It's Turtles (and Shareholders) all the Way Down

 Stephen Hawking starts A Brief History of Time with a metaphor wrapped in an anecdote: 

   ”A well-known scientist (some say it was Bertrand Russell) once gave a public lecture on astronomy. He described how the earth orbits around the sun and how the sun, in turn, orbits around the center of a vast collection of stars called our galaxy. At the end of the lecture, a little old lady at the back of the room got up and said: "What you have told us is rubbish. The world is really a flat plate supported on the back of a giant tortoise." The scientist gave a superior smile before replying, "What is the tortoise standing on?" "You're very clever, young man, very clever", said the old lady. "But it's turtles all the way down!”

A similar tale could be told in the context of Australian corporate law:

An old lawyer walks into a boardroom and explains that a director's duty is to act in the best interest of the corporation - a distinct legal entity that exists independently of its shareholders.  The young Chairman says " You may have been to law school, but as a matter of practice we all know that the corporation is nothing more than its shareholders"  he continued "Corporations don't have interests. Only our shareholders have interests".  The lawyer, not wanting to contradict the Chair, asks "But what if the shareholder is a corporation.  In whose interest will you then act?".  "You're a very clever, old man, very clever", said the Chairman.  " But it's shareholders all the way down!"

The old lady and the young Chair propose a solution that begs exactly the same problem.   Both are guilty of the logical fallacy of infinite regression - where the validity of one proposition depends on the validity of the proposition which follows and/or proceeds it.   Leading to a series of infinitely cascading turtles and shareholders.

Consider that according to one survey, only 3.3% of the shares in the world's very large companies were held by Individuals or families.   The remaining balance is held by a very small number of corporations through a vast network of interposed corporations.   Nor, for the most part, are these corporations holding shares beneficially for individuals.  If there are individuals, they are more likely to be consumers who buy financial products from corporations than the ultimate beneficial shareholder.  

Under the standard assumption that the corporation is nothing more than the shareholder, if all these corporations are "owned" by other corporations who is the shareholder?   This leaves the directors with a practical problem - if the corporation is a fiction, then each shareholder that is also a corporation must logically be a fiction too.  If that's the case in whose best interest is the board supposed to act?   And what happens to the principal agent problem if there are no shareholders who qualify as principals?      



Revisiting the Bainbridge Hypothetical : Corporate Purpose in Australia

At the heart of the Bainbridge Hypothetical is a simple question - by what standard should company directors make their decisions?

Devised by Stephen Bainbridge, a law professor from UCLA*,  his thought experiment asks what the ends of corporate governance should be.    This post revisits the question from the perspective of an Australian director (changes to the original are in bold and are mine):

Acme's Limited board of directors is considering closing an obsolete plant. The board is advised that closing the plant will cost many long-time workers their job and be devastating for the local community. On the other hand, the board's advisors confirm that closing the existing plant will benefit Acme's shareholders through a planned share buy back, new employees hired to work at a more modern plant to which the work previously performed at the old plant will be transferred, and the local communities around the modern plant. 

 Assume that:

  • Acme Limited is an Australian Public Company
  • The long- time workers are research scientists from leading universities;
  • obsolete means sustainably profitable but less profitable than the new plant; and
  • the latter groups cannot gain except at the former groups' expense.

 By what standard should the board make the decision in Australia. 

For the past months I've been figuring out how to get to an answer.  How could an either/or be so tough?

In response to his original hypothetical, the Professor says:

Shareholder wealth maximization provides a clear answer -- close the plant.

And, from what I can gather from recent comments from the Chief Justice of the Delaware Supreme Court, there's little doubt the Professor is right - in Delaware.

But, corporations being creatures of statute, what passes for the ends of governance in one place may be beside the point in another.  Put simply, corporations aren't corporations and their purpose reflect the varieties of the world's legislatures.

In Australia, we have an entity statute which makes the shareholder versus stakeholder debate, implicit in the Professor's answer,  a false dilemma.   Again, in his hometown, and in response to the original hypothetical,  his either/or framing is unquestioned by me.   But, where I practice law, there's a third choice and it's mandatory.

Entity statutes impose duties on company directors to exercise their powers and discharge their duties in the interests of the corporation.  As one eminent Australian lawyer explained, under the Australian Corporations Act this duty refers to the interests of the corporation:

 “as a distinct legal and commercial entity, not the interests of shareholders, and conforms to the basic tenet that the duties of directors under these provisions are owed to corporation”

My question is therefore not whether the directors should or can advantage one group over another.  The issue I'm struggling with is whether it's in the interest of Acme Limited, as a distinct legal and commercial entity, to be more profitable?

But surely that's a "duh" question.   

If monkeys could vote for bananas or the welfare of the plant it's self evident what they'll vote for. 

Perhaps in Delaware, where the Chief Justice recently described corporate governance as little more than the advantage to the stronger - "power is purpose" in their system of corporate governance.  In a jurisdiction with an entity statute, it not as obvious as the answer to this riddle - if an 800 pound gorilla wants more bananas what do you do?

Not, that I think my answer matters that much. 

Absent the rigor of academic method or proving my worthiness by first running the hypothetical across the dusty ruler of agency theory and every other theory that has set sail to an armada of doctorates, luck would have better odds than my answer, when it comes to changing anyone's mind.  That's not a criticism.  We can all share the scholar's spirit.  But what elevates advocacy to good knowledge is precisely the rigor and the absence of bias, real or perceived.

For a practically minded sole practitioner, I suspect my best chance lies in more modest ambitions and an appeal to reason.  With that in mind, and with thanks to the Professor for devising the original, I thought I'd share my plans and outline my argument for getting to an answer:  

  1. The shareholder versus stakeholder debate is irrelevant to my answer because Australia has an entity statute.
  2. The law of purpose in Australia requires a company director to unquestionably act in the interests of the corporation as a distinct legal and commercial entity.
  3. The purpose of a corporation under an entity statute is to maintain its indefinite existence.  All other purposes are necessarily contingent upon the survival of the corporation.
  4. To survive the corporation must receive and store more useful energy from its business activities than it expends on those activities.   A corporation is analogous to (if not) a thermodynamic entity that must convert value internally and exchange value externally to survive. 
  5. Useful energy is stored in a variety of capitals (financial, social, intellectual etc).
  6. The quality of energy stored in each capital ranges from low (manufactured capital) to high (social capital). 
  7. Financial capital is generally a low quality capital due to factors that include (a) it exhausted fully by use(b) "loses" useful energy without use ie. inflation; and (c) in the absence of appropriate defenses, excess financial capitals makes the corporation vulnerable ie. activist attack. 
  8. To survive the corporation must efficiently convert low quality/low productive capital into high quality/high productive capital while maintaining requisite financial capital to fund its business model and activities. 
  9. The priority of stakeholders is therefore determined by the quality of capital available to be exchanged with the corporation.   In other words, priority is determined by the self interest of the corporation and its own survival rather than a duty or responsibility to any other person or group.
  10. If the the corporation systematically converts high quality capitals into low quality capitals, the corporations is more likely to end its existence.   I describe this process as a state of "decapitalism" because the net energy outcome is negative. 
  11. If the corporation systematically converts low quality capitals into higher quality capitals, the corporation is more likely to maintain its existence and grow.  I call this process a state of "recapitalism" because the net energy outcome is positive.

In essence, I propose that the corporation under an entity statute is devised as a way to convert useful energy more efficiently, than the alternative.  The more efficient and positive the process of conversion, the more likely the corporation is to achieve the grail of perpetual and indefinite existence.  

An approach with tacit approval from Peter Drucker:

“profit maximization” is the wrong concept, whether it be interpreted to mean short-range or long-range profits or a balance of the two. The relevant question is, “What minimum does the business need?” – not “What maximum can it make?” This “survival minimum” will, incidentally, be found to exceed present maxima in many cases.”

