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A woeful definition of a company

23 May 2014

Shareholders are not the only consideration for a business, says Paul Vallely

Two dogs have not barked in the row over the bid by the US drugs company Pfizer to take over the British pharmaceutical firm AstraZeneca. They sit on either side of the dispute, but both point to deeper issues that have gone unquestioned in the debate about the efficient functioning of a globalised free market, and the need to protect the science base in Britain.

Critics have argued that the takeover will be bad for research and development. Pfizer has a reputation as an asset-stripper and cost-cruncher. Its takeover of the second-largest pharmaceutical company in Britain would hit research and development, cut British science jobs, and undermine our attempt to position ourselves as a hi-tech knowledge economy.

That allegation carries weight. Politicians who support the unbridled free market say that it does not matter who owns the company, so long as it brings jobs to Britain. And it is true that foreign investment does bring us jobs. But history also suggests that, when a corporate empire makes cuts, it is jobs in far-off branch offices that are first to go. When he appeared before a House of Commons committee, Pfizer's boss, Ian Read, admitted that the combined business would have fewer scientists, and spend less on research than the two companies do now.

Yet for all that, AstraZeneca was itself made up from successive mergers, and only one in six of its staff are British. It is also in the process of closing down its large research facility in Cheshire.

If the Government is intent on boosting the nation's scientific base, what would make more sense would be for it to invest more in Britain's universities. Before the Thatcher revolution, the UK was one of the world leaders in research; today, we spend less on research and development proportionately than the United States, Germany, France, South Korea, and China. Training more scientists is what will give Britain the cutting edge.

There is a deeper point on the other side, too. Repeatedly, we have heard that it is for the shareholders of AstraZeneca to decide whether the Pfizer bid should be accepted. This shows how corrupted our idea of a company has become.

Not even the 2008 global financial crisis appears to have shaken the received Anglo-Saxon capitalist wisdom that the duty of a board is simply to act in the best interests of its shareholders. This is a woefully insufficient definition. It sets up the notion that the share price is the only criterion by which success is to be judged. As Professor John Kay has argued, this turns managers into "meta-fund managers". Yet even those trying to fend off the Pfizer bid accept this logic; AstraZeneca's chairman, Leif Johansson, complained only of the final Pfizer bid that it "undervalues the company and its attractive prospects".

A company has a key responsibility to its shareholders - but also to its customers, employees, suppliers, the local community, the environment, and the wider world, without which it could not operate. The idea that all this is secondary to securing the best short-term gain for shareholders is deeply flawed. It shows that we need to redefine what a company is for in the modern world.

Paul Vallely is Visiting Professor in Public Ethics and Media at the University of Chester.

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