A Real Alternative to Shareholder Primacy


Two fundamental principles guide my thinking on directing and directorship:

  • corporations can't be owned
  • great boards work for their corporations alone

These aren't new ideas.

In one form or another, the notion that corporations are real and independent persons is as old as the laws that govern them.

Real entity theory states that corporations are real legal persons and, like their natural equivalent, can never be owned.  I understand this is a stretch too far for most.  After all,  is there any idea more reinforced in our daily lives than the belief that corporations exist for their shareholders or their self described stakeholders. 

We forget that theories of the corporation and its purpose have ebbed and flowedthrough the centuries.  For example, we take for granted that one corporation can buy shares in another.  But did you know that this was prohibited in the US until around the turn of the 20th century.  It was the idea that corporations were independent and self perpetuating persons that led legislatures to abolish the rule that only natural persons could hold shares.   How ironic that so many corporate investors now equate shareholding with ownership, when if it were not for the rejection of this belief in 1899, there might be no such thing as a corporate investor.      

But in this latest cycle, the old idea that the corporation is a real if unnatural person has all but ebbed into practical obscurity. 

Real entity theory has become the forgotten alternative in the endless debates between shareholders and stakeholders and their push to make corporate directors responsible for their interests.   Apart from a handful of courageous academics, fewspeak up against corporate servitude.   We inexplicably accept that one corporation can exist to serve the interests of another,  but find the idea that a corporation could exist to freely serve its own interests as ridiculous (could there be a clearer double standard when it comes to the academic crime of reification).

This could all change.

After decades of argument, legislation and best practice, neither agency theory or stakeholder theory has established any link between their principles and practice and corporate performance.  Indeed, the evidence points the other way.  Jack Welch has even described agency theory as the dumbest idea ever:

“On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal… Short-term profits should be allied with an increase in the long-term value of a company.”

And, if agency theory is dumb, stakeholder theories might be even dumber.  I don't doubt that a corporation needs its shareholders, employees, customers, the community and the environment.  What I doubt is whether a stakeholder theory could ever be the foundation of a business model.  Leaving aside that boards are blind to the needs of the corporation's stakeholders, not even King Solomon could chair a meeting in which the competing interests of all stakeholders were reconciled and bills still paid.


Fortunately, the choice for today's director is not between dumb and dumber. 

The sole purpose of a corporation is not to make money for its shareholders or to serve the interests of self described stakeholders.  The sole purpose of a corporation is to get shareholders and everyone else to part and keep parting with what the corporation needs to become stronger, more resilient and enduring. 

I propose that we rebuild the corporation and the boardroom from the foundations of the theory that holds that corporations exist in and for themselves.  Starting with the principle that boards work for the corporation alone, a new model of directing and directorship can be constructed around the needs of the corporation: 

  • Designing corporate strategies based on needs and strength, resilience and endurance (SRE).  
  • Identifying trading partners (shareholders, directors, employees, customers etc) that have what the corporation needs for SRE.  Toying with idea of calling them "needholders" ie the holders of what the corporation needs. For example, a customer might consider themselves a stakeholder, but for a corporation they're holding cash, intellectual property, reputation etc. From the board's perspective describing them as needholder makes far more sense than calling them a stakeholder.  What's more calling these groups needholders focuses the board's attention on why shareholders, employees, customers etc matter to SRE.
  • Optimizing the exchange of value with each of the corporations trading partners.  Each trading partner should receive no less and no more than is required to secure the needs of the corporation.  On either side of that equation is weakness and vulnerability.  Taking too much or exchanging too little is the best way to undermine SRE.
  • Prioritizing trading partners based on their contribution to SRE based on the situation.  There are no fixed priorities.  Think of trading partners as the horses on a merry go round with the corporation (through its board) in the center.  At any point in time, each trading partner's priority moves up and down based on the needs of the corporation (hat tip to Professor Du Plessis of Deakin University for this metaphor).

I understand this approach will be met with fear and outrage.

No trading partner or needholder, with value to exchange, need be afraid of this theory.  Under my model, their interests are secured by the commercial reality that they hold something the corporation needs.  More importantly, given the choice, who would a trading partner prefer to deal with - a corporation run to create profits only or one that is run for its own strength, resilience and endurance?  Which mantra instills greater confidence in the corporation's ability and intention to keep their promises?

But what of the shareholder? Why would anyone buy shares in a corporation run not for their interests but for the corporation's interests? The answer is that shareholders have needs too and limited ways (classes of investment) to satisfy them.

For generations shareholders have overplayed their hand as the handmaidens of capitalism.  Maybe in the 1950's, but today on Wall Street, institutional investor are net consumers of capital.  Arguably, institutional investors need corporations more than corporations need them.  But equally shareholders are not the enemy.  They're an essential trading partner and there is a commercial deal to be done.

It pays to remember that there are good commercial reasons why corporations must periodically declare dividends and otherwise dispose of the surplus to shareholders.  Those reasons have nothing to do with maximizing shareholder value and everything to do with keeping a corporation's options open when it comes to raising money, not being mugged (taken over) and more.  That's the genius of the corporation.  As Welch said, shareholder value is a result not a strategy.        




I also know this approach will be met with outrage by some.  Those who demand the corporation's vital capital out of a reckless sense of entitlement will be the first to decry the return of real entity theory.  Activists and the governance industry are the true beneficiaries of the shareholder first mantra - trading on myths in an effort to bluff boards into giving up the corporation's money (and worse) for the price of a share and leaving the corporation with little or nothing to show in return.  These impostor capitalists are the only ones who need live in fear of the eventual return of the sovereign corporation.


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