Based on these propositions, I've started to reformulate the question (again) and turned it into a working equation.  In short, when asking whether to close or keep the plant open, the director needs to account and evaluate, in respect of each option,  the value returned on value invested ("VronVi").   As a general, and even perhaps novel, proposition the answer to the hypothetical becomes relatively simple in an entity jurisdiction.  As absurd, naive and unthinkable as it sounds in other parts of the world, if opening a new plant results in more profit to the corporation but less overall useful and productive energy being available to the corporation to sustain its existence - don't close the plant.  

The equation looks something like this:

Mindful of easy criticism, I'm aware of the rough and bold nature of my propositions.  But, they are just first steps.  And there are benefits to working with propositions as opposed to conclusions.  There seems far less competition.  That doesn't mean I won't try to back up the propositions and come up with an answer.  I'll keep working at it and share my advice to the board of Acme Limited in the coming months.  

In the meantime, for those who sailed their professional careers on these turbulent seas in the past decades, I understand that my propositions might not appear on your maps or, if some do, as nothing more than legends and myths.   But long before economists like Friedman and Jensen erased the corporation from the ends of corporate governance, accountants and scholars like Li, Raby and Eells were theorising the corporation into existence and hypothisizing its goals.  For those of us who live under the rule of an entity statute, these academics, like our Southern Cross, point the way.   

And, for those company directors who, like the monkeys would vote for more bananas, you might think twice before relying on a simple profit heuristic to make your decision.  If the profit comes at the cost of higher quality productive capital, and the math shows it, you might wish you voted for the same amount of bananas and a viable plant.

Of course, it's all conjecture and bit of fun - If an 800 pound gorilla wants more bananas it obvious what you do - ask the elephant in the room.  

Seriously, can any one imagine a board resolving to close a sustainable and profitable research division, whose bygone discoveries and inventions underpinned the companies success, to buy back the one thing that the company has virtually an unlimited supply?  

* Stephen Bainbridge is the William D. Warren Distinguished Professor of Law at UCLA School of Law, with a seriously intimidating intellect.  His biography is here and his blog can be found here 


Five Ways To Fix Adam Smith's Big Mistake

Since the 1970’s corporate governance academics have arguably had more success in creating problems than solving them. 

It started with the agency problem and the challenge to align managers and shareholders. But no sooner had CEO’s received their lucrative options than the next problem arose. CEO’s salaries kept rising and short-termism had become rife. The solution seemed obvious. Boards had become captured by management and what was needed were independent directors. But, being outsiders, many did not recognize that excessive risk was taking capitalism to the edge in 2008. You get the idea. Don't be surprised if the next crisis is blamed on gender quotas.

For students of history, a familiar pattern was emerging.  In the time before Copernicus:

“Astronomy’s complexity was increasing far more rapidly than its accuracy and that a discrepancy corrected in one place was likely to show up in another.”

Kuhn was commenting on the crisis in Astronomy in 1543, but his description equally applies to the crisis in corporate governance in 2017.

Copernicus would of course break the cycle of failure in astronomy by replacing the Earth with the sun in the center of his universe.  This paper argues that corporate governance is on a similar path, and that only by replacing the shareholder can we begin to fix the problems with capitalism.

Lesson One: Beware Copernican Monsters

In the preface to the Revolutions of the Heavenly Spheres, Copernicus comments of his contemporaries:

“Nor have they been able thereby to discern or deduce the principal thing – namely the shape of the universe, and the unchangeable symmetry of its parts. Within them it is though an artist were to gather the hands and feet head and other members for his images from diverse models, each part excellently drawn, but not related to a single body, and since they in no way match each other, the result would be a monster and not a man”.

According to Kuhn, Copernicus thought that an appraisal of astronomy in his time showed that the Earth centric approach to the problem of the planets was hopeless. Traditional techniques had and would never solve the puzzle, instead they had produced a monster. 

It takes little imagination to see a Copernican Monster lurking within corporate governance codes and guidelines that share no common theoretical foundation other than to persist with a shareholder centric approach to the problem of corporate purpose.  Little has changed since I first wrote:

“Corporate governance still has no broadly held theoretical base (Tricker, 2009) Instead, it is overwhelmed by multiple and polarizing theories (Letza and Sun, 2002) and though a number of broad or even global theories have been proposed (e.g.Hilb, 2006; Hillman and Dalzeil 2003; Nicholson and Kiel, 2004) none have gained acceptance. Most importantly, agency theory, widely recognized as the dominant theoretical perspective of corporate governance (Durisin and Puzone, 2009) continues to suffer from empirical research unable to validate its claims or accurately predict outcomes (Daily, Dalton and Cannella, 2003). “ *

In much the same way as students of Ptolemy could not accurately predict the movement of the planets, today’s students of the corporation confront the same challenge – a monstrous discipline unable to explain or predict anything other than crisis.  

 Lesson Two : Avoid Blind Spots

Johannes Kepler, who perfected the laws of planetary motion, understood his discipline's greatest weakness. When questioning why Copernicus had not seen that the planets moved in ellipses rather than circles he responded:

Copernicus did not know how rich he was, and tried more to interpret Ptolemy than nature”.  

Again, corporate governance suffers a similar blind spot.

Scholars are more likely to interpret Isaac Berle or Merrick Dodd than look up and observe how corporations function in practice.

Since the debate between these two law professors began in the1930’s, the question of corporate purpose has divided into two camps. The first led by Berle argues that corporations have a responsibility to maximize shareholder value. The second led by Dodd argues that corporations have a responsibility to balance the interests of all stakeholders. These two approaches pull in different directions and compete to be the central blurred focus of corporate governance.

As much as 16th Century astronomers could not see the role of the Sun for an ancient astronomer, many modern scholars of governance can’t see the role for anything else for the Berle and Dodd debate. Captured by the shareholder versus stakeholder dichotomy academics cannot break the cycle of failure because they can't see beyond these false opposites.

Lesson Three : Understand the Power of Attraction

If pre-Copernican astronomy is a metaphor for the problems of corporate governance, does astronomy after after Copernicus offer a solution?

Adam Smith thought so. Quite literally.

Smith was not an economist but a philosopher and, you guessed it, a student of astronomy.  Not only did Smith write on the history of astronomy, but one of his greatest influence is the man who discovered the laws of planetary motion.

According to Smith, the laws of nature discovered by Isaac Newton could be found in the natural laws of commerce. Smith's concept of the invisible hand was a metaphor for the gravitational force of self-interest:

Is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. [...] Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Whereas Newton connected the movements of the planets by “so familiar a principle connection” as gravity, Smith had discovered the equivalent principle of mutual attraction in commerce.

To Adam Smith, the Merchant was to capitalism what the sun was to gravity. In a commercial society “everyman is a merchant” with its own invisible power of attraction. And, according to Smith, the merchant's self- interest and freedom dictate the natural order of commercial society:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

Now compare this explanation to the deontological theories of Berle and Dodd. Neither are founded in self-interest. Instead,they are based in rights and responsibilities owed by the corporation to shareholders and stakeholders. A careful analysis shows that both are anti-Newtonian and have more in common with biblical justifications of geo- centrism than anything argued by Smith. 

In much the same way as gravity draws the Earth and the sun together, the ethical principle of self-interest drew the merchant and the customer together. 

Lesson Four : Don't Believe Everything that Adam Smith Wrote

If Smith was right and capitalism was powered by self interest, why is the study of corporate governance so broken and confidence in capitalism collapsing?

