers and workforce, but also to the wider community at large. The focus of this discussion is likely to be the degree to which companies pay corporate tax.
This is more of an ethical question than purely commercial one. But it is raising debate around whether corporations of the future can have purely commercial objectives. Many people believe companies can no longer be as detached from the wider community as they appear to have become. This is what underlies the need for new model for business.
Whilst we might be unsure exactly how this new model might evolve, we can speculate upon number of key relationships that it will contain. To start with, there is the relationship between the company and the government – as the representative of the wider community. It is felt that business does not pay fair share of tax and that this situation needs to be remedied.
There is also the relationship between the company and its workforce. currently prevailing view is that company ought to have responsibility to its workforce, both in terms of current decision making and in terms of future employment prospects. Perhaps there is case for worker-directors as bridge between the company and its workforce.
And there is also case for reviewing the core management relationship within the company. There is lot to say for the re-socialising of companies to bring the company owners back into closer proximity to those who manage the company on their behalf.
If we are to see the reform of the relationships between companies and their shareholders, their workforce, and the wider community, return to business-as-usual is unlikely to happen. M
Stephen Aguilar-Millan is the director of research at the European Futures Observatory.
