ownership – Escondido Framework

How not to run utilities

Joseph Bazalgetter the Great Sewer — Joseph Bazalgette inspects the Great Sewer

Were the FT journalists consciously punning when they wrote this morning about Assured Guaranty (a US insurer reported to have more than $10 billion of exposure to some of the most indebted UK water utilities) “agreeing to provide liquidity facilities to Yorkshire Water”?

The long running problems with the financial management and governance of Britain’s water companies have come to a head with the crisis at Thames Water. The company has been at the heart of allegations about releasing sewage into water courses. The company is struggling with rising interest payments on $14 billion of debt. Sarah Bentley, chief executive has resigned. Along with the UK’s other water companies, who also face criticism for releasing untreated sewerage and collectively waste 20% through leaks of the water treated and ready for consumption, it faces public pressure for renationalisation. This sentiment is shared by Conservative Party voters who, according to a YouGov poll last year, are 58% in favour of a return to public ownership.

Before delving into the questions about governance, funding and risk bearing on the water industry, it is important to note the context. The water companies (and Thames Water in particular) operate a system that includes extensive very old and infrastructure (similar issues affect the UK’s railway system) that need maintaining, repairing and replacing, and face increasing demand from consumers and cope with the consequences of climate change – the paradoxical combination of longer periods of drought and increased frequency of incidences of torrential rain that exceeds the capacity of drains and sewers. This is well illustrated by the Thames Tideway Tunnel project, the £4.3 billion, 16 mile long “super sewer” nearing completion to replace Victorian sewerage system built under the direction of Sir Joseph Bazalgette between 1861 and 1875 and intended to reduce the number of “Combined Sewer Overflow” discharges into the Thames in London from an average of 60 a year to fewer than five.

But who is to pay, who should be running the show, and who should bear the risk when things go wrong? Ultimately the customer will pay, whether charges for domestic consumption are averaged out on a per household basis prior to water metering being rolled out or, as is now generally the case, based on the water you use (and is drained away on your behalf using water consumption as a proxy for sewerage generation)? (In a country with bountiful rainfall, the public struggle to understand why they should pay for something that falls from the sky, without understanding what is involved in getting potable water to them). When addressing the investment required for new reservoirs (noting that Portsmouth Water’s new reservoir in Havant will be the first in the past forty years despite at 21% growth in population) or schemes like the Thames Tideway Tunnel, capital needs to come from somewhere (whether from shareholder, lenders or government (either taxpayers or, more likely, investors in government debt, aka lenders) and then needs to be serviced until the cost can be recovered from the customer.

Since the regional water boards (responsible for both water supply and wastewater disposal – noting that thirteen smaller water supply only companies – generally former municipal businesses remain, albeit also now in private ownership), were privatised in 1989, they have geared up with substantial amounts of debt. Critics allege that this has released cash to pay over £60 billion in dividends to investors since privatisation, almost half the sum invested addressing the leaks and the sewer overflow discharges and increasing capacity. A further criticism of the companies is that the interest burden reduces the corporation tax paid by the water utilities, with the result that in 2021-2022 only South West Water reported a profit after tax, with Thames Water in the spotlight for losing £973 million.

Would nationalisation solve any of these problems? As a member of a sailing club that opened in 1979 on one of severally new reservoirs to the west of London, I am a beneficiary of the investment in water supply capacity by the nationalised water industry prior to 1980. I am not in a position to take a view on whether adequate maintenance or investment in distribution and disposal infrastructure took place prior to privatisation but I recall burst water mains and pollution of rivers and beaches in my childhood, so suspect that the nationalised industry underperformed on this count. The industry today has an economic regulator, the Water Services Regulation Authority, and is policed by the Environment Agency, both of whom have their critics. As Dieter Helm wrote in the Financial Times on 2nd July, the problems in the water industry demonstrate a prima facie case that the regulators have failed to use their powers adequately and that they should been given more teeth. But the problems identified do not make the case for replacing regulated privately owned companies with stronger governaance with a system of direct accountability for the management to ministers and civil servants in Whitehall, and financial accountability – including for access to capital for investment – to HM Treasury?

So, what would a fair society look like? Daniel Chandler’s “Free and Equal”

Daniel Chandler was introduced to John Rawls’ Theory of Justice during his history degree at Cambridge. Although I was encouraged to write a dissertation on Les événements de mai 1968 while studying for the same degree thirty or more years earlier, Theory of Justice, only published in 1971, hadn’t made it into Quentin Skinner’s “History of Political Thought” lectures when I attended them in 1976. Instead, my introduction came at Stanford University’s Graduate School of Business a few years later. By the time that I was involved in the Britain’s short-lived Social Democratic Party in the 1980s, Rawls’ theories, particularly his rationale for a just society being one which offers the most for the least well off in society, provided a philosophical justification those who defected to the SDP from a Labour Party wedded to “Clause 4” socialism.