The answer is that Smith sabotaged his own incredible idea by claiming that joint stock companies were managing other people's money:

The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private company frequently watch over their own.... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

Smith had inadvertently put the shareholder at the center of capitalism, unaware that he had fundamentally corrupted his own idea. There were now two types of merchant. Those who could act in their own best interest and play by the rules of the invisible hand, and those bound to act out of a duty to others.

It was as if Newton, having derived his laws of gravitation from the laws of planetary motion, thought it logical that some planets revolved around the sun and others the earth.

A mistake picked up by Milton Friedman and all those who stood on his shoulders who argue that duty to shareholders comes before the self interest of the corporation. Put another way, unincorporated merchants are free to act in their own self interest but incorporated merchants are under a duty to act in the interests of their shareholders. This is not the free market and it is this flaw that is at the heart of modern "good" corporate governance systems that are destroying capitalism.

Which brings me the point where the parallel paths of corporate governance and astronomy cross

Lesson Five: Progress Loves a Revolution

In May 2015, the European Parliament’s Committee on Legal Affairs approved a revision to the 2007 Shareholder Rights Directive that is as revolutionary as it is heretical. Paige Morrow explains:

“(the amendment) explicitly acknowledge(s) that shareholders do not own corporations - a first in EU law. Contrary to the popular understanding, public companies have legal personhood and are not owned by their investors. The position of shareholders is similar to that of bondholders, creditors and employees, all of whom have contractual relationships with companies, but do not own them.

Though the change was omitted from the final version of the Directive, Smith's error had been acknowledged and corrected.

By openly recognising that corporations are sovereign, distinct and independent entities, EU lawmakers joined with a growing number of corporate lawyers to invite us to end the futile Berle-Dodd debate and consider a third model of governance. A model not based on corporations revolving around the interests of shareholders or stakeholders, but in which those interests are served if they help to secure the corporations indefinite existence.

Each corporation is a merchant at the centre of their own universe encircled by all shareholders and stakeholders.  All held in an elliptical orbit by the ever changing gravitational pull of the corporation's self- interest rightly understood. An invisible force that draws shareholders and stakeholders in and determines the proximity of their interests to those of the corporation.

After decades of legal practice, this hypothesis fits with my observations and the law. Smith's vision of capitalism realised through the sovereign corporation.

My proposition is that the central object in capitalism is the concept of personhood biological and corporate. Each a Smithian merchant in their own right having an innate inclination to continue to exist and enhance itself by aligning its self interest with the self interest of other merchants.

But what does a corporation's interest look like?

In the case of a corporation, an interest is one of the capitals. - human, intellectual, environmental, social, produced and financial. Commonly associated with Integrated Reporting <IR>, the capitals can equally be flipped to provided a complimentary accounting to explain how corporations maintain their existence.

Flipping the capitals results in the corporation becoming the first person and the capitals are thereby directed toward its interests.  The symbol is >i< .

>i< Accounting is based on the proposition that a corporation must store and convert each of the capitals to maintain and enhance itself. Please note, >i< Accounting is based on the intrinsic interests of the corporation and not the extrinsic interests of shareholders or stakeholders. It is derived from a non teleological understanding of the corporation.

The basic proposition underlying >i< Accounting is that excess and lower value capitals (typically financial capital) must be converted by a corporation into rarer and higher non financial forms of capital (human, intellectual, social capital etc). The purpose of this is to enable the production of lower forms of capital (produced capital) which in turn must then be converted into financial capital which is then converted into rarer and higher forms of capital and on it goes. In the >i< model cost equals capitalization and properly understood is a virtue.

Theoretically this cycle of capital creation can continue into perpetuity provided the corporation does not exploit the sources of capital or do something stupid. And by so doing, the corporation obliquely serves the interest of all those who hold capitals. [A paper and model that explains the concept of >i< Accounting will be published soon].

To continue the astronomical metaphor and explain the mischief caused by Smith conflating the shareholder for the corporation, excessive shareholder influence causes a corporation to exhaust its energy and become a dying star.

Under the influence of shareholder primacy the corporation begins to convert its higher capitals human capital, intellectual capital, social capital etc into one of lowest forms of capital - financial capital. It's called "efficiency" and "costing out". The resulting financial capital is then transferred for limited or no capital return in the form of buy backs, dividends etc. If there is any doubt about this process consider that total payout to shareholders in the US as a percentage of net income of the corporation stands at unprecedented levels. You might call it short-termism. Drucker called it suicide:

“Everyone who has worked with American management can testify that the need to satisfy the pension fund manager’s quest for higher earnings next quarter, together with the panicky fear of the raider, constantly pushes top managements toward decisions they know to be costly, if not suicidal, mistakes,”

If the cost out process is allowed to continue, the corporation's value previously stored across all the capitals eventually becomes exhausted. Ultimately making the corporation less able to maintain its very existence. This process is the corporate equivalent of Cotard's syndrome. And, if the decline in the number of public companies and confidence in capitalism are any measures, its become a pandemic.

One day, the sovereign corporation will be no less obvious to corporate governance as the sun became to astronomy. And while ignoring the sun could only hurt the pride of the scholar, ignoring the corporation and its interests will continue to hurt the wealth of all nations. For this was Smith's promise. The interests of all stakeholders will be met but only if corporations reject the call to act in the interests of shareholders and embrace Smith's enduring call to action.


Getting the Balance Right Between Value Protection and Value Creation

Grant Thornton's latest report The Board: creating and protecting value, considers how for purpose and profit organisations in the UK are finding the balance using my work into DLMA Analysis.*

According to the report, DLMA Analysis:

"is a simple yet powerful tool which provides a framework with which to evaluate how well an organisation is performing regarding the balance of skills, understanding of roles and responsibilities between the executive and Board and the alignment between the balance of energies between risk (value protection) and opportunity (value creation) and the overarching strategy and purpose."

To understand the key concepts, follow my presentation to the 2016 Better Boards Conference:

Applying my model to a survey of company directors, company secretaries, and executivesGrant Thornton found:

  • 27% of respondents thought there was Directorship role for non executives when it came to designing, debating and deciding the organisation's future.
  • 14% of respondents questioned whether the non executive directors were exercising oversight in their Assurance role.
  • 88% of respondents in all sectors thought their organisation's dominant control function was Leadership.

Most surprisingly, the Report found that only 18% of respondents thought that company directors were not guiding and inspiring executives.   I haven't seen the survey, but I wouldn't be surprised if the figure of 18% represented the total number of executives who participated in the survey.  A feeling confirmed from this finding:

"There was also a strongly held view that non executives do not inspire and guide the executive to realise the organisation's purpose, and that this shouldn't be expected ."

But as one CFO in Local Government explained non executives "make it difficult, rather than inspire". 

For the observant, you may have noticed this sentiment in my slides.  There's an expression for a certain type of director in Australia (and I expect the world). They're called "seagulls" - They fly in. Drop their contribution on the executive from a great height. Then fly out.

If your interested in DLMA Analysis I encourage you to read the Report and get in touch with me.

*Though Grant Thornton utilize my work I was not involved in the preparation and in no way is this post endorsed by them.


An Open Letter to Corporate Governance Scholars

Should governance researchers be required to disclose the sources of their funding?

Economists do.  Consider this resolution passed by the Stanford Economics Department

"It is expected that all members of the Stanford Economics Department will publicly disclose any financial or other significant interest that may be perceived to affect the conduct of their research. If a reasonable person would infer that a faculty member’s research conclusions or opinions might be biased by his or her financial or other interests, it is appropriate that the faculty member reveal those interests. Such interests, even if not related to the funding of the research, should be disclosed when appropriate in working papers and publications along with other acknowledgments of financial support and assistance from editors, reviewers, colleagues and seminar participants...."

My open letter published in the January edition of the International Corporate Governance Society newsletter calls on the society to consider a code of ethics for its Members.

