Marketing Shareholder Primacy 4: Play Mind Games

Shareholder advocates are keen to point out the risk of company directors becoming captured by "groupthink".

But while the shareholder primacy movement is all over this danger in the boardroom, they ignore the presence of groupthink in their own thinking about the boardroom.

This is the fourth instalment in the marketing shareholder primacy series.  It considers whether the investment industry plays mind games to entrench the "virtue" of maximising shareholder value and defend their rivers of gold.


Groupthink is the “mode of thinking that persons engage in when consensus seeking becomes so dominant in a cohesive in-group that it tends to override realistic appraisal of alternative courses of action.” 

First described by social psychologist Irving Janis in 1972, groupthink is characterised by a group that sets itself above the law and protects itself at all costs.   Instead of trying to find the best solution, the group uses a variety of techniques to encourage conformity.

The dangers of groupthink are well known.   The board and officers of Enron, WorldCom and more recently Citigroup in the lead up to the global financial crisis were all accused of groupthink.  Under the influence of groupthink, these boards engaged in commercially unjustifiable risk taking.

Janis documented eight signs of groupthink:

  1. Illusion of Invulnerability: Members ignore obvious danger, take extreme risk, and are overly optimistic.
  2. Illusion of Morality: Members believe their decisions are morally correct, ignoring the ethical consequences of their decisions.    
  3. Collective Rationalisation: Members discredit and explain away warning contrary to group thinking.
  4. Out-group Stereotyping:  Members construct negative stereotypes of rivals outside the group.
  5. Pressure to Conform:  Members pressure any in the group who express arguments against the group’s stereotypes, illusions, or commitments, viewing such opposition as disloyalty.
  6. Self-Censorship: Members withhold their dissenting views and counter-arguments.
  7. Illusion of Unanimity: Members perceive falsely that everyone agrees with them.
  8. Appearance of Mindguards: Some members appoint themselves to the role of protecting the group from adverse information that might threaten the group.

According to Janis “When more of these symptoms are present, the likelihood is greater that groupthink has occurred, and therefore the probability is higher that any resulting decisions will be unsuccessful, possibility even catastrophic.”

Unfortunately, in the absence of catastrophic failure, it can be difficult if not impossible to diagnose group think let alone convince those afflicted.  Just ask economist Nouriel Roubini who anticipated both the collapse of the US housing market and the worldwide recession which started in 2008.

Groupthink and Shareholder Primacy

Characteristic symptoms of groupthink can be seen amongst the members of shareholder primacy movement.

But before I go on to explain why, I freely admit that a handful of quotes and anecdotes is not an argument but a structured form of observation.    It would be easy to argue that all I've done is constructed a bogeyman of straw by selecting a few self-serving examples.  

But I'll leave it for you to judge the difference between a paradigm of knowledge and a psychological condition.

Illusion of Invulnerability

The first sign of groupthink is that members are overly optimistic and ignore danger, leading to greater risk taking.  Under the illusion of invulnerability, group leaders begin to believe they are infallible and always right.

Lucian Bebchuk, professor of law, economics and finance at Harvard Law School and director of its corporate governance program is the current day champion of the shareholder-centric corporate governance model.

Now consider this statement from the Professor’s article entitled, “The Long-Term Effects of Hedge Fund Activism”:

Empirical studies show that attacks on companies by activist hedge funds benefit, and do not have an adverse effect on, the targets over the five-year period following the attack.
Only anecdotal evidence and claimed real-world experience show that attacks on companies by activist hedge funds have an adverse effect on the targets and other companies that adjust management strategy to avoid attacks.
Empirical studies are better than anecdotal evidence and real-world experience.
Therefore, attacks by activist hedge funds should not be restrained but should be encouraged.

Bebchuk promotes hedge fund attacks despite the dangers of rent seeking behaviour being recognised as far back as Adam Smith.    Moreover, he ignores the warnings from those that work for and within corporations.

But what he ignores most is commonsense.  Should we also encourage arson because forests regenerate in the years after an attack?   It's nonsense wrapped up in the pretense of science.  Callously indifferent to the impact on anyone but the investment industry.   

But none of this seems to temper Bebchuk’s aggressive encouragement for risk taking in the form of increasing activist attacks nor his unbounded conviction that he, and his colleagues, are right.     

Belief in inherent morality

The second sign is the belief in a group’s inherent morality.   This belief causes members to believe they are the arbiters of what is morally right and just.

Shareholder value maximisation is firmly entrenched in a moral framework.  Shareholders are often described as the moral owners of the corporation and directors are said to owe a moral duty to shareholders.   

