With Colin Mayer, Saïd Business School, University of Oxford
How can we deal with the fact that Latin America is the most unequal region of the world? How can we manage lackluster economic growth? And how can we transform our economies and make poverty and exclusion a thing of the past?
To answer some of those questions, Colin Mayer, the Peter Moores Professor of Management Studies at the Saïd Business School at the University of Oxford, recently spoke at the IDB as part of the Research and Policy Seminars, a new series that features distinguished speakers who work at the interface of policymaking and evidence-based research.
Professor Mayer is an expert on corporate finance, taxation and governance who is critical of the emphasis that businesses place on shareholders and profits to the detriment of a more socially-conscious, community-minded vision. Good corporate governance, he believes, is key. He distilled some of his ideas from his presentation on the topic for an on-camera interview with the IDB presented below.
Do companies exist to maximize profits?
That firms exist to maximize profits is certainly not the right conceptualization of business. Business is there to help us solve problems. It’s an incredibly powerful tool for doing that. In the process, it makes profits, but profits are not the primary purpose of business.
What are the implications of companies’ emphasis on profits?
The emphasis in business on profits has given rise to a focus on just one party in society, namely shareholders. And that domination of shareholders has given rise to a sense that the system is inherently unfair, that it isn’t concerned with anything other than driving financial benefit for a very small group in society. The consequence has been rising inequality, concentration of wealth, and serious problems in terms of the environment, society and the way in which our politics operates. And the consequence of that has been the rise of populism around the world.
How does good governance contribute to companies’ success?
Firms that are well-governed recognize that they need to have a well-established purpose, a purpose that demonstrates how they are addressing the issues and problems that certain parts of society face and how they’re setting about doing it. To do that, the governance of a company needs to have a clear notion of the values that are required to support the delivery of those solutions and a strategy by which they’re going to actually implement them. They need to have ways of measuring performance and incentivizing people according to the delivery of the success of those purposes.
There are few large, efficient, highly productive companies in Latin America and the Caribbean. Is that related to governance?
The absence of large corporations in much of Latin America is a reflection of a failure of business to build up relationships of trust with the parties to the firm that are needed for success. What one observes in other parts of the world is that where companies are able to create that sense of performing an important role for society, they flourish, they grow, they are able to invest and raise funding. Where, on the other hand, there is a serious lack of trust in business what ultimately occurs is that there are political interventions, regulation that undermines the growth and the success of business. Latin America needs to recognize what it will take to create growing, prospering businesses that will create prosperity for society at large.