The ICGS was founded in 2014 with a mission:

to provide a forum for corporate governance scholars throughout the world to interact with each other so that they can produce rigorous and relevant research, teaching and consulting that enhances corporate governance practices and systems within the global economy.

Though not a governance scholar, I joined up and attended their second annual conference in Boston in September last year.    My open letter follows a brief discussion with ICGS President, Bill Judge, during which I questioned the need for a code of ethics for corporate governance scholars.   You can learn more about the ICGS here.

The Ethics of Corporate Governance Scholarship: Does the ICGS Need a Code of Ethics?

In recent years, the integrity of knowledge produced by our universities and the credibility of the scholars who create it has been the source of much debate.    At issue is whether industry influence is compromising the ethics of scholarship.  

The life sciences are well advanced in this debate.  For example, in response to numerous studies, codes and guidelines have been developed to assist medical researchers to stay on the path of truth and avoid falling into the abys of advocacy for “big pharma”.

Less advanced is the connection between corporate governance scholarship and industry.  Arguably, the finance industry is to corporate governance what the pharmaceutical industry is to medicine.  And though the latter has been studied exhaustively, the relationship between corporate governance scholarship and the finance industry is still largely unknown.  That said, it would be wishful thinking to believe that corporate governance scholarship is immune from public perception that undisclosed commercial forces could be at play.  

In light of this, I encourage the ICGS to play a leadership role in maintaining and promoting the integrity of corporate governance scholarship by establishing a working group to formulate a code of ethics.  

Though the scope of such a code is beyond this letter, these questions provide a start:

  • Should members avoid "advocating" on behalf of any class of industry participant such as "share owners"?
  • Should members not accept industry funding tied to favorable research findings?
  • Should members disclose the source of their research funding?
  • should members be encouraged to disclose all their research data for peer review?
  • should members commit to the scholars duties?

Sadly, this last issue has all but been reduced to a duty to avoid plagiarism.   It is worth remembering that exactly one hundred years before the ICGS held its inaugural conference in Copenhagen, the American Association of University Professors (‘AAUP’) set down the duties of the scholar:

Since there are no rights without corresponding duties, the considerations heretofore set down with respect to the freedom of the academic teacher entail certain correlative obligations. [...] The liberty of the scholar within the university to set forth his conclusions, be they what they may, is conditioned by their being conclusions gained by a scholar's method and held in a scholar's spirit that is to say, they must be the fruits of competent and patient and sincere inquiry, and they should be set forth with dignity, courtesy, and temperateness of language.

Critically, the AAUP Principles state that the duty is owed to the public.  The scholar’s “duty is to the wider public to which the institution itself is morally amenable”.  

Corporate governance scholars are well known for reminding company directors and officers of their duties and ethics.   In my view, the ICGS will do a great service by reminding its members of their duty and ethics. 



Leadership Vs Management : Only Half the Story

Leadership versus management captures the executive's side of the story.   If company directors have a broader role to play, the way we think about who's in control and their role in creating and protecting value needs to evolve.

The following introduction to the Value-Control Matrix is based on an article that appeared in the 2016 Better Boards Magazine.  

it’s hard to see beyond the forest from behind the trees: rethinking organisation design. 

Peter Tunjic | Organisational Design

Consider a majestic landscape. Mountain peaks set against a boundless sky. A dense forest rises up to the foothill divided by a restless river. In the foreground, you make out the individual branches. Look closer again, and you might see things hiding.

Ansel Adams' iconic photograph of The Tetons and Snake River is a symbol of the past and future of organizational design.

The Tetons and Snake River - Ansell Adams

The Tetons and Snake River - Ansell Adams

To see the past, scroll down to remove the mountains.

The half image captures the current state of management thinking - Leadership and management draws the executive's focus onto the forest and the trees.    Whereas governance or assurance, draws the eye of the board to the predators hidden in the shadows.        

Now scroll back.  The complete image becomes a metaphor for the future of organizational design - leadership, management, governance and what has been missing - the focus on what lies beyond the forest.     


To transform this natural metaphor into a diagnostic tool I created the value-control matrix.  A quadrant based framework that allows directors and executives to evaluate their competence when it comes to their focus.

It’s hard to see beyond the forest from behind the trees.

The two axis of the matrix are value (divided between the extremes of creation and protection) and corporate control (divided between the extremes of the board and the executive).

The Value-Control Matrix turns the traditional governing, leading, managing pyramid into a dynamic 2x2 business framework.  It exposes the dilemma inherent in organizational design and gives rise to the alternate acronym - DLMA Analysis:

Directorship = Board + Value Creation

Leadership = Executive + Value Creation

Management = Executive + Value Protection

Assurance = Board + Value Protection

The framework is designed to show that each discipline is important and compelling in its own right but pulls the organization in a different direction. 

The simple tool provides a way of exploring and measuring these tensions within an organization starting with the role of the board.

Getting Beyond the Pyramid

In the boardroom leadership is directorship.   That's the key.  Without directorship, organization's can lose sight of distant mountain summits and the boundless horizon .

Traditional governance approaches focus almost entirely on the board looking for what's hiding in among the trees - Independent directors managing risk through maintaining control, exercising managerial oversight and ensuring that risk systems are in place.  

Experts agree boards need to be looking at what lies beyond the forest.  Here the focus is on value creation and directorship – culture, strategizing, communicating vision, appointing the CEO and then inspiring the executive. 

Directorship and assurance are both necessary but require a fundamentally different approach and mindset.  Assurance is about protecting value, directorship is about creating it.  Assurance concentrates on risk oversight, directorship requires risk taking.  Assurance focuses on process, directorship is focused on people.  Assurance is about control, directorship is about innovation. 

Sound familiar?

For decades the c-suite has been debating the difference between leadership and management.  It turns out that the same distinction can be made in the boardroom.  The Value-Control Matrix highlights the need to split corporate governance in the same way – one discipline focused on value protection and the other on value creation.  Healthy competition between directorship, leadership, management and assurance is integral to an organization's success.  

It all starts with a simple question -  Where is the board and management focused. 

Above the Line – Directorship and Leadership


Above the line represents those quadrants that focus on value creation - the forest and what lies beyond.



Directorship and leadership are focused on doing the “right things”. 

The board and executive have complimentary and collaborative leadership roles.  They make different decisions, pull different leavers, but boards that lead and executives that lead share the same objective of creating the greatest possible value for their organization.

Below the Line – Assurance and Management


Below the line represents the quadrants that focus on value protection and the trees.



Assurance or governance sets a managerial tone in the boardroom.  Assurance, in the form of best practice, involves formulas and processes, monitoring and oversight, setting risk appetite, etc.  From this standpoint, the board and the executives share similar characteristics captured in the phrase "things right".

Challenge yourself to answer whether your organization has got the balance between value and control right.   Is the board stuck below the line, looking at what’s hiding behind the trees or are they also looking out beyond the forest?  Is the board asking what if when they should be considering what else?

And if you're wondering about what the river symbolizes read this post that describes how corporations get direction.

Further Reading

To learn more about DLMA Analysis download my presentation from the better boards conference.



Back to the Future: Newton and the Next Economy

My latest work examines the parallels between ancient astronomy and moderngovernance - Copernican monsters, a blind spot and a futile hypothesis.  I conclude by proposing a model of governance for the next economy.  One based on the re-discovery of corporate centricity and the gravitational force that holds sovereign corporations and their many stakeholders together.  

The article first appeared in the September issue of Governance - The UK's leading journal on Corporate Governance.  

Creating Sustainable Companies Summit

I am looking forward to moderating a panel discussion at the Creating Sustainable Companies Summit in Brussels tomorrow.

