ON DIRECTORSHIP is by PETER TUNJIC.

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 a leading voice in the re-discovery of what corporations are and why they exist.

The Green Shoot of a New Branch of Directing

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In the Third Way, I argued that Corporate Governance should be elevated to a category of knowledge in the same way we see law or biology.

I was wrong.

Corporate Governance is not the tree of knowledge, it's just one twisted branch in the taxonomy of company directing.

Taxonomy from the Greek taxis, meaning arrangement or order, and namos, meaning law or science, traditionally categorizes and classifies things or concepts in a top down structure.  In a hierarchical taxonomy terms have a tree and branch structure.  Each term is connected to a broader term (unless it's at the top in which case it is the tree) and one or more narrower terms (the branches).

My mistake was that a term cannot be both the tree and a branch in a hierarchical taxonomy of directing.

I should have realized this when a noted professor exclaimed at the end of one of my Directorship presentations "THAT'S NOT CORPORATE GOVERNANCE".

She was right.

The professor belongs to a generation that typically divides Corporate Governance into one of two dominant theories.  Shareholder primacy and Stakeholder theory.  These in turn divide into their sub-branches and so on.  Though some would dispute it, Corporate Governance is seen by this generation as the top level term and all the knowledge of what directors do or ought do can be classified within its boundaries.

But, in declaring that Directorship was not Corporate Governance, the professor was conceding that Corporate Governance was no longer a synonym for all the knowledge of directing.

The green shoots of a new branch of directing had started to appear that requires a rethink of where Corporate Governance fits in the bigger picture of company directing.

But at what point does the tree divide?  After all, both Corporate Governance and the alternative study are concerned with the boardroom. 

The split occurs at the point of Corporate Objective - the irreducible purpose of the Corporation from which all policies, practices and processes flow.

I propose that:

  • Corporate Governance is concerned with external objectives - Directors direct for someone or something other than the Corporation; and
  • Directorship is concerned with an internal objective - Directors direct for the Corporation in its own right.

In this sense, external refers to any one of a number of "stakeholders".  Internal refers to the Corporation as a legal person separate from any other person.

Of course, there are those that argue that the "outsiders" are the"insiders".  To them, Corporate Governance concerns the "internal relationship between the participants to the corporation".  The Corporation and one or all Stakeholders are one and the same.  But all that does is re-enforce the fundamental separation between the branches of directing.  Through the eyes of Directorship, those "internal particpants" are "external trading partners".  The division between the two branches of directing could not bemore stark.

    Each branch of directing answers the question of objective of the corporation from an opposite direction.  One outside - "what should the board do for one or all trading partners?".  The other inside - "what should the board do for the Corporation?".  They are incommensurate branches of a common tree with very different solutions to how Corporations should be directed.

    [Extending the footballing metaphor, Directorship is largely about playing for the jersey (or jumper if you're Australian).  Corporate Governance is all about playing for (a) shareholders who bet on the team ( Shareholder primacy) or (b) the other team (stakeholder theory)].

    To be clear, the point of this discussion is not to argue against Corporate Governance.  It doesn't have to be broken for the alternative to be better.  My point is that each board must ask what the ultimate objective of their Corporation is.  Do we direct for the Corporation or do we direct for someone else?

    But choose wisely.  Each branch leads in a different direction and requires a fundamentally different approach to directing.    

    Here is a simple flow chart of what I'm proposing:

     

     

     

     

     
     

     

     

    How Does This Corporation Work ?

    The Third Way