Firm Commitment: Why the corporation is failing us and how to restore trust in it

Q&A with Colin Mayer, author of Firm Commitment: Why the corporation is failing us and how to restore trust in it

Q. What inspired you to write the book?

A. The corporation is the most important institution in our lives but it has had little serious analysis to date and, to the extent that it has, it has been badly misunderstood. In particular, following the financial crisis, I appreciated that many of our economic ills over the past few decades were incorrectly attributed to other factors when in fact the corporation lay at their heart. Having worked for several decades on the subject, it was therefore an opportune moment to write a book that brought my ideas on the corporation together.

Q. What are the primary reasons as to the loss of public trust in firms and why?

A. The loss of trust in the corporation reflects a belief that it exists simply to make money for its owners, its shareholders, and it will do whatever it takes to achieve this. From our point of view as customers, employees and communities we are therefore pawns in a game in which we are manipulated for the benefit of others. The repeated recurrence of scandals only serves to reinforce the belief that the corporation is inherently untrustworthy.

Q. What are the biggest changes a firm can make to regain public trust?

A. The biggest change is to set out precisely how it will uphold the interests of its customers, employees or communities and why they should believe such assertions. How will the corporation compensate us if they fail to abide by their promises? How can we be sure that they will do so even when their financial conditions change or their attractive investment opportunities which lure them off to other markets? Such commitments are credible and thereby instill trust in their customers.

Q. What impact has the attitude about takeovers had on firms? Does this attitude differ in different markets?

A. The threat of a takeover is regarded as an important discipline on management, encouraging it to act in the interests of its shareholders. However, it also means that management is unable to prioritize broader corporate interests in their employees, customers, and communities. There are variations in the extent to which takeover markets operate freely: at one extreme stands the UK with a very liberal takeover market; at the other end is Japan where the hostile acquisition of corporations is prevented by shareholdings controlled by banks and other corporations; in between stands the US with several takeover defenses and states legislating acquisitions.

Q. How does public versus private ownership affect the way a firm is run?

A. Public ownership of corporations is used to align the private interests of corporations with those of society more generally. The concerns include public corporations being subject to political influence that detracts from their commercial performance; those running public corporations have weak incentives to operate them efficiently and productively; and the deep pocket of the state means that they are not subject to the threat of bankruptcy and they are immune to the discipline that comes from the threat of being taken over. Many countries have therefore chosen to privatize their corporations to encourage greater efficiency and less political interference.