Hosted by law firm, Frank Bold and Cass Business School, the summit is designed to examine best practice and policy for sustainable corporate governance.   The organizers have attracted around 150 leading thinkers, businesses and policymakers to "chart the way to the next generation of corporations".

I'll be moderately a panel discussion on ways to strengthen the role of the board:

Boards play a key role in setting and steering corporate strategy. They influence crucial factors like corporate values, corporate culture, and risk appetite, and determine the attentiveness of the corporation to the interests of its stakeholders and its purpose. In order to effectively fulfill their role, boards must consider the corporate mission and long-term value creation strategy, have a good overview of the interests of the corporation’s stakeholders, understand and assess relevant risks, and decide on the objectives of the compliance and due diligence systems.

Helping to discuss a framework for the role and functions of the board in a purpose driven world will be:

  • Peter Montagnon - Institute of Business Ethics
  • Ritta Mynttinen - EcoDa
  • Emma Ihre - Head of Sustainability, Mannheimer Swartling

I'll share my notes from what promises to be an insightful discussion in the coming days.



DLMA Analysis: Can You See Beyond the Forest From Behind the Trees?

My message to the 2016 Better Boards Conference:

"From behind the trees you can't see beyond the forest."  

To learn more follow the slides below.

 A big thank you to Jo Smyth (Chair) and Andrew Hume (CEO) from Gowrie Victoria.  Who better to answer questions than those who use put DLMA Analysis into practice.

For more on this innovative tool designed to solve the dilemma at the core of organisations read Governing and Directing: Are They Different.

Do Company Directors Know Right from Wrong

DuPont’ dismantles research teams that have provided a century of competitive advantage.  Apple borrows billions to buy billions in shares that it can issue itself.  Here in Australia, a major supermarket tells their suppliers that from now on they'll get paid in 60 days instead of 30.  

What makes this behavior right or wrong?

Milton Friedman thought ethics.    Read his infamous essay " The Social Responsibility of Business is to Increase Profits" and it becomes clear that, for all the "unethical" conduct it has inspired, the vile maxim is principally about doing the right thing.   Anything else, including corporate social responsibility, was subversive and wrong because it was unethical.  

In fact, the ethical foundations of capitalism can be traced all the way to Adam Smith and beyond.  But Smith's was a very different kind of ethics.   Whereas Friedman based his ethics in obligation, the invisible hand was, and still is, guided by virtue.   One is based in duty, the other in self interest.

When we question corporate behavior,  it's worth remembering that ethics is at the core of a commercial society, and that corporate governance is fundamentally about how company directors tell right from wrong. 

At this year's annual conference for the Association for Professional and Applied Ethics (AAPAE) I presented "Duty vs Virtue: The Ethical Dilemma Confronting Corporate Governance".  With the benefit of the generous feedback from those in attendance, here are my slides:

In the months to follow I'll write more about Australian virtue ethics and how Australia can become a safe haven for corporations at risk of financialisation.      In the meantime, if you're interested in learning more contact us.

To learn more about the AAPAE click here.

It’s hard to see beyond the forest from behind the trees: rethinking organisational design.

Imagine a wooded landscape.  Bright sky and distant peaks.  A forest rises in the foreground.   All life blends into one.  But look closer and you see the trees standing alone.  Look closer again, and you see things hiding.


Nature provides a metaphor for re-framing the way we think about boards and executives:   

  • When directing, the board is focused on what lies beyond the forest
  • When leading, executives are focused on the forest   
  • When managing, executives are focused on the tree
  • When assuring or governing, the board is focused on finding the danger hidden behind the trees

If your organisation was a forest, where would you look?

I'll be sharing my insights at 10th Australasian Better Boards Conference, to be held in Melbourne on July 29-31 2016.

Considered the largest regular gathering of leaders from the for purpose sector in Australasia, the goal of the conference is to give board members, chairs, CEOs and senior managers practical solutions to take back to their organisations.

A Copernican Revolution In Corporate Governance


2016 feels a lot like 1543.

In the time before Nicholas Copernicus:

“Astronomy’s complexity was increasing far more rapidly than its accuracy and that a discrepancy corrected in one place was likely to show up in another.” (Kuhn 1972)

In an age and a discipline far removed from medieval astronomy, history is repeating.

Despite no empirical connection between "best practice" and performance,  good governance grows more complicated each year:

At present, corporate governance has no broadly held theoretical base (Tricker, 2009) Rather, it is overwhelmed by multiple and polarizing theories (Letza and Sun, 2002) and whilst a number of broad or even global theories have been proposed (e.g.Hilb, 2006; Hillman and Dalzeil 2003; Nicholson and Kiel, 2004) to date none have gained universal acceptance. More importantly, agency theory, widely recognized as the dominant theoretical perspective of corporate governance (Durisin and Puzone, 2009) continues to suffer from empirical research unable to validate its claims or accurately predict outcomes (Daily, Dalton and Cannella, 2003).

The only thing academics can predict with any certainty is that the solution to one governance problem will become the next.

In 1976 the biggest problem facing capitalism was aligning the interest of managers and shareholders.  Solved when Jensen and Meckling came up with the idea of paying managers in securities.  But this led to exorbitant executive remuneration, financial engineering and artificial ratio manipulation.  Solved by ensuring that there are more independent directors.  Which in turn has lead to Boards lacking sufficient industry knowledge and experience to provide sufficient directorship and assurance which in part led to the global financial crisis. Solved by greater oversight.  Which in turn has produced greater levels of distrust between boards and managers.         

Corporate governance has become a "Copernican Monster"

In the preface to his most famous book the Revolutions of the Heavenly Spheres,  Copernicus (though there is some argument whether he said this or the publisher) comments of his contemporaries: 

“Nor have they been able thereby to discern or deduce the principal thing – namely the shape of the universe, and the unchangeable symmetry of its parts. Within them it is though an artist were to gather the hands and feet head and other members for his images from diverse models, each part excellently drawn, but not related to a single body, and since they in no way match each other, the result would be a monster and not a man” 

Copernicus thought that an honest appraisal of contemporary astronomy showed the earth centered approach to the problem of the planets was hopeless. Traditional techniques had and would never solve the problem; instead they produced a monster (Kuhn, 1957). 

It takes little imagination, to see a Copernican Monster lurking within corporate governance codes and guidelines than share no common theoretical foundation other than to force the shareholder into the centre of the corporate universe.

Ironically, Copernicus' contemporaries papered over the flaws in their theory with things called epicycles.  Patches (that look a lot like piecemeal governance reforms) that worked for a time but were fundamentally flawed.   More independent directors, more committees, more rules will not solve the problems of corporate existence whilst academics, regulators and even directors labor under the impression that corporations exist to maximize the wealth of shareholders.  These will become the next problem.  Epicycle on Epicycle.  Reform on Reform until, as we saw in 2008, the system almost collapses.  

The solution to the mess is to follow the astronomer's lead.

Substitute the corporation for the shareholder at the centre of the corporate universe encircled by stakeholders.  Each held in an elliptical orbit by the ever changing gravitational pull of both the corporation and the stakeholders self interest rightly understood.    

It's not hard to observe this principle in practice.

Watch a healthy company and you may notice that interests (defined as all the capitals - human, intellectual, financial, natural, produced and social) are prioritized in a way that contributes to the strength, resilience and ultimate longevity of the corporation as a sovereign legal entity.   Financial and non financial capital constantly being traded for all things that are needed to sustain a company into perpetuity.   And, as promised by Adam Smith, the interests of stakeholders are obliquely met in proportion to their contribution to the corporation's self interest.

But why has it taken so long to notice?

