Shareholder Primacy: Paradigm or Groupthink

Shareholder primacy is a norm of corporate governance that requires the allegiance of a corporation’s board of directors to the single objective of shareholder wealth maximization.  To think otherwise is considered a form of “corporate deviance”.

According to Yale Law Professor Jonathan Macey, “Corporations are almost universally conceived as economic entities that strive to maximize value for shareholders”.  To the Professor and just about everyone else, the popular battle for the corporate objective has been won - the objective of corporate governance is to assure financial corporations and other shareholders of their equity investments.

On the margins of corporate law, economics and management science are the vocal minority who refuse to fall in behind Professor Macey, and the rest of what shareholder advocate James McRitchie calls the “corporate governance industrial complex”.  The deviants are the outsiders who rely on legal argument, logic and a failing thirty year case study to argue for greater choice in corporate governance.

Yet despite the minority arguably holding the higher intellectual ground, shareholder primacy is proclaimed to be entering its “golden age”.  Undeterred by the absence of evidence in support of their claims, the “in-group” openly mocks outsiders like Cornell Professor Lynn Stout from behind, what Professor Macey admits is an ideology and “possibly dogmatic belief in shareholder primacy”.

How can there be freedom to choose the objectives of corporate governance, when the argument in favor of shareholder primacy is reduced to comparisons between maximizing shareholder value and “other notions such as “democracy” and Freedom of Religion” and even “capitalism”?   

Sadly, it may take more than good argument to displace shareholder primacy.

When a paradigm becomes “groupthink”, the better argument and all the warning signs can be ignored until it's too late.  And, even that’s not guaranteed.  Consider the global financial crisis.  Rather than take the opportunity to reconsider the norm of corporate governance, the crisis has become the trigger for the shareholder spring.

Why is it that the “in-group” is all over the dangers of groupthink in the boardroom but can’t recognize the signs of groupthink in their own thinking about the boardroom?

This essay considers whether the psychological phenomenon of groupthink explains why, in the face of growing disquiet and discontent with the belief in maximizing shareholder value, the corporate governance industrial complex, remains not only entrenched, but increasingly active in defending the status quo and maligning the alternatives.




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 characterized 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, these boards engaged in commercially unjustifiable risk taking.

Janis documented eight signs of groupthink:

  • Illusion of Invulnerability: Members ignore obvious danger, take extreme risk, and are overly optimistic.
  • Illusion of Morality: Members believe their decisions are morally correct, ignoring the ethical consequences of their decisions.    
  • Collective Rationalization: Members discredit and explain away warning contrary to group thinking.
  • Out-group Stereotyping: Members construct negative stereotypes of rivals outside the group.
  • 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.
  • Self-Censorship: Members withhold their dissenting views and counter-arguments.
  • Illusion of Unanimity: Members perceive falsely that everyone agrees with them.
  • 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 group think 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 marketand the worldwide recession which started in 2008.

Groupthink and Shareholder Primacy

I believe that the characteristic symptoms of groupthink can be seen amongst the members of the corporate governance industrial complex.

But I freely admit that a handful of quotes and anecdotes is not an argument but a structured form of observation.  I’m also mindful that in a short essay it’s impossible to avoid the criticism that I’ve constructed a bogeyman of straw by selecting a few self- serving examples.

There are of course many open minded moderates within the corporate governance community but, if social media is any measure, there are many more close minded hardliners and fundamentalists who can't tell 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 recognized as far back as Adam Smith.  Moreover, he ignores the warnings from those that work for and within corporations convinced that, within the tightly bounded rationality of his empirical analysis, he has captured the corporation like a child catches a bug.

And what if he was wrong ?  The consequences of his directive being misguided could be devastating.  But this possibility neither tempers Bebchuk’s encouragement for risk taking in the form of increasing activist attacks nor his unbounded conviction in his conclusion.

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 maximization is firmly entrenched in a duty based 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:

“Consider a society based on private property rights. In such a society - Friedman claims - 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”

Friedman argued that that the morally right thing for business to do is make as much money for shareholders as possible. 

Friedman even warns that the very foundations of a free society are threatened by any other moral code of the corporation.

Tamara Belinfanti, explores the moral framing in her excellent paper, Forget Roger Rabbit—Is Corporate Purpose Being Framed? :

"...proponents of shareholder primacy describe shareholders as 'owners'. This notion of ownership taps into a deeply held value in American society of the benefits of acquiring property, having a homestead, and the general ability and freedom to exercise dominion over something that one owns (within the confines of law). Similarly, shareholder proponents use terms such as 'shareholder rights' and 'shareholder democracy'. The values of 'rights' and 'democracy' are near universal truths and are held as ideals that should not be tampered with. Other linguistic choices of shareholder primacy proponents include calls for increased 'transparency', 'governance', 'independence', and 'accountability', all of which tap into most people’s desire to live in a stable and law-abiding environment, where people bear responsibility for their actions, and where those in charge do not exercise imperialistic or clandestine power"

No other management idea creates the same sense of moral panic and outrage when questioned as the so called duty to maximize shareholder value.

