Choosing Sides in the Governance Wars*

The corporation is a near perfect idea.

How better to raise the standards of human existence than create a vehicle for collective aspiration, endeavour and ingenuity.  And though, in the hands of the thoughtless, corporations do bad things, this is a reflection of the human condition and is not a condition of incorporation.

The corporation is capitalism’s great innovation and it’s being hijacked.

There is a war going on for the hearts and minds of those who direct public corporations.  In the fight for control of the corporation, the ideological capture of the corporate director represents the high ground and victory.

But you could be forgiven for not noticing.  You see, the battle within the boardroom is fought blindfolded.  Left and right, north and south all fight under the same standard “corporate governance”.

Over thirty years consultants, academics, regulators and a host of others have all gathered under an identical banner to influence and tell directors how to direct.  But make no mistake. They share no common belief.  Whereas some believe in the primacy of the shareholder, others believe in the rights of stakeholders and an increasing number just believe in making the most money with the least effort in the shortest time. 

Forget the scores of definitions, corporate governance can best be summed up as the way shareholders and stakeholders pursue their agendas and self interest in the corporation through the boardroom.   

At the core of corporate governance is a deep flaw.  Under the silent influence of competing beliefs corporate directors are pulled in every direction.

The time has come for flags to be raised, battlelines drawn and for policies and practices, universally described as corporate governance, to be divided according to their allegiance and for directors to choose sides.  At stake, is nothing less than the future direction of the corporation.

Bob Monks, pioneering shareholder activist and influential corporate governance adviser, has lifted the first colours in what some call “the shareholder spring”.   

In a keynote address to the International Corporate Governance Network in Paris on 13 September 2011, Bob made his L’Appel (the Call). To the gathered audience of institutional investors who between them represented trillions of dollars he laid out his manifesto for what he calls “democratic capitalism”:

“Shareholders (must) confront their dysfunctionality as owners as the primary responsibility of corporate ownership.

The overriding first need is for owners to recognise that the ultimate issue may be survival – survival of what we call the system of democratic capitalism and all that this means for the strength and prosperity of the world... It is essential that the system of accountability to shareholders be confirmed and re-enforced so that public and private causes can generate sustaining returns traditionally associated with equity investment.”

To Bob, the shareholder had become the "forgotten man”.  He appealed to the true capitalists, the shareholders of the world, to accept their responsibility as owners and ensure their interest were entrenched within corporate management, and its associations and agents.  This was a militant form of the shareholder first ideology that has become the corporate governance norm.  

He even singled out his enemy - “autocratic capitalism”.  An informal coalition of managers and compliant regulators, that have captured a generation of the world’s brightest minds through a combination of stealth and propaganda.  Men and woman who now rule their corporations convinced that capitalism is a function of “efficient market theory" and finance.  To the autocratic capitalist, shareholders have become a symbolic component of a mathematic model.

According to Bob, autocratic capitalism is a new and dangerous form of corporate governance that can only be defeated by shareholders accepting his challenge.  And accept they did.  The audience stood and roared in approval as if to rattle their swords to be heard in the financial centres of the world.  As Bob took questions, we were told that even academia had turned against democratic capitalism.  Unable to find a link between shareholder primacy and corporate performance, once supportive academics were accused of surrendering to the enemy and becoming part of the autocrat’s propaganda machine.

As the delegates settled, I knew I had accidentally found myself deep in the enemy’s camp on the eve of war. 

Democratic capitalism is an older but no less dangerous form of corporate governance.  Not just because its ideas and practices are flawed and unconvincing or the description of shareholders as forgotten, audacious, but because democratic capitalism is fundamentally uncommercial.  Under the long reign of democratic capitalism, directors are losing the will to create value in and for their corporation.  They have become relegated to defenders of a losing game.

But I am no autocratic capitalist either.  This enemy of the corporation goes by another name – the “pirate”.  I have no issue with people who think in numbers but still work hard for their corporation.  But I give a damn when managers are driven to make the most money with the least effort in the shortest amount of time.  In doing, turning once great corporations into short term projects.   Pirates are as adverse to the hard work of good business as they are clever.  They are opportunists - who disregard orders of consequences beyond their personal return.  To some, they lack ethics.  To me, they lack the work ethic upon which corporations and capitalism are founded.

There is a third way.

Reconnect the boardroom to the original system of capitalism whereby corporations are not owned but are their own sovereign, autonomous entities that are traded into prosperity under the hand of the board.

Commercialism has been the victim of the governance wars.  What democrats and pirates share in common is a reckless indifference to the most basic law of capitalism - no trading partner can be elevated beyond their benefit to the corporation.

Shareholders are trading partners.  Employees are trading partners.   In fact, every so called stakeholder is a trading partner of the corporation.  Each holds something that a corporation needs to become strong, tough and enduring.  And, the best way to get it is for the board to ensure that the corporation exchanges the best possible promises with each person with whom it trades.

Corporations prosper when the interest of stakeholders are prioritized according to their contribution to value.  Not the other way round.  If there is no value exchanged, or the value is systemically weighted to any trading partner the corporation will soon be traded into weakness, vulnerability and ultimately insolvency.   

The third way is the alternative to democratic capitalism and the answer to piracy.  My challenge to the directors of the world is to rebuild the boardroom in the image of commercial capitalism.

Commercial capitalism stands for maximising the value ofcorporations not the return to its trading partners (that is their business); creating value not just defending it; freedom of contract not freedom of capital; accountability to promises not accountability to shareholders; the wisdom of the trade and not the wisdom of the quants; the value of promises and not the value of shares; aptitude and professional integrity not independence; and that corporate directors must perform and not conform to the narrow interests of lobbyists who suck all the air from the boardroom with their unbounded expectations and from pirate capitalists who just plain suck.

Commercial capitalism also rejects current best practice, its assumptions and principles.  Instead it advocates a new system of thinking called “directorship” that is founded on corporate sovereignty, revolves around trade and is within the “rules”.  Directorship takes the boardroom back to first principles and, step by step, rebuilds the board into a force for enduring competitive advantage.  No simple mantras.  No silver bullets.  No more promises made in hope and kept in fear.

Today, the war for the boardroom is fought by lawyers, academics and advisers.  We barely notice that directors are held hostage to competing external interests and their distorted vision for the board.  Directors must not surrender their corporations so easily.

The time is coming when boardrooms will fight it out and not academics.

The fog of the governance wars will soon lift and directors will have a clear choice.  No longer will they practice corporate governance.   Rather, they will choose between democratic governance, directorship and new approaches yet to be conceived and they will follow different paths.  Corporations will then compete as much on boardroom strategy and tactics as they do on products and services.  Only then will the battle be won.  Not on paper, but in the marketplace where it counts.


* First Published as the Third Way in the November 2012 edition of Governance.




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