Another ancient astronomer may have the answer.   Johannes Kepler, who went on to perfect the laws of planetary motion, understood his discipline's blind spot.  When questioning why Copernicus had not seen that the planets moved in ellipses he responded “Copernicus did not know how rich he was, and tried more to interpret Ptolemy than nature”.   Likewise,  to understand the nature of the firm, it is far more productive to study what real corporations do and not what economists or law professors say.

But the last word goes to Copernicus,  whose advice to his deniers applies equally to those who would deny corporate personhood as the organising principle of the corporation: “The hypothesis of this book need not be true, nor even probable. It suffices if they make possible calculations which fit with observations. We may confidently place them alongside older hypothesis which are no more probable.”


Based on Directorship Theory: Kuhn, the Copernican Monster and the Crisis in Capitalism.  Presented by Peter Tunjic at "Corporate Governance and the Global Financial Crisis", The Wharton School, Philadelphia September 24-25, 2010


The Economist Promotes Shareholder Primacy: It Must Be Spring in the Northern Hemisphere

Around the same time for the past three years, the Economist has published an article that praises the virtues of shareholder value maximization.

While, the publication describes its goal to "take part in a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress.", it appears to take a spring break.

Last year, in Capitalism’s unlikely heroes: Why activist investors are good for the public company, management were described as "rotten", mutual and pension funds were "lazy" and bosses "clubbable".  The year before that, The Economist wrote a set-up piece called How activist shareholders turned from villains into heroes.   

But calling activists heroes was no joke to Yvan Allaire, Executive Chair at the Institute of Governance, who believed The Economist was running infomercials for activist hedge funds:

"On a topic requiring sober, balanced coverage, The Economist cuts logical corners, tramples contrary evidence, ignores a vast store of scholarship, and conjures up an empirical “study” to produce misleading data."

This year, The Economist is at again. 

If the 2014 article was journalism and 2015 was an infomercial, this quote from Analyse this: The enduring power of the biggest idea in business, suggests that in 2016, The Economist has a deliberate agenda:  

Today shareholder value rules business.....  The only boardrooms that shareholder value has not reached are those of China’s state-run firms, whose party-appointed bosses look baffled if asked about return on capital and buzz for more tea.

The article describes shareholder primacy in literally glowing terms "These ideas lit up corporate America first" before taking aim at those who would criticize the biggest idea in business at "This moment of ascendancy".       

Ironically, having mocked the communist failure to embrace shareholder primacy, The Economist has no trouble channeling the apparatchik's defense of its failed ideology:

The outbreaks of madness in markets tend to happen because people are breaking the rules of shareholder value, not enacting them.

In more familiar words, it's not the system that's the problem, its just that people aren't doing it right.  The second line of defense is equally naive, and can be summed up as its just too hard "the trouble is identifying a goal that could replace the pursuit of shareholder value."    Add these two arguments together, throw in Larry Page's re-organization of Google and The Economist concludes "For these reasons shareholder value - properly defined - will remain the governing principle of firms".  

Job done until next spring.

Jokes aside, The Economist's editorial calendar reminds us that words do the heavy lifting for the shareholder primacy movement.   Indeed, if corporate governance is power, as their leaders openly admit, language is the key way the shareholder primacy movement has taken it for their own business objectives over the past four decades.  If you have any doubt, I recommend reading The Economist alongside Tamara Belinfanti excellent paper, Forget Roger Rabbit—Is Corporate Purpose Being Framed?.    

23rd Australian Association for Professional & Applied Ethics (AAPAE) Annual Conference

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Click to Learn More

I'm pleased to advise that my paper "Duty Before Virtue: The Ethical Dilemma Confronting Corporate Governance" has been accepted for the AAPAE annual conference to held in Adelaide, South Australia on 15–17 June.

The theme of the conference is Responsible leadership and ethical decision-making:

There is an emerging consensus that a key challenge for responsible leaders is to build and cultivate sustainable relationships with stakeholders, whether in business, politics or other parts of society. Rather than a preconceived construct or predefined remedy to leadership failure and organizational ills, responsible leadership is seen emerging as a multilevel theory that connects individual, organizational and institutional factors, including values, virtues and ethical decision-making on the individual level; the interplay of social responsibility, stakeholder theory and leadership on the organizational level; as well as contextual factors such as power distance, collectivism and humane orientation that indicate the extent to which social concerns are part of cultural practices.

My paper (abstract below) considers the notion that self interest rightly understood provides an alternative ethical decision making framework for company directors. 


At the core of modern business practice is an unspoken ethical dilemma.

DuPont’ dismantles its research team that for a century has provided its competitive advantage. Woolworths extends supplier payments by a month undermining the viability of those upon whom it relies. Apple assumes a billion dollar liability to tear up its own shares through a buy back.

Company directors are torn between a duty to maximise shareholder wealth and the virtue of acting in the self-interest of the corporation rightly understood.    

When Milton Friedman declared in his New York Times article that "the social responsibility of business is to increase its profits" he wasn't changeling the ethics of Adam Smith, but the 10 commandments.    

His was a duty ethic. For the Nobel prize winner, a corporation acted ethically when it maximizes shareholder value within the constraints of the law.  From then on, Adam Smith's most famous quote would read:

It is not from the self-interest of the butcher, the brewer, or the baker that shareholders expect their dinner, but from their regard to their duty and responsibility.  
This is a reformulation of the most basic organising principle of capitalism.

For Adam Smith, the invisible hand was a virtue ethic because a person’s actions are not motivated by obligations or duties, but by an internal motivation directed at realizing a person's self-interest rightly understood.

Drawing on developments in corporate law and governance, this paper will examine: 

  • the tension between the deontological ethics of modern financial capitalism and the virtue ethics that was the defining feature of its predecessor;
  • the application of virtue ethics to the corporation as sovereign legal entity; 
  • how pursuing the interests of a corporation rightly understood may produce better social outcomes than those associated with duty based ethical frameworks.

Cotard's Syndrome and the Modern Corporation

Mademoiselle X was dead, or so she thought.   According to her medical records she was convinced that “she has no brain, no nerves, no chest, no stomach, no intestines… only skin and bones of a decomposing body”.

Her neurologist diagnosed “délire des negations”.

Cotard’s Syndrome, named after the 19th century doctor who first treated the unfortunate French woman, is a condition whereby sufferers believe they no longer exist.   Left untreated, the afflicted, believing they have no need to eat any more, eventually starve themselves to death.

While dying from this bizarre psychosis is rare among natural persons, for corporations, a Cotard like condition may be a silent killer.

THE Curious Case of DuPont

Label unmarked samples and leave everything else in place”.  No sooner had DuPont announced its merger with Dow Chemical, than the scientists working at Central Research & Development were being told to halt their laboratory work.

The company that invented and commercialized nylon, rayon and Teflon was changing its business model from chemical engineering to financial engineering.   

“We are taking our costs down to align with what we think is affordable in the current business environment that we are facing and the challenges we have,... It is not what you spend. It’s what you get for what you spend”.

Motivating this change of direction was not the interests of the centenarian but the desire to “drive better returns on R&D by aligning what we work on with what has commercial potential”.             

Abraham Lenoff, a chemical engineering professor at the University of Delaware, describes the madness:

It takes an enormous effort and a lot of time and a large infrastructure, especially human infrastructure, to create value in a large company like DuPont. The financial community doesn't know how to do that. Hedge-fund managers know how to extract value from a company, and leave an empty shell, so they can build their houses in the Hamptons.
DuPont had one of the premier engineering units anywhere in the world. They knew the principles and how to apply them. Without people like that you can't develop, design, and start up plants. It's an enormous loss to science and engineering.”

Like Mademoiselle X, DuPont’s leaders appear to be starving the corporation by denying its critical need for human and intellectual capital required to maintain a viable system of innovation.   Jeffrey Sonnenfeld, an influential academic on the work of boards, sums it up in terms of self-harm: “What they’re cutting now is muscle and bone – not fat”.

