How the UK prime minister's corporate boardroom reforms hurt Britain
© Getty Images

One of the first speeches by the new British prime minister, Theresa May of the Conservative Party, laid out an aggressive agenda for reforming corporate boardrooms that could have been written by the AFL-CIO.

ADVERTISEMENT

The speech suggests that her new road map for British economic policy stands to destroy everything that the Iron Lady Margaret Thatcher, who governed from strong conservative policies, fought to create and defend.

May's first suggestion was to mandate inclusion of worker representatives onto corporate boards of directors. A number of European countries have utilized similar co-determination structures in which union representatives sit on corporate boards of directors.

Capitalism is a system in which the owners of capital, the shareholders, serve as the ultimate focus of corporate benefit. Maximizing shareholder profit is a crisp, clean way to meter the effectiveness of the corporate enterprise.

Installing worker representatives on boards occludes the crystal-clear objective of profit maximization with nebulous "responsibility" objectives that may be impossible to quantify. This invites the potential for crony deals in which executives and labor representatives negotiate side deals that impede disciplining mechanisms for each group, at the shareholders and pensioners' expense.

Even accepting, for the sake of argument, that co-determination worker collectives made sense in certain transition periods in our history — such as in a German economy struggling to reunify in the 1990s — they have no place in the modern global economy. The same goes with the watered-down socialism of labor representatives on boards of directors.

The prime minister also suggests mandatory shareholder referendums on CEO pay, and disclosure of the ratio of the CEO's pay to that of the average worker. These proposals appear inspired by aggressive compensation regulations in many EU countries that cater to a misguided populism.

In the same speech, the prime minister also emphasized that "Brexit means Brexit," as she vowed to respect the Brexit vote. But her speech ignores that a central impetus behind the Brexit vote was getting out from under the thumb of European bureaucracy. In the same speech in which she emphasizes respect for the British nationalism that undergirded the Brexit vote, she proposed introducing a European corporate governance system with a series of aggressive regulations.

This includes a suggestion that shareholders should have a mandatory vote on executive compensation. Shareholders have traditionally delegated power to informed boards of directors as a more efficient means of governance than the nightmare of a business run by town-hall-style format.

Day-to-day decisions are best left to boards. Otherwise subsidizing shareholder votes, at corporate expense, on corporate action risks empowering small minorities of special interests — the same special interests who wielded power over Britain's state-owned firms before that were privatized under the Thatcher regime.

If policymakers want a powerful disciplining mechanism for boards, shareholders can serve as a powerful check on boards if they put up their own money and seek to buy control of a firm at a premium to its going market price. That premium is how new shareholders "put their money where their mouth is" and thereby send a strong signal to shareholders that the new owners plan to run the company more effectively than current management.

Shareholder takeovers can provide a robust market discipline, including takeovers from foreign competitors. But the prime minister's speech again suggests the wrong anti-market instincts, as it includes a suggestion to limit foreign takeovers for certain industries.

May further suggests hikes in business taxes to pay for social services. In Thatcher's final address to Parliament, a Labour Party member remarked, "there is no doubt the gap between the richest 10 percent and the poorest 10 percent has widened substantially ... surely she accepts that is not a record that she can be proud of." Thatcher promptly responded, "What the honorable gentleman is saying is that he would rather the poor be poorer, provided the rich are less rich." The new prime minister's view of the wealth gap suggests she repeats the mistakes of the 1980s Labour Party.

It appears May seeks to supplant conservative principle with political expediency and more socialist ideology. Her proposals will replace the discipline of the market with the cronyism of special interest governance. Thatcher's government drew a firm distinction with her Conservative Party platform, built on the values of free enterprise and the unforgivable business discipline of market competition. The Iron Lady knew what she believed, and she governed from those beliefs.

Prime Minister May's speech provides a road map that merges some conservative rhetoric with a series of top priorities for liberals and the Labour Party. A Conservative Party platform cannot survive however with such a cafeteria approach to principal.

Verret is an associate professor at the Antonin Scalia Law School at George Mason University and a senior scholar with the Mercatus Center.


The views expressed by contributors are their own and not the views of The Hill.