Models of the Company and the Employment Relationship
| DOI | http://doi.org/10.1111/1467-8543.00284 |
| Date | 01 September 2003 |
| Published date | 01 September 2003 |
| Author | John Parkinson |
Models of the Company and
the Employment Relationship
John Parkinson
Abstract
How the company is conceptualized has important implications for employees.
Divergent theoretical approaches towards the company are synthesized below to
form three models: the ownership, nexus of contracts, and social institution
models. The first two endorse current UK corporate governance practice, in
which companies are run for the ultimate benefit of their shareholders, who have
the exclusive right to appoint the board. The third model questions this arrange-
ment and, more generally, the characterization of the company as a wholly
private association. The conclusion examines the implications of the third model
for reform of company law and governance in the UK.
1. Introduction
There is no single understanding of the company. In the Anglo-American tra-
dition, companies are viewed as property, or more recently as the product of
contracting between the various participants in the business. These perspec-
tives share a characterization of companies as ‘private’ and hold that they
should be run exclusively in the interests of their shareholders. In the con-
tinental European tradition, on the other hand, companies (that is, eco-
nomically significant ones) are regarded as partially public bodies, with
constituencies that extend beyond the shareholders to include other groups,
such as the employees and local communities. The purpose of this article is
not to make a comparative assessment of national company law and gover-
nance systems, on which there is a substantial literature (Albert 1993;
Charkham 1994; Hopt et al.1998), but rather to examine the ways in which
the company has been conceptualized in academic and policy debate in the
UK. In so doing, particular attention will be paid to the implications of the
various rationalizations of the company for the position of employees.
The article will draw selectively on the literature from a number of disci-
plines in order to construct three distinct theoretical models of the company,
British Journal of Industrial Relations
41:3 September 2003 0007–1080 pp. 481–509
John Parkinson is at the University of Bristol
© Blackwell Publishing Ltd/London School of Economics 2003. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
the third of which is presented in different versions. The principal aim is to
make explicit the sometimes unspoken descriptive and normative premises on
which policy prescriptions are based, and to subject these premises to criti-
cal evaluation. While organizing the material in this way introduces a risk of
distortion, since some arguments defy neat categorization and others span
more than one model, it is hoped that the analytical benefits will outweigh
this disadvantage. The conclusion expresses a preference for the reasoning
that underlies the third model, and outlines some of the implications for the
reform of company law and governance in the UK.
2. The ownership model
An influential approach to understanding the company has been that of the
property analysis, which remains of importance in the contemporary debate.
The notion that shareholders are the owners of the company and as such are
entitled to insist that it be run exclusively in their interests is regularly relied
on in policy arguments in order to defend the fundamentals of the current
governance structure. An example is found in the Cadbury Report on cor-
porate governance, which notes that ‘the shareholders as owners of the
company elect the directors to run the business on their behalf and hold them
accountable for its progress’ (Committee on the Financial Aspects of Cor-
porate Governance 1992: para 6.1). Similarly, the CBI, as part of its sub-
mission to the Hampel Committee, opposed the idea that directors should be
responsible to employees and other stakeholders in the business, since this
would derogate from the overriding rights of shareholders as the company’s
owners (CBI 1996: 8).
The property model rests on an analysis of the relationship between the
shareholders and the company, which proponents of the model treat as a pro-
prietary one.1The ownership rights that shareholders enjoy over their capital
contributions are considered to carry through into the enterprise, so that
when shareholders invest they become part owners of the company, or at least
of its business (Sternberg 2000a: chapter 2). This notion of shareholder own-
ership then provides a legitimating basis for the shareholders’ right to have
the company run exclusively in their interests and to exercise ultimate control.
Any deviation from these principles is said to undermine respect for the rights
of private property, which require that property be used solely in the inter-
ests of its owners. A second and related issue concerns the threat to the liberal
order if managers expend shareholder funds to pursue objectives that do not
maximize profits but instead conform to their own view of what the public
interest requires (Hayek 1960). From this standpoint, the public interest is
best served by individuals pursuing their private goals in free competitive
markets. Furthermore, allowing the public interest to be defined by an
unaccountable group may produce irresistible pressure for the invisible hand
of the market to be replaced with the visible hand of state intervention
(Friedman 1962: 134).
482 British Journal of Industrial Relations
© Blackwell Publishing Ltd/London School of Economics 2003.
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