If Cotard were not a neurologist but a board doctor he might wonder if his patient had lost its mind. 

The Delirium of Negation within the Boardroom

No doubt, Mademoiselle X thought her doctor was sick.   Could he not see that she was no more?

Likewise, there are those who are adamant that lawyers who consider that corporations are real, and have interests of their own, are mentally deficient :

"a requirement to benefit an artificial entity, as an end in itself, would be irrational..."

But to my mind, and that of many of my learned colleagues, the suggestion that a corporation does not exist is as implausible as a walking talking corpse.   However widely held, the belief in non existent corporations does not conform with well established legal principles.

And, whilst there are many law school professors keen to argue otherwise, denying that corporations are separate legal and commercial persons has done little to arrest their ever increasing mortality rates.

Indeed, if the deniers who promote the exclusive interests of shareholders and others were conducting a clinical trial rather than best practice, the experiment would have been stopped years ago on ethical grounds.

With this is mind, let's consider the three symptoms of this novel corporate condition.

The DELUSION THAT Corporations Don't Exist

Among experts in corporate governance there is a widespread belief that corporations don't exist other than as a legal fiction.

Shareholder primacists are convinced that corporations are an aggregated body of the shareholders and that company directors are their agents.  As such, these officers have a duty to use the corporation as means to maximize the interests of the shareholders.

Opponents argue that company directors have a responsibility to use the corporation to advance the interests of a broader range of stakeholders, that include, but are not limited to shareholders.

What both shareholder and stakeholder theorists share in common is the delirium of negation.   Both equate the corporation as a thing, a form of technology rather than a legal and commercial person.  As one commentator puts it:

Corporations are, in effect, a social technology, a form of organization that has evolved -most especially over the last century to serve human interests. Those interests are many and varied. for the most part, corporations serve the interests of those who create them, although of course those that are successful at earning profits in the long run are successful at doing so precisely because they are able to serve a range of other parties interests, too.

Conceived as a technology (and to shareholder primacists, property), the corporation has no intrinsic existence other than to satisfy the extrinsic interests of others.

Australia’s leading legal text for company directors makes no mention of what a corporation’s “interest” is or might be. The financial interests of shareholders are often treated as synonymous with those of the corporation.   Whereas, the when the word “interest” is debated among lawyers and academics, the question is whether directors can have regard to the interests of stakeholders over and above the shareholders. 

In all cases, the focus is not on the interests of the corporation as conceived by the law as a separate person, but on extrinsic purpose.

The DELUSION that Corporations Don't Have THEIR OWN Interests

Yale Law professor Jonathan Macey illustrates the second aspect of the delirium, the denial of the corporation's interests:  

“all major decisions of the corporation, such as compensation policy, new investments, dividend policy, strategic direction and corporate strategy should be made with only the interests of shareholders in mind”.

The Professor forgets that it's not because of the shareholder's needs that shares are issued but because the corporation needs money.   If it were not for the needs of the corporation, they would not be shareholders.   The board issues shares when the company needs financial capital, not when an investor needs somewhere to put their money.

In fact, in nearly all cases,  stakeholders owe their relationship to the corporation based not on their needs, but the needs and necessity of the corporation to possess a form of capital required for its continued existence. 

The basic building blocks of corporate life are the capitals:  intellectual, human, produced, environmental , social and financial.  The only capital it does not acquire from some one else is its unissued share capital.    Depending on the sophistication of its business model, a corporation must continually acquire these capitals.  

Employees, customers, suppliers, shareholders, corporations, institutions, groups and communities are just other names for these treasures.   Each stakeholder holds some form of vital capital that the corporation, as a sovereign entity, requires to sustain its existence.  In this sense, the corporation's interests are defined by what it needs to remain a vital legal person.    DuPont needs them all.   Investors only need one. 

The proposition that a corporation has its own interests can be tested.

How long can a corporation continue to survive by denying its interest in maintaining viable suppliers, funded research and financial savings to name but a few? 

The answer for a public company is about 10 years and declining. 

Put simply, a board that denies the needs and necessities of its corporation, out of the mistaken belief that it is a mere tool to serve others, will eventually starve the corporation of its business critical value needed to remain in existence.    That is until, like Mademoiselle X, it is no more.


The third, and most disturbing symptom of the delirium of negation is the tendency to self-harm.

“Everyone who has worked with American management can testify that the need to satisfy the pension fund manager’s quest for higher earnings next quarter, together with the panicky fear of the raider, constantly pushes top managements toward decisions they know to be costly, if not suicidal, mistakes,”

For Peter Drucker, the business of business was to stay in business.  Rationally, that objective requires that the corporation prioritize stakeholders based on its self interest as defined in terms of both financial and non financial capital.   What a stakeholder receives is a function of their importance to the survival of the corporation.    As the needs of the corporation change, so does the importance of each holder of financial and non-financial capital. 

The idea that a corporation can stay in business through financial engineering designed to maximize the financial interests of shareholders who (in the main) are not contributing to the viability of the corporation is illogical.  

The essence that preserves and maintains corporate existence cannot be mastered, let alone understood, by studying the purpose of the corporation through the pocket of the shareholder. 

But for the 20th Century's most influential corporate denier, that's precisely his logic: 

The firm is not an individual.  It is a legal fiction which serves as a focus for a complex process in which the conflicting objectives of individuals (some of whom may “represent” other organizations) are brought into equilibrium within a framework of contractual relations.

To Michael Jensen,  the only legitimate interest is the financial interests of shareholders:

I argue that since it is logically impossible to maximize in more than one dimension, purposeful behavior requires a single valued objective function. Two hundred years of work in economics and finance implies that in the absence of externalities (and when all goods are priced) social welfare is maximized when each firm in an economy maximizes its total market value.

According to Jensen’s thesis the greatest challenge faced by capitalism was not figuring out how a corporation stays in business by prioritizing stakeholders based on their contribution to the firm survival.   The challenge was getting managers to maximize profits on behalf of shareholders by aligning their financial interests.

A proposition that is now described as “the Dumbest Idea In The World" and widely acknowledged as the leading cause of chronic short termism.  A condition that causes business leaders to focus on quick financial results and meeting short term financial expectations to the firm's long term detriment.  For example, 80% of US financial executives surveyed in 2006 said they would decrease spending on research and development to meet a short term earnings target.

But turning corporations into cash machines is not really about the short or the long term.

What short term decisions have in common is the pursuit of financial capital to benefit another person at the expense of the capital required for a corporation to stay in business.   To understand why Drucker thought financialization was suicidal you need only to consider the idea of borrowing vast sums of money to buy back shares that are promptly torn up.  How does increasing debt, incurring interest expense and assuming onerous lending covenants contribute to the viability of the firm?   

What we call short-termism might better be described as the corporate equivalent of Cotard’s syndrome.    Time is not the issue and it's a red hearing.   The real problem with the financialization of corporations is the detachment of the action from its probable harmful consequences to the firm as a legal and commercial person.

How to Treat Delirium

Is there a cure?

We know shock therapy isn't the answer.   The global financial crisis of 2008 didn't work and neither have successive corporate scandals caused when companies put the interests of others ahead of their own.  The paradox of the condition is that failure appears to reinforce the delusion. 

It begs belief that the most notable response to the world's worst liquidity crisis caused, in large part by companies not acting in their own interest, has been a re-commitment to the primacy of shareholder financial interests measured by the ever increasing influence of activists over the affairs of corporations.

My solution is cognitive.  Let's talk openly about what causes the condition, how it spreads and why it is so resilient.   

