Paper-clip monitoring departments

Great piece by Adrian Wooldridge at Bloomberg, syndicated at BusinessDesk, on the dangers when corporates shift into stakeholder management.

Regulation not only diverts companies’ focus from outside (serving customers and mastering technological change) to inside (monitoring internal processes). It also contributes to internal bureaucratisation.

After the government creates a department of paper-clip regulation, the corporation must perforce create its own internal department of paper-clip monitoring – and soon the head of the paper-clip monitoring department is demanding a seat on the executive committee. A second culprit is the shift from shareholder capitalism to stakeholder capitalism.

Shareholder capitalism provided companies with an external discipline: If CEOs diversify into unrelated businesses or engage in vanity projects they are soon punished by the market and disciplined by their boards.

But stakeholder capitalism weakens external discipline and increases the power of jostling pressure groups. CEOs can claim they need to engage in this or that grand project to earn their licence to operate regardless of the short-term impact on shareholders. Pressure groups can argue the company needs to pursue this or that good cause to satisfy this or that stakeholder group.

New Zealand's External Reporting Board requires so much paper-clip monitoring....