The Review is pleased to give hospitality to CLARE group articles, but is not necessarily in agreement with the views expressed; responsibility for these rests with the authors. Members of the CLARE Group are M.J. Artis, A.J.C. Britton, W.A. Brown, W.J. Carlin, J.S. Flemming, C.A.E. Goodhart, J.A. Kay, R.C.O. Matthews, D. Miles, M.H. Miller, P.M. Oppenheimer, M.V. Posner, W.B. Reddaway, J.R. Sargent, M.FG. Scott, Z.A. Silberston, J.H.B. Tew, S. Wadhwani and M. Weale.

Both those who are critical of the current structure of corporate governance, and those who support it, share a common set of prenaises. The corporation is owned by its shareholders: managers exert power and responsibility on behalf of their shareholders: corporate governance is a question of effective accountability to shareholders. If there are problems, they should be dealt with by making these mechanisms more effective. This article challenges that view.

The principal-agent model bears no relationship to the way large companies are actually run. The attempt to bring reality in line with the model is one possible road to reform: another is to adjust the model to reality. Shareholders do not own large companies, in any ordinary sense of the word own. Firms like BT or BP are social institutions, owned by nobody. The distinction between plc and the owner managed limited company should be real, and not just titular. Corporate managers are not the agents of the shareholders, but the trustees of the assets of the corporation, which include its reputation, its distinctive capabilities, and the skills of the employees and suppliers. Their objective should not be to maximise shareholder value but to further the interests of the business.

This account is probably a better description of the current state of British company law than the principal-agent model, but we advocate a new company statute to put the matter beyond doubt. Disposing of the fiction that executives are the agents of shareholders allows us to establish an effective system for achieving the key goals of corporate governance: freedom for managers to manage, combined with real accountability for their performance. We advocate a fixed four-year term for company chief executives, involving a wide ranging and searching review of effectiveness which would involve not only directors and shareholders but advisors, associated companies and employees.

It is better that property should be private, but that man should make it common in use ..... it is the task of the legislator to see that the citizens become like that. Aristotle