Fortunately, while the causes of Mademoiselle X's delusion remains a mystery to the medical profession, the cause within the boardroom seem more obvious.    The idea that only shareholders exist and have interests have been at the core of management education, academic research, journalism and management consulting for over 30 years.    Perhaps it's sensible to start the intervention there.










Better Boards Conference 2016

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Click here to register

I’m excited to announce that I’ll be speaking at the 10th Australasian Better Boards Conference, to be held in Melbourne on July 29-31 2016.

Considered the largest regular gathering of leaders from the for purpose sector in Australasia, the goal of the conference is to give board members, chairs, CEOs and senior managers practical solutions to take back to their organisations.

This year theme is Game-Changing Moves... Governing for Maximum Impact.   Presentations will focus board and leadership discussions on four key areas that support successful outcomes in contemporary game plans: Strategy, Innovation, Entrepreneurship and Technology.

My presentation is on DLMA Analysis.

Pronounced “dilemma”, DLMA stands for  directorship, leadership, management and assurance (or governance).  Developed here in Melbourne, DLMA analysis provides a window into the way boards and managers must balance the tensions between all four management disciplines to assure success.  The interactive presentation is designed to help attendees understand their role as value creators and protectors as well as helping them to produce their own DLMA profile.  Download more here as published in Governance.  

Thanks to the organisers for allowing me the opportunity to share my insights.

Story Telling and Business

Well before the current fascination with story telling and business, the Melbourne Company of Friends held its own special forum.

It was March 2002.

I'd founded a group of readers of Fast Company Magazine a few years earlier and we'd meet monthly to discuss the future of business.  On that night the invite read:

Why is it that business struggles to maintain culture whilst indigenous Australians appear, at least to me, to have developed and maintained a cultural unity for generations. I suspect part of the answers lies in story telling.
Joy Murphy Wandin an Aboriginal Elder of the Wurundjeri people, businesswoman, Chairperson of the Australian Indigenous Consultative Assembly and... has agreed to lead us in a discussion on the importance of story telling.

But by 6pm Joy had not arrived.  She wasn't going to make it.  We were in the Bunjilaka Aboriginal Cultural Centre within the Melbourne Museum and I had 30 people and no speaker.  Or so I thought.

Our security guard for the night was Brendan and, as luck would have it, he was an elder and an exceptional teacher.

It was a long time ago and I remember more about the way he made me feel than what he said.  But my notes tell part of the story.  He referred to us as tribe and spoke about timeless things:

  •  the difference between elders and leaders
  •  the purpose of story and culture
  •  the link between rhythm ( heart beat ) and community
  •  looking and listening before thinking
  •  the importance of walking together in business and all looking and listening

He shared many stories.  But looking back, the most important one was the one I've forgotten.  I don't remember it because it wasn't the story that was important but the lesson he shared.  He separated the tribe by gender.  He told his story and then asked the two groups to discuss what it meant.  The same story was described in two very different ways.  One was "men's business" and the other "women's business".

Brendan ended by getting us all to sing a traditional aboriginal song and do a dance to sing our way home if we were ever lost (in life as much as the Australian bush).

For all the stories on story telling,  it's the one told that night by our accidental leader that holds most true and still exercises an important influence on my work on directorship. 


About the Company of Friends

The Melbourne Company of Friends disbanded in 2003 following 4 years of monthly events.  What we had in common was that we all read Fast Company.  

We were disruptive.  Never meeting in the same place.  Never covering an idea covered somewhere else.  Never following the same format.  Just to be surprised by what would happen - even when 50 people turned up knowing there was no agenda.

Our themes would not be out of place tomorrow - story telling and business,  the role of mindfulness on strategy and how the work place was a self organizing system.   I'll share my notes on some of these events as they seem far more relevant now than they did over a decade ago.  


Duty Before Virtue : The Real Ethical Dilemma Facing Corporate Governance

“I don’t think our duty is to put shareholders first. I say the opposite”.

The Dutchman is convinced that something is rotten:

“Capitalism in its current form is broken... The very essence of capitalism is under threat as business is now seen as a personal wealth accumulator…. if you go back to Adam Smith, his thoughts were that capitalism was intended for the greater good”.

Since Polman's appointment, the Anglo-Dutch company has ended quarterly reporting, refused to pander to analysts, doubled capital spending, increased R&D, reduced the number of hedge funds in its shareholder base by half and, according to its CEO treats people, such as their 75,000 small hold tea farmers, fairly.

Polman’s approach puts him at odds with elite academics like Professor Macey from Yale Law School who teaches that “all major decisions of the corporation, such as compensation policy, new investments, dividend policy, strategic direction and corporate strategy should be made with only the interests of shareholders in mind”.

To his critics, Unilever has an impostor at the helm.  

But this CEO is no phony.    He's more capitalist than any shareholder activist and he's bringing the magic back .

The 10 Most Important Principles of Directorship

The old ideas aren't working.

Confidence in capitalism is collapsing.   The gap between the 1 % and the rest has been growing for forty years.  And, corporations are six times more likely to die in 2016 than in 1976. 

The old theories of shareholder ownership, good governance and profit maximization are making a mess of things.

But these are not theories.  Theories are meant to explain things, not change things for the worse. No, they're the pillars that prop up the investment industry. 

Agency theory is their improbable mission statement.  Maximizing shareholder value was never the moral responsibility of a corporation. It's the vision statement on the desk of every hedge fund manager.  Good governance is not a virtue, it's little more than the codification of their investment strategy.

Time for company directors to start again with a different set of first principles based on the law and capitalism's original ethical framework:

1. Corporations are not property or a technology . . .

It is a universal affront to the rule law to conceive of a corporation as property. No one can lawfully own a corporation. A corporation cannot be bought and sold or compelled to work for another.

Corporations are distinct, separate and sovereign persons.

What makes a corporation a person ? It’s not biology. In the eyes of the law, flesh and blood are not the markers of personhood. A person is anyone or anything to whom a state grants the rights of personhood: the right to own property, the right to make promises, the right to sue and be sued and the right to be responsible for wronging another.

Nor, is sentience a barrier to personhood. The law has long recognised that those who cannot act for themselves may act through agents, such as a board of directors. Who, historically, had an unequivocal duty of loyalty to the corporation.

If corporations are not property, how can they be considered a mere tool or technology. While a technology is created to achieve an objective, a person cannot be brought into being for an objective. In any other context, this suggestion would be abhorrent and offensive.

Yet, despite their personhood, corporations are still treated and mistreated as technologies. According the norms of corporate governance, corporations exist to enrich other persons (both corporate and human) Misconceived as nothing more than elaborate cash machines, they are denied their most fundamental right: the right to choose and realise their own purpose through their agents.

2. Corporations are entities with whom humanity has a vital symbiotic relationship. . .

3. The purpose of a corporations is to be a corporation. . .

4. Corporations shall not act out of an artificial duty to shareholders or a responsibility to stakeholders. . .

5. The organizing principle of a corporation is self determination, not profit maximization. . .

6. Corporations shall be directed according to the moral principle of self interest rightly understood . . .

7. It is in the interests of corporations to prioritize stakeholders based on their contribution to the well being of the corporation. . .

8. It is not in the interest of corporations to harm people or the environment. These are a corporations's life support . . .

9. Corporations Shall be governed in a way that protects them from expolitation from shareholders and others. . .

10. Profit at the expense of self interest rightly understood, is self harm. . .

How to Build Alignment Between the Board and Executive

I’m pleased to share an article published in Governance.  Considered to be the leading source of information about corporate governance world-wide, I’m grateful to Lesley Stephenson and her team for including this in their October issue.

My paper continues the theme that governing and directing are different.  In it I propose a new way to analyse how well a company manages the potentially contradictory elements of assurance and management with directorship and leadership.

Click on the image below to be redirect to the article published on Governance Issue 256.