Daily Times

Corporations play a central role in the allocation of resources in any economy. It is the corporations that determine economic outcomes through decisions they take vis-à-vis investment, employment and trade. Governments realise this and therefore are anxious to unveil corporate governance systems that can ensure corporations are broadly in line with the political and economic imperatives of the government of the day. In order to achieve production at an optimal level, nations must first find social peace between ownership, management and workers. This is what shapes political imperatives for corporate governance models. Social peace is achieved by nations by diffusing means, many of which are strongly rooted in the kind of corporate governance model they follow. Since the ways of achieving social peace vary, there is considerable divergence in national models of corporate governance, even as there is evidence of a broad convergence to Anglo-American principles of corporate governance vis-à-vis shareholder rights and control as in France and Germany of the 1990s.
Social democracies (left of centre such as France, Germany and Sweden etc. as opposed to right of centre wholly capitalist ones like the US) pressurise managers to stabilise employment even if it means foregoing some of the profit maximising but risky opportunities for corporations. The political imperative is to ensure that social peace and cohesion is maintained by means of creating an equitable society. Consequently, social democracies are not always accepting of pro-shareholder approaches in corporate governance, which is the hallmark of the US system of diffused or dispersed ownership (as opposed to concentrated ownership prevalent in many other countries including Pakistan) which emphasises shareholders’ rights and vests in manager discretion to act in accordance with the profit maximising impulse. Social democracies therefore are less open to the idea of modern pro-shareholder tools such as incentive compensation, mergers and acquisitions, and shareholder wealth maximisation because the policy followed by social democracies does not take into account purely shareholder values. Social democracies therefore are not entirely comfortable with the idea of public firms with diffused ownership. Since social democracies unravel the link between management and shareholders in terms of interests, owners opt for a more concentrated form of firm ownership. This means a direct correlation between social democratic politics, concentrated ownership and weakly competitive markets. The converse of this is also true. The more laissez faire an economy is the more likely it will be competitive and with a diffused ownership structure. The public firm with dispersed ownership is likely to exist in the US but in social democracies such firms are likely to be absent.
As a result, while in the US dispersed ownership of public firms thrives, in Germany and France the opposite seems to happen (despite an increasing number of mergers and acquisitions). In France, for example, the family and entrepreneurial sector has been challenging the government-controlled sector by means of concentrated ownership. Much like France and Germany, Pakistan’s own corporate structure is also concentrated instead of following the Anglo-American structure given the preponderance of family owned enterprises in the country. Many of the largest firms therefore have one single owner with a large block of shareholder stock. In Germany, the principle of co-determination is in place whereby labour has significant management control by mandatory representation on the supervisory board. Under this system workers’ committees and councils play an important part in corporate governance. This is by far the most striking case of a political imperative affecting corporate governance. The system of co-determination favours concentrated structure ownership because shareholders have to counter the labour block as a block.
Political imperatives in social democracies favour employees with jobs in place and favour expansion instead of downsizing. In contrast, in the more laissez faire US corporate world shareholder activism ensures that companies are routinely downsized and brought to an optimal level. In the US, the political imperative is precisely the opposite. It is the absence of a strong social democracy (as opposed to capitalist democracy) in the US that ensures the perpetuation of large corporations with dispersed ownership. There are other non-political but purely economic and technical imperatives that ensure divergence in corporate systems. These may include different levels of economic development, technical disparities, differing tax and legal structures but it is not always easy to separate these from the political objectives of the state. Ultimately, politics govern corporate governance.
Obviously, corporate restructuring has occurred to some extent in both France and Germany, which would indicate a triumph of the US model. In France, much of this had to do with the fact that, unlike Germany, workers were not in any power to influence the boards. In Germany, the workers have cooperated at times with restructuring. Active alliances have been seen between workers and managements that have favoured the restructuring of corporations. In both cases, the restructuring — which itself was an economic imperative given globalisation and the rise of the ‘new economy’ in the US — cut against the grain of old political imperatives that had sustained concentrated ownership structures. This indicates that there is some movement to converge on a set of best practices, itself fuelled by the imperative of globalisation.
Unfortunately, the government and the legislature in Pakistan are often pathetically ill-equipped to link political imperatives with corporate governance. The debate has often remained suspended in arguments for and against nationalisation and privatisation but no political party in the country has paid serious attention to corporate governance and, consequently, the subject is left to unelected bureaucrats. No serious effort is made by the powers that be in determining whether dispersed or concentrated models of corporate ownership better suit Pakistan’s development needs. These are policy questions that need to be answered by elected representatives of the people, who have all but abandoned all responsibility on this count. These linkages between democracy and practical things such as corporate governance are what distinguish a real democracy from the tamasha (spectacle) that we think it is. To be a representative of the people, one has to be foremost a servant alive to the real needs and requirements of the electorate and not just populist slogans and catchwords.

The writer is a lawyer based in Lahore and the author of the book Mr Jinnah: Myth and Reality. He can be contacted via twitter @therealylh and through his email address yasser.hamdani@gmail.com