The morality of shareholder primacy can be traced to its founding father, Milton Friedman.  In Capitalism and Freedom, Friedman makes the following remark:

“there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud .... Few trends could so undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible”

This is the highest form of moral justification for shareholder primacy and exploits all the tricks of linguistic rhetoric.  

Friedman argues that that the morally right thing for business to do is make as much money for shareholders as possible.   He even warns that the very foundations of a free society are threatened by any other moral code of the corporation.   And to this day no other management idea creates the same sense of moral panic and outrage when questioned. 

Collective rationalisation

The third symptom of groupthink is the group rationalisation of warning signs that would otherwise cause members to question or abandon their assumptions.   Negative information reinforces the group’s commitment and is the cue to invest even more resources to rationalise that they are making the right decision.

If there was ever a warning sign that all was not right it was the rolling global financial crisis that began in 2008. 

The response of the industry is telling.   While a minority have used the crisis to reconsider the assumptions of shareholder primacy, the majority have responded by recommitting to the principles of shareholder ownership under the banner of the “shareholder spring”. 

Rather than question whether the principles and practices of corporate governance contributed to the global financial crisis, the response to the crisis is to agitate for a purer form of corporate governance where activist shareholders,  hiding behind the corporate veil, increasingly demand the right to call the shots.

The push is on for greater shareholder influence and more good governance – more independent directors, more shareholder influence and more monitoring. 

Nothing will dissuade corporate governance experts from their collective rationalisation of what occurred in 2008 and the years leading up to the crisis. 

Out-Group Stereo Types

The fourth symptom of groupthink is the group's stereotyping of adversaries.  A “with us or against us” attitude leaves no middle ground.  Adversaries are seen as unenlightened and weak-minded and undeserving of a serious response. 

No two individuals capture the lopsided polarisation of opinion between the 'shareholder first' in-group and everyone else than Martin Lipton and Lynn Stout.

Lipton is a founding partner of New York law firm Wachtell, Lipton, Rosen and Katz. He has been credited with inventing the concept of the poison pill and is active in questioning the shareholder-centric governance of corporations. To many he is the enemy of the “shareholder democracy”:

Speaking with the enemy: how the OSC's dialogue with Martin Lipton threatens those whom the OSC is charged with protecting

     Fasken Martineau LLP

No one would accuse Lipton of being feeble minded.   Instead he is stereotyped by his profession.  A popular commentator is known to flippantly dismiss Lipton’s arguments on the basis that, as a lawyer he’s engaged by management and therefore you wouldn’t expect him to argue for anything else than management’s interest.  

Cornell Professor Lynn Stout is also in the crosshairs following the publication of her academic best seller The Shareholder Value Myth.   And like Lipton, she is also stereotyped by her profession.

When Stout published an op-ed article, "Why Carl Icahn is Bad for Investors", activist investor Icahn and his loyal followers were quick to play the “academic" card:

In my opinion, the article was so wrongheaded that I am surprised that it was afforded an appearance in a premier business newspaper. I hope better academic guidance is provided for students in California than that exemplified in the editorial.

Carl Icahn: The Icahn Report

Stout is presumably a tenured professor, thereby immune to the market forces that everyone in the private sector - from McDonalds workers to Icahn - not only lives with, but thrives upon.


Prof. Stout obviously has studied the results of many business deals over the years; but that she presumes to understand their underlying causes is pompous, even a bit silly.


Stout is an Academic. Not a practitioner. So, her opinion should be discounted at a much higher rate than that of someone who is actually in the business doing deals every day. Academics make me laugh.


These are not isolated examples but representative of the general attitude to Stout’s work as undeserving of serious consideration because she’s "just an academic".    And, if you have any doubt about the "with us or against us attitude" consider Mr Icahn's latest in-group only forum and the inflammatory imagery on the home page.

But I’ll leave the last word on the fourth sign of groupthink to Professor Stout:     

Yes, it’s pretty common to find that people who disagree with my ideas sometimes resort to vilification and ad hominem attacks.  I personally always find this reassuring, as it suggests they have no good substantive critiques of my ideas, which in turn suggests I am probably getting it right.

Illusion of Unanimity

The fifth symptom of groupthink is that the majority view and judgments are assumed to be unanimous.   Group leaders reinforce this phenomenon by publicly and prematurely stating that the group has come to consensus.

If there is one sign of groupthink that is hard to miss it’s the illusion that everyone that matters agrees that shareholder wealth maximisation is the objective of corporate governance and corporate law.  

