Prem Sikka: the power of elites to hijack companies

Prem Sikka, Professor of Accounting at Essex Business School’s Centre for Global Accountability, opened a recent article by reflecting that corporations are being run entirely in the interests of executives and shareholders, with little concern for anyone else.

Professor Sikka points out that the possible demise of retailer BHS draws attention to the need to change the way major corporations are governed:

“Currently, corporations are run as private fiefdoms for the benefit of directors and shareholders. The wealth is generated by the collective energies of all stakeholders, but is being appropriated by a few executives and shareholders to the detriment of employees, pension scheme members, suppliers, customers and other stakeholders.”

Some reports suggest that around £580 million has been taken out in dividends, rental payments and interest on loans. As Sikka writes, the company was surrounded by highly paid accountants, auditors, lawyers, bankers and non-executive directors, but none ever objected to the extraction of cash or drew public attention to the perilous state of BHS’s finances.

He argues that companies are not private entities, because they affect the lives of many people, adding, “The BHS debacle once again shows that companies that produce short term gains for present shareholders do not necessarily produce wealth for employees, other stakeholders or society. The obsession with enriching shareholders persuades management to pursue cavalier strategies. They do not bear the cost of their excesses because they are shielded by limited liability”.

The UK Companies Act 2006 (Section 172) is cited by Sikka. Though it requires company directors to promote the success of the company by having regard to the interest of employees, suppliers, customers, community and the environment, all this has to be for the ultimate benefit of shareholders. He continues:

“UK corporate legislation sees directors as agents of shareholders rather than as trustees for stakeholders. As trustees, their responsibility should be to ensure that the wealth of the company is allocated fairly to all stakeholders and not just appropriated by a few executives and shareholders”.

Companies frequently claim that employees are their biggest assets, but deny them any say in the way companies are governed. Employees have a vital interest in the long-term success of the company but have no right to elect directors or shape corporate policies.

Company directors can be prosecuted for making false statements to shareholders, but there is no equivalent duty to be truthful to employees and other stakeholders.

A major lesson from the BHS scandal is the need to change the way large companies are governed. Professor Sikka points out that some countries already have employees on company boards and since the Second World War, major German companies have been obliged to have a system of two-tier boards. The Executive Board manages the business. The second-tier known as the Supervisory Board consists of other stakeholders, such as employees, and is responsible for oversight of the executive board. The two boards co-operate for the long-term success of the company.

If companies like BHS had Supervisory Boards and employees and pension scheme members were represented on it, they would have considered the impact of the cash extraction on BHS’s ability to invest, compete or fund the deficit in pension schemes.

Sikka ends by noting that the national minimum wage, health and safety, gender equality and other reforms had to be imposed in the teeth of opposition and that there would be resistance to reforms of governance structures that “dilute the power of elites to hijack companies”. Nevertheless they must be made, because “we can’t afford more BHS’s”.

 

 

Read his article here: http://leftfootforward.org/2016/05/the-bhs-scandal-shows-that-we-need-workers-on-boards/

See a post on employee ownership, prompted by this article.

 

 

 

 

 

 

 

 

 

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Posted on May 31, 2016, in Finance, Government, Inequality, Legal issues, Politics, Vested interests and tagged , , , , , , . Bookmark the permalink. Leave a comment.

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