Four years into the most serious structural crisis of modern history and it is apparent that there are a number of flaws in both the current national and global economic system that need to be addressed if a number of countries are to resume stable and meaningful economic growth.
It is our contention that one flaw that has received less publicity than it ought surrounds issues of corporate ownership and its contribution to capital formation and economic growth. We believe the issue is especially important in the context of a growth strategy for the UK and for the West in general.
At the beginning of the new millennium Robert Monks and Allen Sykes in a CSFI publication (http://www.csfi.org/  CSFI “Capitalism without owners will fail: A policymaker’s guide to reform”, Nov 2002) outlined the growing “disconnection” between the control of corporations (and other entities) exercised by both management, and its owners.
Importantly their study did not simply re-state the agency problems, but also looked at issues to do with the differing objectives of professional investors as owners of public companies versus the objectives of owners of private companies. The importance of this latter point is vital as they conclude that it is these professional investors who fail to match their interests with those of society as a whole.
Their study’s predictions suggested the creation of a specific set of policy and governance reforms to avoid this failure. In his foreword, Dr. Henry Kaufman warned “Capitalism without owners will fail”.
The policy and governance reforms outlined in their report went disregarded. Indeed in the intervening decade through deregulation the problems multiplied and we are now suffering the consequences of these structural faults: a huge compression of the investment time horizon towards an extreme short term bias. This constitutes a major barrier to capital formation and economic growth. It distorts the value of enterprises, reduces their availability of capital and their ability and opportunity to use it. It also ignites permanent instability through a vicious spiral, with higher volatility, uncertainty, new “asset bubbles” resulting, inter-alia, in sustained high levels of commodities and food prices. This creates a preference by investors for “safe” assets such as gold that in reality are both risky and unproductive. ‘Operation Twist’ launched by the FED and the recently announced QE by the Bank of England, claim exactly to soften this malicious time horizon distortion and goes into the right direction. Yet, our contention is that it should be accompanied by a proper set of systemic policy and governance actions: ‘Operation Direct Growth: The New Avenue to Redevelop the Real Economy’ http://www.economonitor.com/blog/2009/11/operation-direct-growth-the-new-avenue-to-redevelop-the-real-economy/
Whilst the reforms proposed by Monks and Sykes, re-regulation of capitalism on a global scale, are arduous to be implemented at the same time, this does not stop any one country from tackling the problem, by developing policies that encourage SME companies to grow. This neatly avoids all of the arguments over level playing fields that are so dominating the re-regulation of global banking.
Moreover, it is relatively easy to carry out research into just what policy changes in the UK we might implement and what their effects might be as most of the policy instruments necessary to support the growth in the number of private companies as well as the growth within such companies are under the control of the national government.
By contrasting German and UK SMEs we can discover why German SME companies are on average much larger and characterized by their focus on technology and long term investment; we also believe that new financial arrangements such as the development of a direct capital flow between investors and SME companies should be created: Systemic Economics: New Dawn to the Future: http://www.economonitor.com/blog/2011/03/systemic-economics-new-dawn-to-the-future/
Since governments seem unable to develop a growth strategy, lately, from the very wealthy came an unusual appeal to be willing to contribute more to the costs of the recovery by paying more of their fair share (Warren Buffet http://www.ft.com/cms/s/0/0ee8f794-c75f-11e0-9cac-00144feabdc0.html#axzz1YgAfrX9H, French L’Oreal heiress Liliane Bettencourt, Christophe de Margerie, of Total and of the Tattinger family, and then Ferrari’s Chief, Luca Cordero di Montezemolo). Yet, in the best interest of everyone, what is really required is fixing our economies lack of growth. This is an appeal, not to encourage the rich to contribute more, but to contribute in a better way by directing more of their wealth into SME companies, the benefits of enhanced economic growth would then be for all.
A more extended version of this article will be available on the Center for the Study of Financial Innovation web site, on the Global Policy Institute and the Long Finance Journals.
Brandon Davies is a Board Director of Gatehouse Bank plc: Brandon.Davies@gatehousebank.com
Carlo Resta is a Senior Research Fellow at the Global Policy Institute: Carlo.Resta@Oraculum.eu