In Britain and the United States, maximising shareholder value is universally accepted as management's paramount goal.

The McKinsey Quarterly, No. 2

“Corporations are almost universally conceived as economic entities that strive to maximise value for shareholders”

Jonathan Macey

“There is no longer any serious competition for the view that corporate law should principally strive to increase long-term shareholder value "

Hansmann and Kraakman

The “shareholder value” model has come to be accepted by most directors, shareholders, creditors, customers, academics, judges, legislators, and others over the last three decades as the optimal framework, or perhaps even the only cogent framework, underpinning corporate governance

The Conference Board

The pervasiveness of the belief has even led the godfathers of shareholder primacy to ominously conclude that resistance is useless:

 It will not pay the individual citizen to invest much in understanding the issues surrounding the corporation controversy. If he is at all realistic he will understand that he is virtually powerless to do anything to effect the outcome.

Jensen and Meckling


The sixth symptom of groupthink is that members who disagree with the group will stay quiet and not express their disagreement.   Group members self-censor their dissenting behaviour to preserve their place in the group.

It's difficult to measure self-censorship.  First, people don't recognise they do and second, if they do, they're usually a little embarrassed to admit it.

How would tweeting this perspective make you feel?

Direct Pressure on Dissenters

The seventh sign of groupthink is that members are under pressure not to express arguments against any of the group’s views.   Social pressure is applied to members who stand up and question the group’s judgement.

The continuum of pressure on people who don’t conform to the 'shareholder first' view of corporate governance ranges from none-too-subtle personal threats to the worst form of institutional pressure – the "comply or else” regime.

'Comply or explain' is a regulatory approach used in a number of countries whereby listed companies must either comply with the requirements of the code, or if they do not comply, explain publicly why they do not.

To be clear, there is no empirical evidence to support the comply part of these codes including their obsession with independence.   For example Nell Minow, credited as one of the founders of the governance industry, has recently stated:

 "No study has successfully drawn a credible connection between independence on the board and reduced risk or enhanced returns. That is not because independence is unimportant. It is because our indicators of ‘independence’ are inadequate and flawed."

Despite the lack of evidence, public companies are expected to 'out' themselves if they do not comply.  This is a form of direct pressure on dissenters who are required to publicly explain their actions in “deviating” from an unvalidated norm.

Companies must either conform to the norm or disclose their competitive advantage in not conforming to their competitors.  This entrenches the norm as there is no incentive to innovate.      

Self-appointed ‘mindguards’

The last sign of groupthink is the emergence of self-appointed “mindguards”.  Individual members take it upon themselves to protect the group and the leader from information that is problematic or contradictory to the group’s cohesiveness, view and/or decisions.

No one has "mindguard" on their profile.   However, thanks to the phenomenon of business networking site LinkedIn, it’s possible to see the mindguards of shareholder primacy at work.

Apologies for the indulgence but here are three examples of mindguards in action taken from my experience on LinkedIn:


This post that compared the current state of corporate governance research with pre-Copernican astronomy was removed from a LinkedIn governance group days after being published.


When I published this essay which questioned whether governing and directing are different was removed from the same LinkedIn governance group.  A link to the essay was not posted to the group nor was I an active member following my earlier experience of censorship.    


Since publishing Governing and Directing: Are They Different an owner or moderator of a LinkedIn group took it upon themselves to block me from posting to all LinkedIn groups without approval from the owner or moderator.  This lasted for well over a year.     

Shareholder Primacy: Paradigm or Groupthink?

Are all symptoms a coincidence or nothing more than a paranoid and skeptical straw man?   

Or, is it just business?  After all, shareholding is, first and foremost, a business model with its own marketing strategies for success.

Playing mind games might be yet another of the sublime strategies used by the investment industry to ensure funds keep flowing in their direction.  Why rely on a compelling value proposition to generate revenues when the grip of groupthink on the minds of those holding the corporate purse will do the same thing at a fraction of the cost?

But, if it's just business, business leaders need to know when they're being played and not get suckered in to believing the spin.

So too regulators, that continue to expand the rights of shareholders.  They should remember Janis' ominous warning - “When more of these symptoms are present, the likelihood is greater that groupthink has occurred, and therefore the probability is higher that any resulting decisions will be unsuccessful, possibility even catastrophic.”

About the Marketing MSV SeriesAs a participant in the 2014 Annual Global Drucker Forum,  I'm posting a series of unofficial perspectives on the way maximising shareholder value (MSV) has used marketing to turn capitalism into the personal business model of the finance industry.


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