Collective rationalization

The third symptom of groupthink is the group rationalization 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 rationalize 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.  Whilst 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 activists shareholder, hiding behind the corporate veil, increasing 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.  Despite the crisis, the lack of evidence in support of their claims and empirical studies that establish that corporations with “poor” corporate governance did better in the aftermath of the global financial crisis those with stellar records, nothing will dissuade the corporate governance industrial complex.


Out-Group Stereo Types

The fourth symptom of groupthink is the groups 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 polarization 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, and 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 cross hairs following the publication of her academic best seller The Shareholder Value Myth.  And like Lipton, she is also stereo typed by her profession.

When Stout published an op- ed article, "Why Carl Icahn is Bad for Investors", activist investor Ichan 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 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 maximization is the objective of corporate governance and corporate law.

In Britain and the United States, maximizing 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 maximize 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 god fathers 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 group think 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.

How comfortable would you be sharing this article on social media?


Direct Pressure on Dissenters

The seventh sign of group-think 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.

Consider what happened in 2014 when an SEC Commissioner and a Stanford law professor publicly questioning whether the Shareholder Rights Project at Harvard Harvard violated US Federal Securities Law by not disclosing the full body of evidence.

We are thirty-four senior professors from seventeen leading law schools whose teaching and research focus on corporate and securities law. We write to respectfully urge SEC Commissioner Daniel M. Gallagher, and his co-author Professor Joseph Grundfest, to withdraw the allegations, issued in a paper released last month (described on the Forum here), that Harvard and the Shareholder Rights Project (SRP), a clinic at its law school, violated the securities laws by assisting institutional investors in submitting shareholder proposals to declassify corporate boards.

The continuum of pressure on people who don’t conform to the shareholder first view of corporate governance extends to 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 enhance returns. That is not because independence is unimportant. It is because our indicators of ‘independence’ are inadequate and flawed"

Despite this, 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 public explain their action in “deviating” from an un-validated 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 group think 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 LinkedIn it’s possible to see the mindguards of shareholder primacy at work.

Here’s three examples of mindguards in action taken from my experience :


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

The post formed the basis of an essay that was later featured by 


When I questioned whether governing and directing are different, I was removed from the same LinkedIn governance group.  A link to my essay wasn't even posted to the group nor was I an active member following my earlier experience of censorship.    


After publishing "Governing and Directing:  Are they Different"  I was blocked for many months from posting to any linked in group without approval from the owner or moderator.  As result, many of my posts and comments continue to be pending approval weeks after submission. Linkedin advised that I'd be blocked by a moderator.

Clearly there are those out there who believe they need to protect their groups from different views.

Corporate Governance: Paradigm or Groupthink?

When I first started writing this piece in 2013 I accepted that I may have created a straw man.   But none of the symptoms went away.   Indeed, they're worse.  if rampant short termism and other non commercial behavior is any measure, the psychology that drive shareholder primacy is reaching its peak.  An epoch that sadly we may only recognize in retrospect.



How Shareholder Value Tied the Invisible Hand : And Why Unilever Wants it Back

Paul Polman, CEO of Unilever NV, considers himself a hardcore capitalist.  A label many in the corporate governance community find hard to believe given his stance against the mantra of maximizing shareholder value - “I don’t think our duty is to put shareholders first. I say the opposite”.

The Dutchman is convinced that something is rotten:

“Capitalism in its current form is broken... The very essence of capitalism is under threat as business is now seen as a personal wealth accumulator…. if you go back to Adam Smith, his thoughts that were that capitalism was intended for the greater good”.

Since 2009, the Anglo-Dutch company has ended quarterly reporting, refused to pander to analysts, doubled capital spending, increased R&D, reduced the number of hedge funds in its shareholder base by half and, according to its CEO treats people, such as their 75,000 small hold tea farmers, fairly.

Polman’s approach puts him at odds with management theorists, and no doubt, many of Unilever's competitors that embrace shareholder primacy as the organizing principle of their corporations and modern capitalism.

To his critics, Unilever has an impostor at the helm.  

According to Bob Monks, pioneering shareholder activist, the “true" capitalist is the shareholder. In a keynote address to the International Corporate Governance Network in Paris on 13 September 2011, Monks passionately argued that shareholder primacy was not a threat to capitalism but its savior.

The overriding first need is for owners to recognize 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.

Will the true capitalist stand up.  Is it Polman, who puts Unilever first or Monks, who puts the shareholder first?