Chandler and I share a huge respect for Rawls. Chandler takes this to the extent that Rawls’ theories become his lodestone for examining public policy. In the first half of his book, Free and Equal: what would a fair society look like?[1] Chandler performs a valuable service by providing a readable and accessible summary of John Rawls’ famously turgid and impenetrable book, along with an account and rebuttal of Rawls’ critics and of those such as Amartya Sen (a hero and, apparently, mentor to Chandler) who have built on Rawls’ foundations. But the second half of the book, which justifies the sub-title , leaves me imagining that Chandler either wears a leather bracelet imprinted with WWRD (like members of some Christian youth groups wearing one for “What Would Jesus Do”) or lives under a banner like that raised by members of the Occupy Movement at St Pauls Cathedral in 2011.

Chandler works his way through a wide range of public policy issues, trying to apply Rawls’s view of what constitutes social justice by setting out a collection of prescriptions for addressing social and global problems, such as income and wealth distribution, the environment, and distribution of power in the workplace. The attempt is admirable, but disappointing. While conveying the impression that emotionally he is politically on the left, he is resolutely a centrist and not afraid to challenge traditional leftist positions, probably reflecting his academic move from history to politics and philosophy, so less a slave to dogma that some who take on this challenge.

His cv includes Harvard and the LSE, the UK Prime Minister’s Policy Unit, the Resolution Foundation and the Institute for Fiscal Studies, but his prescriptions and supporting accounts lack grounding, are uniformly derivative, and feel embarrassingly like the work I was turning out as a student politician and parliamentary researcher in my late teens and early twenties. Given his background, he can’t be blamed lacking the grounding in the real world that might have informed an approach that would be both more nuanced and insightful. His account of ownership and power in the context of the firm is particularly disappointing and falls into the trap of believing that the shareholders generally hold the power rather than the managers, and the power of different stakeholders depending on the characteristics of the particular markets in which the firm operates, may have more or less power[2]. The consequence is a very simplistic set of prescriptions, with nothing particuarly original.

I briefly found myself bothered by the utopianism that underlies the ambition for the second half of the book, but then cames across his own apology for this and explanation of the need for ambition to make the world a better place, and the value of Rawls’ ideas about justice in thinking about what constitutes “better”. I was then reminded of Lenin, writing in the fifth chapter of What is to be done? Where he cites 19^th Russian nihilist Pisarev

“the rift between dreams and reality causes no harm if only the person dreaming believes seriously in his dream, if he attentively observes life, compares his observations with his castles in the air, and if, generally speaking, he works conscientiously for the achievement of his fantasies. If there is some connection between dreams and life then all is well.”

before then observing

Of this kind of dreaming there is unfortunately too little in our movement.[3]

So, full marks to Chandler for his account of Rawls, and also the aspiration to frame practical solutions in light of Rawls theory, even if he falls well short in his prescriptions and how be presents them.

[1] Chandler, D. (2023). Free and Equal. Penguin UK

[2] Ironically, I read his objection (page 262) to John Lewis Partnership being viewed as a co-operative “because workers do not exercise full control over management” on the very day that the John Lewis staff chairman Dame Sharon White lost a vote of confidence in her past performance from the Partnership Council although she received support for her future leadership going forward.

[3] Wikipedia. (2023). Dmitry Pisarev. [online] Available at: https://en.wikipedia.org/wiki/Dmitry_Pisarev [Accessed 10 May 2023].

How can investors and owners support purposeful business?

This, the fourth session of the British Academy Future of the Corporation – Purpose Summit opened with the Colin Mayer as session chair arguing that shareholders should be responsible for insisting that the business in which they own shares following their corporate purpose.

It may not have been his role as chair of the morning session to set out the logic behind the assertion, but it was disappointing that he did go on to frame this not so much as a responsibility of the shareholder as being something that is in their interest. After all, it is in the interest of the shareholder who has invested in a particular business proposition (with the prospect of financial returns that relate to the industry sector, corporate capability, strategy and market position) that the business “sticks to its knitting” and pursues its purpose to the best of its ability. After all, we are taught at business school that the shareholder can diversify their risk by investing in a variety of business and can buy instruments and investment that offer different patterns of return. The purpose of the company is something that attracts the shareholder to invest, and both the company and the shareholder have an interest in the company following its purpose. This proposition is the outcome of Escondido Framework thinking and its model of the firm.

