Why Britain’s company law is not fit for purpose

The closure of British Home Stores shows not only how badly managed the company has been. It shows how Britain’s company law is not fit for purpose.

Founded in 1928, the company was one of Britain’s longest-established high-street department-store brands. But it has ended up with a £571m pension deficit, all its 163 stores will close and 11,000 jobs will go. Sure, the high street is unforgiving? But how can such a giant be brought so low?

Step forward Sir Philip Green and Dominic Chappell, particularly Green, the high-profile businessman so regularly pictured with supermodel Kate Moss on his chubby arm aboard his superyacht. Green and other investors took more than £580m in dividends, rent and interest payments during his tenure at BHS; Chappell’s Retail Acquisitions consortium was paid millions in fees and salaries. Meanwhile, Green did not close BHS’s defined-benefit pension system (as most other large and small companies have done, following Gordon Brown’s disastrous change in the regulations while he was Chancellor). What on earth was he thinking? Was he thinking about the future at all?

It’s a bad advertisement for capitalism, right enough, when the reality is that most businesspeople scrimp, save, mortgage their homes and watch every penny to help their companies grow. 

But it’s an even worse advertisement for all the UK (and, dare I say it – EU) regulation around business governance. Designed to keep businesses transparent and well run, our company law now has the opposite effect. It has tried to substitute official rules for shareholders. And shareholders are the best regulators – after all, it is their business, and their money at risk. 

Sadly, UK and EU politicians did not appreciate this regulatory role of shareholders (though the rising volume of shares held by corporatist-minded pension funds did not help either). Shareholders were seen as merely money-takers; their power was curbed and the powers of boards and executives grew – with everyone being told that’s fine, because there were so many rules to control them.

It is not a new problem. Philosopher and corporate law expert Dr Elaine Sternberg pointed it out in the ASI report Competition in Corporate Control as long ago as 2003. Let shareholders run their businesses as they want, she argued. If some mess up – paying too high salaries, say, or giving executives too much control – nobody is likely to do that again. Competition in corporate control is self-regulating: good systems crowd out the bad. But our regulatory system, substituting top-down rules for market-driven competition, kills that self-regulating process.

It really is time for a bonfire of controls. At least then when we see CEOs sipping G&Ts on their £100m superyachts, we could be confident that deeply interested and farsighted share owners figured they are worth it.