Devil's Advocate: Who controls companies?

As industry competition heats up, Martin Brampton looks at whether power to drive change within organisations now lies primarily with high-level executives.

Last month the Economist Intelligence Unit (EIU) published a study claiming their research showed that pressure from stakeholders would drive ever greater competition between companies. Yet when one scrutinises the cited stakeholders, one is driven to wonder where companies are going.

Apparently based on the beliefs of senior executives, the EIU report starts with the premise that companies will be driven ever harder by customers, employees, competitors and shareholders. Yet it is far from clear that these groups are in a position to exert much influence. Let us take them in turn.

It is hard to see that customers are in a strong position. There is much talk of customer power but equally there are numerous examples of customers having the utmost difficulty getting what they want. In markets such as utilities, where the product is more or less homogeneous, buyers are obviously inclined to buy on price. The response to that has increasingly been the operation of price confusion strategies. Indeed it is a strategy often employed by market leaders in many sectors.

In the technology sector, where one might expect to find much sharper differentiation between products, other factors often hold sway. How many IT purchases are made on the technical merits of the products, as opposed to a perception of market leadership? Indeed, IT managers who venture along less well trodden paths are often brought sharply back to the herd by their own internal customers.

What of employees? The management literature abounds with examples of good employees who use their initiative to promote customer satisfaction and thereby enhance the company's image. Despite this, the increasingly common experience is for customers to deal with employees who have no discretion to act outside extremely rigid limits and no ability to refer matters to anyone who has.

The only limit on removing jobs to other countries seems to be practical considerations of service delivery. When your central heating boiler needs servicing, it is little use being put in touch with a plumber in Bangalore. The trend, though, makes products that are thrown away when they go wrong, eliminating the need for service personnel.

Competitors are more interesting. Certainly it seems true competitors are keen to take business from each other. Yet there are considerable constraints to this. Rivals are often more interested in sharing high margin business rather than grabbing volume through competitive pricing. Often it is not a sound business principle to maximise efficiency, as opposed to finding a level that is adequate to retaining a strong position.

How exactly shareholders will exert pressure on companies looks ever more problematic. For the most part, shares are controlled by people who do not own them. Most of us have investments of one kind or another, including pension funds. Few of us are direct owners of many shares. Fund managers have objectives that relate more to their competitive position than to the actual results achieved.

Moreover, over the last couple of decades, the proportion of shares owned by company directors has increased very considerably. As the incomes of board members have risen much faster than earnings generally, significant amounts of money have been used to build portfolios of shares, often held directly rather than through mutual funds.

We are thus heading to a situation where the only truly active shareholders are the executives of other companies. Especially where the shares are in companies belonging to the same industry sector, it is unclear exactly where their owners' real interests lie. The coalescing of ownership and management clearly undermines the concepts on which our limited liability companies are structured.

Economic issues are always hard to disentangle. But the most obvious conclusion from the trends described is that power is shifting quite rapidly to the senior executives of companies. To the extent that there is increasing competition, one must then suppose that this primarily serves to maintain and consolidate the existing power structure. Unless you know otherwise?