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.

Understanding the Corporate Condition

Peter Drucker said that the only valid purpose of a "firm is to create a customer".  But why?

What is it about the corporate condition that drives a firm to create a customer or to maximize shareholder value or to enhance the interests of those who claim a stake in the corporation?   

The customer, the shareholder and the stakeholder would respond in chorus "to serve my interests".  And each would provide their "persistent, persuasive and unrealistic" arguments for why they are the corporation's true reason for being to the exclusion of all others. 

The shareholder cites their self evident ownership of the company, their status as the residual claimant, the fact that its agent, the directors are in control, the efficiency of ensuring managers only have one goal, that maximizing their wealth fosters social wealth, that managers have impliedly promised to do so and on and on.  

The stakeholder disagrees.  They understand the corporate condition as a "business project" in which "all parties work together for a common goal and shared benefits by opting in".  According to these theorists the corporation should be creating value for all.  And they too have their moral, social and economic arguments for their position.  

The customer, in the guise of Roger Martin, reduces the corporate condition to maximizing customer satisfaction.  Only by maximizing their value is shareholder value realized.  And he cites Johnson and Johnson and their credo that puts customers first and shareholders last as a case study in support of a customer centric version of capitalism. 

Tellingly, each declares their view to be the one truth and all claim and counter claim the others to be impossible myths and misconception.  And they'd all be right.

So why do firms set out to create customers, issue shares or engage with so called stakeholders - my answer is self interest.  You see, the corporate condition is really the struggle to secure the means of perpetual existence. 

 

The customer, the shareholder and all other persons, corporations, institutions, groups and communities represent the corporation's means of existence.   In their minds they're stakeholders and investors, but to the corporation they're all trading partners.   Each holds some form of vital capital that the corporation must secure to grow stronger, more resilient and to ensure its own survival and endurance.  They are no more stakeholders in the corporation than my employer, lender or grocer is a stakeholder in me.      

My solution to the riddle of the corporate condition rests on the concept of corporate sovereignty.  That is, that the corporate is not owned but is its own sovereign entity that owes nothing that it has not promised.   

Under this conception of the corporation the objective of the corporation is to ensure its own strength, resilience and endurance.  And this can only be achieved by trading with each of its trading partners to secure the means of existence.  In non exhaustive terms:

  • Members provide one element of incorporation, financial capital, control and a way to commercially relieve the corporation of its surplus financial capital
  • Directors supply the second element of incorporation, intellectual capital and control
  • The State provides the the third element of incorporation and continuing legal recognition
  • Employees provide their labor and intellectual capital
  • External trading partners provide every thing else from customers providing cash to the community providing legitimacy and reputation

The struggle for the means of perpetual existence drives the corporation to optimize the relationship with each of these trading partners.  But not out of legal or moral duty.  The rationale is commercial.  To realize the objective of the corporation, the corporation through the board and management, must prioritize trading partners according to their contribution to firm value over the longest time.

This insight into the corporate condition means no trading partner will logically have a fixed priority.  Rather, the value exchanged with each trading partner will be determined by their contribution to the overall strength resilience and endurance of the corporation.  As circumstances change so too will the priority of the trading partner as their relative contribution to firm value naturally increase or decreases.  But likewise, no trading partner can be mistreated or misused lest they refuse to trade when the corporation needs them most.   Under a sovereignty model, shareholders, customers and all other trading partners can have greater confidence in the corporation's intent and ability to keep its promises.

 

Goethe said "there is nothing so terrible as activity without insight".

Arguably we have had decades of escalating activity in the boardroom based not on an insight into the corporate condition but that of the human condition.

Corporate governance is polarized between insights into the best and the worst of the human condition.  The shareholder assumes managers are self interested and cannot be trusted.  Stakeholders assume the opposite.  Each constructs a model of governance based on differing opinions of human nature that pay little, if no attention to the nature of the corporation.

I advocate an approach to directing based on insight into the corporate condition that describes how directors can contribute to securing the means of existence for the corporation.  This includes working in modes and directly creating value through their choices or indirectly by guiding management, helping out or developing their team.  It also includes using mechanics to align the teams actions, behaviors and approach to the task at hand.  Mine is a theory of means, modes and mechanics.

Of course the shareholder, stakeholder and customer might claim the approach outlined above is nothing but an unrealistic myth.  As John Parkinson sums it up "a requirement to benefit an artificial entity, as an end in itself, would be irrational..."  But what, in the main, are shareholders and other, so called, stakeholders if they are not corporations?  Under Parkinson's logic it must be irrational to work for a shareholder that is a corporation.  After all, the corporation and its incorporated shareholders are made of the same stuff.  The only difference is the business model.  The idea that a corporation cannot rationally pursue its own objectives but can rationally pursue the objectives of another corporation (whose shares may be held by another corporation) seems perverse.

In my view, the shareholder, the stakeholder, the customer and even the sovereignty approach I advocate are myths.

Perhaps the one real truth in business is that there are no truths in business and the future is seldom realistic.  There are only myths called competing strategies based on insight.  And they're not measured by the validity of the theoretical argument but by the enduring success of the activity of the corporation.      

As we look to rebuild confidence (not trust) in capitalism and corporations it's worth remembering John F Kennedy's words and be open to considering fresh insights into the corporate condition: 

 “The great enemy of truth is very often not the lie--deliberate, contrived and dishonest--but the myth--persistent, persuasive and unrealistic. Too often we hold fast to the cliches of our forebears. We subject all facts to a prefabricated set of interpretations. We enjoy the comfort of opinion without the discomfort of thought.”
 

 

 

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