Salient to Investors:

Colin Mayer at Harvard writes:

British capitalism is the textbook description of how to organize capital markets and corporate sectors. Yet the performance of the British economy has been mediocre, with much of the population dissatisfied with economic and social conditions, large-scale manufacturing that has been decimated, decades of underinvestment and a banking system that inadequately funds small and medium-sized enterprises properly, with heavy dependence on a financial sector exhibiting some of the worst failures of any nation during the financial crisis.

The British financial system systematically extinguishes any sense of commitment – of investors to companies, of executives to employees, of employees to firms, of firms to their investors, of firms to communities, of this generation to any subsequent or past one. You are only as good as your last deal, as farsighted as your next, admired for what you can get away with, and condemned for what you confess.

Incentives and control are center-stage in conventional economics, but commitment is not. Economics does not recognize the fundamental role of commitment in all aspects of our commercial as well as social lives, and the way in which institutions contribute to the creation and preservation of commitment. Commitment is the subject of soft sentimental sociologists, not of realistic rational economists.

Economics fails to recognize our dependence on others to assist us, and the dependence of their willingness to do so on our commitment to them. If we are not committed to abide by contracts, they are of no significance. My trust in you derives not from the piece of paper that I hold in my hand but from the sacrifice that I see you making on my behalf.

Shareholder power makes true commitment extremely difficult in the corporate capitalism that has evolved in the UK, and, to a lesser extent, in the US, and thus corporations and economic well-being have suffered.

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