Douglas Lamont, CEO of Innocent Drinks gave us a inspiring account of the Innocent Drinks story including a description of its purpose, vision and values – the why, what and how. He explained how Coca Cola, when it invested in the company in 2009 approached its investment with the intent that the purpose of Innocent should be protected. The relationship should be “connected not integrated” so Innocent could benefit from the positive things that Coca Cola could provide but not be swamped and turned into a fizzy drinks brand. As a consequence, Lamont feels that he has a “strong, trusting relationship with our shareholder” and sees the model of his company’s relationship to Coca Cola being a challenge to big corporates to emulate with their acquisitions and subsidiaries.

Lamont also spoke about the being a “B Corp”, the movement of companies trying to shift the reputation of business from greed to good.

Hiro Mizuro, CIO for the Japanese Government Pension Investment Fund spoke about the relationship between the “owner” of the asset in the shape ultimately of the pension beneficiary, the investor or investment fund and the portfolio company. He posed the question that I see as the beneficiary of some pension funds that are not yet paying out and some that now are, and as the owner of insurance policies and Individual Savings Account investments in tracker funds. To what degree do I take responsibility and, indeed, in relation to the argument from Colin Mayer at the start of the session, can I take responsibility for the purpose. On the other hand, thinking back to my time as chair of the Finance Committee at Versus Arthritis, it was just this approach from the team at Baillie Gifford that attracted me to advising the charity to invest in its Global Stewardship Fund, which proved the best decision I took in my eight years as a trustee of the charity.

The penultimate presentation of this session was Phil Thomson, president of global affairs at GSK. He spoke of joining Glaxo Wellcome, a pharmaceutical company with a strong sense of purpose 20 years ago, but also of an industry that lost its way in terms of its sense of purpose for time. He spoke of how the world had “dodged the bullet” of a pandemic several times in that time but the sense of purpose for the life sciences companies has been restored and reinforced by the current crisis and has helped stabilise and increase the resilience of the business. He argued that embedding purpose takes time and requires consistency but, along with clear values (Transparency, Respect, Integrity and Patient Focus) provides a simplicity that can be understood among the 125,000 employees of the organisation across the globe. Later, in answer to questions, he talked about how the values and the shared understanding of the purpose gave staff a sense of ownership in terms of their responsibility for what the company does and how it does it.

The final speaker was Deb Oxley, chief executive of the Employee Ownership Association. It is her role to promote employee ownership, extolling its virtues, overclaiming for what it can deliver, and blinding her to the competing challenges of other stakeholders to ownership rights and to diversity of types of engagement of people in a workforce – from the casual part-timer, to the person with transportable skills through to “lifers” who have made huge commitments to the organisation and few choices to move elsewhere. The shortcomings in her presentation only highlight the strengths of the alternative way of understanding ownership that underpins the Escondido Framework.

Employee activism: what does the Escondido Framework say?

Staff at Wayfair, the online furniture and household goods company, have been protesting at their employer selling furniture to a company equipping migrant detention centres in the US.[1] What does this say about the relationship of companies to their staff, about limits on the ability of shareholders to exercise power over the behaviour of that conventional theory suggests that they own, and about the rights and responsibilities of every one of us in relation to the organisations that we work for?

The relationship of companies to their staff

An organisation should consider ethical and political behaviour as part of the marketing mix when it thinks about its strategy towards its employees. Charities and other not for profit organisations are generally able to employ staff at a lower cost than organisations without an ethical mission because their staff make trade-offs between the income they receive in cash and feeling that they are achieving something for the wider good. As I have written elsewhere, when I headed up the buying and merchandising for the UK’s largest retailer of stationery in the 1980s, I argued to my bosses that the halo effect of developing environmentally responsible product ranges would be to enhance our standing among the students graduating from universities where we were recruiting. By selling to a company equipping detention centres, Wayfair has effectively shifted its positioning on one of the marketing dimensions of its interface with employees. This decision may blow over, but in the longer term Wayfair needs to consider whether to adopt a clear stance about the larger customers it sells to or it may ultimately have to accept that is will need in some way or other to change. This might involve paying staff a bit more in order attract staff to replace those who don’t want to be involved doing something they view us unethical. Or, if we make the assumption that one of the benefits of employing ethically informed staff is they are more trustworthy, it may need to put controls in place to cope with the risk that staff who are not as ethically sensitive to offset a lower level of trustworthiness. Or, if the values of the staff protesting against the sales for the detention centres reflect cultural norms in the location of the offices or warehouses in which they work, Wayfair may need to go to the expense of moving its operations to locations where the local population is less sensitive to such issues.

