A question of property
Pfizer’s planned offer for AstraZeneca is a poor test case for almost any big question about big corporate acquisitions. The weaknesses of everyone involved in the potential deal only bring out the futility of the whole idea that big companies have owners.
The would-be American acquirer, the British target, the UK government and whole pharmaceutical industry are all tainted. They are guilty, respectively, of a tax fixation, cutting research, empty words and inadequate drug discovery. So there is really no one with the moral authority to say whether this is a good deal.
But the whole debate is marred by the law, which leaves the final decision to only one group, the equity shareholders. The squealing politicians and whinging scientists can be cast as intruders, interfering with the rights of these owners. That is wrong. Shareholders should not decide, because the law is economically wrong. The typical large company does not have owners.
Yes, shareholders own some of the financial capital, and should protect their interests. But the shareholders’ capital contribution plays a relatively minor role in most quoted enterprises. The financial base is far less important than a long list of other assets: human capital, government protection, brands, reputation and technological expertise.
There is also a fundamental difference between a company, a human organisation, and property, which is stuff like cars and houses. Property can be used and sold at the owners’ will. Companies, like other human organisations, have a life of their own. Companies should be treated in the same way as a family, a church, a government agency or a voluntary organisation, as institutions with many social roles and responsibilities – and without any owners.
The people who found, fund and manage companies sometimes think of these enterprises as their property. They have a point, but as the companies grow and the founder-funder-managers age, the companies become independent entities. The belief that the companies have owners leads to a muddled discussion on the purported owners’ responsibilities and rights.
On responsibilities, corporate reformers are confused when they call for owners to live up to their name. Of course, it is true that most shareholders of big companies are ill-suited for this responsibility. They are too numerous and scattered to be considered a decision-making body, and most of them have the wrong attitude – too interested in today’s share price, too little concerned with the company’s contribution to the common good.
But there is no more reason to expect an institutional portfolio manager or hedge fund operator to act like an owner than to expect a commuter to design bus routes. It’s not their job. The management of all complex organisations is correctly entrusted to people who are intimately involved and able to take a broad perspective when they make small and large decisions. For companies, that means senior executives and informed boards of directors.
On rights, shareholders are only residual financial investors. They do not have a right to determine corporate strategy, unless they are being asked to put more money into the firms. They have a right to be informed about the financial health of the companies that will pay them dividends, and to express their opinions, but as outsiders with a narrow perspective they rarely have much to offer.
The right to advise but not to decide applies to takeovers. When the target company is not in a dire condition – AstraZeneca is troubled, but far from desperate – financial investors should not have the final word. It is the board that should make the final decision on a takeover bid, one that best promotes the good of the whole company and of society. The directors should consult with people who share that broad interest: politicians, regulators, workers, industry experts, and perhaps a few thoughtful shareholders.
That is not what happens now, as the AstraZeneca community is painfully aware. A bid is considered a signal to take the idol of shareholder democracy out of storage, dust it off and hold it out for worship. The board is constrained to follow the will of the so-called owners.
It is possible to imagine a world where the next act in the AstraZeneca story would not involve either company. Rather, the governments of the United States and the UK would address what is clearly the weakest economic point in the debate. They would jointly promise to punish Pfizer for trying too hard to reduce its tax bill. And then, if Pfizer were still interested under those changed circumstances, the AstraZeneca board could decide whether the company as a whole will be better off on its own or with a new parent. Shareholders could lobby, but the board would be well advised to make up its own mind.