The endangered public company

Public companies can be poorly managed, but  the  main problem with them is centuries old, and centres on the difficulty to get them managed in function of a properly defined “ self interest”. Indeed, in classical economics, all economic agents seek their self-interest, and well functioning market mechanisms transform a myriad of self-interested decisions into the Common Good. Adam Smith insisted that, if there is enough competition and transparency, this happens in a pretty automatic way because people in business tend to seek their profit with a concern for the quality of their products and the satisfaction of their clients- in fact a form of sympathy that brings long term profits-, and with ethics, because it pays to be honest: those who are not, loose their reputations and their clients, and are quickly out of business.

Do Corporations fit in this respect? Complicated. Entrepreneurial companies owned by their managers mostly do, and many family companies also; but Large Public Limited Companies (LPLCs), with a widespread shareholding, are a problem. Very often they are managed not in function of their self-interest, but rather in function of the self-interest of their loosely supervised top managers, and as you mention, the way this “Agency problem” is supposed to have been solved, has become part of the problem. With stock options and bonuses, most LPLCs now concentrate on a simple objective: the single-minded financial objective, usually quarterly or annual profit, which will maximize the remunerations of top management. Hence, many of them do not include in their self-interest the real quality of their products and the real satisfaction of their clients, loyalty to their employees,  or an ethical concern, because they think it costs too much in the short term, and anyway they can rely on massive communication (advertising, PR, or plain propaganda) to create an impression of quality-concern and ethics.

Of course some LPLCs are different, and Steve Jobs was pursuing the real long term interest of Apple, and thus its clients and its reputation, and so do may many other CEO’s, but still, plenty of LPLCs behave in a way that does not fit classical economy, and does not increase the Common Good. The rather “enlightened” self-interest has then been replaced by short term profit maximization, often trough market dominance rather than efficiency, just like Adam Smith warned about the LPLCs of his time, the colonial Companies

Some corporations now claim to be concerned about their “Social Responsibility”; this could become a way to give them a richer notion of “Self Interest”,  but today unfortunately remains often little more than additional propaganda, and will remain so until public companies can be made to  adopt objectives that are more consistent with the classical view where the profit motive is pursued with respect for clients, sustainability, transparency and competition, and their top managers are motivated accordingly.

Eric De Keuleneer


Solvay Brussels School of Economics

Université Libre de Bruxelles

Brussels, Belgium

Posted by Eric De Keuleneer at 6:00