Limits on company owners

Ownership is a complex subject. Ownership of a piece of paper that says you have a share in the common stock of a company gives you a right to residual profits of a company and (assuming it is voting stock) in decisions about the appointment of directors of the company. And even if you are the owner of the entire voting share capital, it does not give you the ability to dictate everything that the company can do. Others who interact with the company can exercise their rights too. The Wayfair employees have made it clear their views and are attempting to limit the ability of the company’s owners to sell to whoever they wish. It is not a matter a law, or at least not law alone, the practical balance of power between an incumbent workforce, the managers and directors, as well as those of people who have invested in the company all come into play. In the case of a company with publicly traded shares that offer the opportunity to exercise votes once a year, if at all, and then only as a very blunt instrument, the shareholders can hardly been exercise ownership rights in relation to decisions about whether to sell to the developer of a migrant detention centre. The managers and directors will have to consider what is best for their own interests: do we concede to the employees’ demands, or do we shift the company’s market positioning in relation to the explicit and implicit interests of the workforce?

Our rights and responsibilities in relation to the companies we work for

The workforce at Wayfair may have put their jobs at risk. Those who have walked out are likely to have breached their contracts of employment. But acting in line with your conscience is not a matter of exercising a right as discharging a responsibility. The staff at Wayfair will be making trade-offs (or need to realise that this is what they are doing) between doing what they believe is right and their immediate financial self interest. The level of risk they take will reflect their own market power: can their employer find substitute staff with the requisite skills at a price that it can afford, or will it respond to the pressure from the protest, and furthermore, are they supported by the legal framework surrounding their employment or not?

[1] “Activist employees pose new labour relations threat to bosses: Wayfair walkout shows CEOs cannot duck political risks by claiming neutrality” FT 4^th July 2010

Revisiting Colin Mayer’s “Firm Commitment”

I first read Firm Commitment[1] when it was first published in 2013 and found the opening chapters – which include a well-constructed critique of the shareholder value paradigm – offered the tantalising prospect that Colin Mayer might be about to expound a theory similar to the Escondido Framework description of the firm occupying a solution space bounded by market interfaces. Unable to recall where his diagnosis of the failings of the modern firm and his prescription for addressing them departed from my own, I recently revisited his book.

Returning to Firm Commitment, I rejoiced again at much of the description in the early chapters of the shortcomings in the classical model of the firm, in which share ownership is linked to provision of investment capital and the assumption of risk. In common with the Escondido Framework, he describes the company as an structure independent of ownership and sees one of its purposes being long term survival, delivering value to society at large. He comes close on occasion to describing some of the other risk bearing parties, the market related transactional considerations and the interests of different stakeholders. In particular, he bemoans the failure of corporations to engage with wider social and environmental concerns.

But rather than continuing down the path developed in the Escondido Framework he focuses on the shareholder and sees the failure of the modern corporation lying in the lack of commitment of shareholders to the company. His prescription is reform to tie in shareholders to the company, to increase their commitment to the firm – hence the book’s title. In contrast to our model, Mayer remains committed to a view that shareholders “own” the company, rather than owning pieces of paper that entitle them a share in the profits of the company and which have a value reflecting a market perspective on the discounted value of the expected future cash flows. What he is unable to explain is how tying in shareholders in this way will improve the quality of decision taking by managers, enhance their accountability, or contain their ability to extract economic rent in the form of salaries, bonuses and equity incentives.

[1] Firm Commitment, Colin Mayer, Oxford University Press 2013

“Shareholders do not own companies, nor do they own the assets of companies”

Six academics, from law schools and business schools in the US, UK, and continental Europe, have written a first class letter to the Financial Times today, printed under the headline “Acknowledge that companies remains separate legal entities”.

They take the Business Secretary to task for slipping into the trap of asserting, in the course of the controversy over bankers’ pay, that shareholders “own” banks.

Kent Greenfield and his colleagues write:

“….the notion that shareholders own companies is simply incorrect.

Shareholders do not own companies, nor do they own the assets of companies.

Shareholders own shares of stock – bundles of intangible rights, most particularly the rights to receive dividends and to vote on limited issues.

Unfortunately the erroneous notion….that shareholders own companies seems to have side tracked the discussion, and policy formation, around corporate governance leading to an inappropriate and ultimately counterproductive focus on shareholders.

…..companies are separate legal entities, without owners, and effective corporate governance involves the consideration of a variety of parties not, necessarily, shareholders.”

Signatories to the letter: Kent Greenfield (Boston College Law School); Andrew Johnston (University of Sheffield); Jean-Philippe Robé (Sciences Po Law School, Paris); Beate Sjåfjell (University of Oslo); Andre Spicer (Cass Business School); Hugh Willmott (Cardiff Business School)

1993 Tomorrow’s Company paper and latest paper for Cranfield Renewing Capitalism project

Two papers setting out some of the key ideas in the framework have been added to the site. A paper written for Tomorrow’s Company, when in its initial phase under the sponsorship of the Royal Society of Arts, can be found on the Origins page. A recent paper written for the Cranfield Institute’s Renewing Capitalism initiative can be found on the home page.