Restore the role of owners in the capitalist system

A quite interesting article about corporate governance in Sweden from Financial Times (here, probably behind pay wall). The article has this to say about the Anglo-Saxon model:

[T]he Anglo-American model where dispersed ownership among thousands of investors means shareholders usually have little power, with votes at annual meetings often resembling Soviet-era elections

The article describes the Swedish system with holding companies typically owning shares representing 10 votes instead of 1 vote. The origin of these holdings often go back to the first half of the 20th century, so control is exercised by being involved in the operation of the company rather than by selling the shares. The article praises the the big holding companies called Investor and Industrivarlden and claim they have performed better. However, that all depends on the starting year and the benchmark index. When I looked back 26 years it is clear that the two companies performance have beaten some indexes but not others. A guesstimate is that they have delivered somewhere between negative 0.5% and positive 1% over index per year. A detailed study of performance on the industry level must be made to really answer the question.

Still, the article raises an important question. In classic capitalism we had owners using land, capital, and labour to produce goods. Any surplus accrued to the owner. A perversion of capitalism happened when owners stopped acting as owners. From the owners perspective there is no difference between workers striking for higher compensation and top executives rewarding themselves higher compensation. A strong owner would put down the foot and say no.  This is still a good theoretical model for organising economic activity in society.

I don't think there is any current model that works. The Swedish system has a bit fewer managers on the corporate boards, but is also suffering from diffused ownership which makes owners invisible and silent. Modern finance theory argues for diversification and ownership is more and more controlled by investment funds, which might even engage in blind indexing, i.e. invest in all firms included in a benchmark index.

Cultural norms in society are important too. The man on the street (and the politicians) does not notice any major difference between a fund manager and a CEO. In the simplified American debate, both are part of the vilified 1%. The debate in Europe is not much more intelligent. However, the two roles should be as different as an owner is to a worker. If the owner gives in to the workers' strike, the workers will strike more often. The same process occurring between the fund manager and the CEO is not even noticed. The cultural norms are different in Sweden, but it might very well be the case that there are some good practices to copy. However, the key problem is the invisible owner. That problem has to be addressed directly through the law. Here is one suggestion consisting of four changes to current practice:

• We can make it illegal for top managers to sit on boards. The CEO should be a member of the board, but all remaining board members should not be managers in the company or any other company big company. Include the previous CEO, which would be able to ask very penetrating questions to the current CEO. Include an academic or consultant with strategic management knowledge, i.e. somebody that asks a lot of questions. Include a retired accountant, that also will ask questions.  Include a few representatives of the shareholder that have a large ownership and a concentrated ownership.
• We can make it illegal for investment funds to own shares in more than 15 companies (or we can provide tax breaks to the same effect). In such a concentrated portfolio, the fund managers need to pay full attention to the companies they own. Managers with deeper knowledge of the industry will manage investment funds. Investors can diversify by buying into several investment funds.
• We can limit the compensation to top executives by law. There is no limited supply of qualified people in the world that would take a top executive job even if it only paid USD 1M (or 3M) and no additional benefits. In fact it is probably better if the CEO is less driven my money in the first place. Individuals who want to make USD 10M (or 300M) can become owners (i.e. entrepreneurs). We need more of those in society anyway. 
• We can remove inheritance tax and wealth tax, which make it difficult for owners to remain across generations.

Whether the problem is an inherent problem in capitalism or second order effects of regulation of capitalism is interesting, but not of primary importance here. Institutional ownership has increased since the mid 20th century and it is likely to continue to increase. With the rise of index-linked funds owners are going to become totally invisible and we will have a massive tragedy of the commons. Drastic measures are needed to restore the role of owners.