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Managers must be shareholders to ensure long term benefits

Corporate rot started with the East India Company


Corporate governance is a big problem today, witness ridiculous risk taking, huge cash bonuses out of revenue (not profit) and investment in products no one understands. Why is it like this?

The answer strangely is the East India Company. Johnny Company was the corporation most responsible for the public limited company structure that is so prevalent today. There were many things wrong with the company, starving Bengali’s to death to increase profits for one, but the one I’m particularly concerned with here was its governance.

The Company was owned by share holders based in London, but more often than not by appointed managers who didn’t own majority stakes. As a consequence the only way that managers could make money was by using the corporate machinery to make short term profits, hence starving people to death in Bengal. If you don’t believe me read Nick Robin’s fantastic, The Corporation that Changed the World: How the East India Company Shaped the Modern Multinational.


But the key point I want to make here is that people running companies who don’t own them is a bad thing. They make decisions that are not always in the long term interest of that company. Here are a few things I think could make some changes to this:

1 Have a voluntary charter mark governance scheme, overseen and run by the Bank of England.

When a new CEO is appointed a significant share holding is given to them in the company. This would be held in trust by the firm until after 12 months of their leaving. At the 12 months point these share would be bought back by the firm at the market rate and the departing CEO given the proceeds. No bonus would be paid but the CEO would get the dividend alongside their pay each year.

Also a director would be appointed by the Bank of England and paid for by the firm into a large pot for general use by all subscribers to the charter mark. That Director would be responsible to the Bank and report annually to the public. The Director would be specifically charged with Whistle blowing and risk taking.

These things would help put some belief back into the system.

2 In order to limit short selling which is a particularly useless use of money, perhaps shares could be created with a minimum 3 month ownership period before they could be traded on each time. We after all create preferential A and B shares.

By Mark-in-History
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