W HY DIDN’T the Rover workers revolt? They certainly have a right to be angry. They have lost pretty much everything: jobs and prospects, and their pension fund has a pounds 67 million hole in it. To add insult to injury, the residual value of the cars they were persuaded to buy as a show of support is now in many cases less than what they owe. Meanwhile, their bosses and shareholders – the Phoenix Four – have walked away with pockets and pension pots brimming. They are unlikely to need to work again.

The legacies left by Rover on its deathbed to its shareholder and worker inheritors could hardly be more different. Yet, despite belated protest and token wringing of hands, the only remarkable thing about the indignation is the speed with which it has died down.

The truth is that the Rover workers (and we) are resigned to the despoliation. We have so internalised the idea that this is the way the world is that while, as in this case, we can be indignant about individual abuses, that is precisely what we assume they are – aberrations rather than something inherent to the system that produced them.

But Rover demonstrates just how rotten the foundations of that system are. Consider how any company really works. Its unique potential resides in the ability to combine the resources of different constituencies to create value that neither could on their own. Without the human capital contributed by employees, the financial capital of investors is sterile. Employees need financial capital to amplify their efforts. Each is necessary to the other.

Neither is the company actually ‘owned’ by the shareholders in any normal sense – the whole point of the ‘limited-liability’ trade-off is that shareholders shed final responsibility for the assets and liabilities on to the ‘legal person’ of the company itself, embracing all its constituents.

So how come that the Phoenix Four can make off with all the swag without being arrested?

The answer is that we have bought the orthodoxy that the company exists to maximise returns to financial capital alone. From this principle a whole set of consequences flow and all the participants have acted out their roles in textbook manner. Behind it all lurks the argument that financial capital is entitled to the greatest returns (or, in some cases, all of them) because it shoulders the major risks. True to form, this has indeed been argued in the case of Rover.

But, as management guru Sumantra Ghoshal pointed out, for this to have any justification, it is necessary to make a big assumption – that labour markets are perfectly efficient. In other words, if employees do not feel that their wages exactly represent the contribution they bring to the company (the default position) they will instantly and costlessly switch jobs to one where they do.

‘With this assumption, the shareholders can be assumed as carrying the greater risk, thus making their contribution of capital more important than the contribution of human capital provided by managers and other employees and, therefore, it is their returns that must be maximised,’ he said.

However, as Ghoshal also observed, this is the opposite of the reality. Shareholders can and do dispose of their holdings in a tiny fraction of the time and effort it takes an employee to find a new job. The rush to close or downgrade company pension schemes – even though the ratio of profits to wages has increased from 33 to 50 per cent since the 1970s – simply underlines the fact that in every substantive sense, it is employees who bear the greater risks, not the shareholders.

What’s more, in today’s economy where knowledge is the most critical and most fragile element of corporate success, there is a good case for arguing that the skills, entrepreneurship and know-how of human capital are more important to enterprise than financial capital, a commodity in oversupply.

Why then do we accept a model that so comprehensively fails the tests of justice and common sense, stacking up neither in theory nor practice? The underlying reason is that corporate purpose is a classic casualty of the well-documented and overdeveloped propensity of managers (and politicians) to reduce as many as possible of the variables with which they have to deal to numbers.

Numbers are important – the choice of what and how to measure is one of the most crucial and least well understood tasks of management. Unfortunately, they are also treacherous. All too often the measure subverts the purpose.

As Igor Ansoff, the father of strategic management, put it: ‘Managers start off trying to manage what they want, and finish up wanting what they can measure.’

That is precisely the case with shareholder value. Common sense says that companies and societies prosper when interests are balanced – when companies look after customers, suppliers and employees in such a way that they can nurture the human capital to innovate and improve alongside the financial capital to invest in the future. But that’s messy and difficult unlike returns to shareholders, it is hard to express in numbers and impossible to reduce to a single figure.

As a model, shareholder value is a travesty, as is what happened to Rover in the past five years. It may well be true, as a new report from the Cambridge-MIT Institute claims (see above), that by 2000 Rover was already doomed and we have just been witnessing the longest corporate death scene in history. But that should not be allowed to disguise the fact that the episode truly represents in every respect ‘the unacceptable face of capitalism’. Tellingly, it took a German company, previous owner BMW, with its different traditions of labour-capital relations, to point it out.

The Observer, 1 May 2005