Who might Adam Smith give the prize.

The Invisible Hand           

Free market capitalism is loosely based on Smith’s idea that “the invisible hand” of the market will create the best possible outcome for the most people.

Smith formulated the most basic organizing principle of capitalism – In a commercial society “everyman is a merchant” . And the merchant's self interest and freedom dictates everything from price to the nation's progress.

Smith argued that self-interest (but not selfishness) produces the greatest good.  To Smith the “everyman merchant”:

Is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. [...] Nor is it always the worse for the society that it was no part of it.  By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Smith’s laissez-faire disciples are prone to forget that he was not an economist, but a moral philosopher.  More importantly, they forget that Smith’s morality was based on the virtues of the market as an organizing principle of capitalism and not property rights.  The point of trading and bartering was not just the wealth of individuals but the "Wealth of Nations”.

Democratic Capitalism

Smith described both the virtue of self-interest, and its vice:

The directors of such companies … being the managers rather of other people’s money rather than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which [they would] watch over their own [...] Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

Capitalism was powered by self interest but corporations are corrupted by it.  Smith can’t have imagined that his distrust of the human condition would one day inspire the shareholder wealth maximization norm that now dominates modern capitalism.

Under the influence of so called free market leaders, like Nobel Prize winner Milton Friedman, who argued that the only proper goal of business was to maximize profits for the company’s self described owners, public companies have come to be directed and controlled in such a way as to maximize the financial return to shareholders and, increasingly, to ensure shareholders have strategic control of the corporation.

Academics, policy makers and management consultants all celebrate the “virtuous cycle of shareholder value creation”.  The instruction given to company directors is unequivocal.  According to Professor Macey, “all major decisions of the corporation, such as compensation policy, new investments, dividend policy, strategic direction and corporate strategy should be made with only the interests of shareholders in mind”.

In this model of democratic capitalism, the board is primarily an extension or instrument of the shareholder’s business model.  A "man" on the inside responsible for assuring a return on the decision to buy shares.

But unbeknown to Smith, and it seems Friedman and his coterie, the philosopher had introduced a terrible mischief into capitalism by confusing ownership of a share with the ownership of the company.

For the invisible hand to work, everyone must be free to act in their own best interest.  But, under the norms of shareholder primacy, with one very important exception, corporations are not free.  Shareholders are viewed as the owners of corporations, the board of directors and managers are the shareholders agents and finally, the board’s primary role is to minimize the agency costs caused by the so called separation of ownership and control.  This norm of corporate governance is not freedom but a form of corporate servitude that corrupts the free market.

The exception is the corporation that happens to trade shares.  Financial corporations are free to act in their best interest by requiring non-financial corporations to forget theirs.  What believers of shareholder value maximization conveniently forget is that most shareholders are not human beings.  Shareholding describes a relationship, not a person.  In most cases, shareholders are corporations, and shares the commodity they trade.  With apologies to Orwell, all corporations are created equally but, at the moment, some are more equal than others.

This rhetorical trick creates a double standard that twists and ties the invisible hand. 

In a free market system, the needs of the shareholder corporation would be satisfied out of the self-interest of the non-financial corporation.  The shareholder’s share of wealth created by the corporation would be commensurate to the needs of that corporation, not the needs of shareholder.  As Smith reminds us “It is not for the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”.

Whatever the elaborate rationalization for shareholder wealth maximization in law, economics or morality, the effect of shareholder primacy is that only financial corporations are free to play by the rules of capitalism laid out by Smith.  Maximizing shareholder value is revolutionary.

The result is a one-handed form of capitalism, in which shareholders convince boards and management to ignore the best interests of their employer.  This is a distorted form of capitalism where one set of corporations are free to act in their own self-interest to build their individual wealth, but other corporations must yield theirs.  This is not free market capitalism it is an institutionalized form of rent seeking that threatens capitalism.  I can only imagine that to Adam Smith, champions of shareholder wealth maximization like Harvard Law Professor Lucian Bebchuk, would be rallied against as a rent seeking apologists rather than lauded as a hero of the free market.

Corporations in Smith's day looked nothing like today's behemoths.  But his basic message remains true.  When the baker ignores their self-interest, the nation suffers.

Commercial Capitalism

What Unilever and its deeply principled leader understand is that it takes two hands to compete in today’s global market.

The Guardian newspaper sums it up well:

Polman is scathing of companies that claim their hands are tied by fiduciary duty to maximise profits for shareholders in the short-term, arguing that this is too narrow a model of Milton Friedman's old thinking. The world has moved on and these people need to broaden their education with the reality of today's world.

But he’s far from alone in demanding change.

Leading the charge to expose the myths of shareholder primacy is Distinguished Professor of Corporate and Business Law at Cornell Law School. Professor Lynn Stout.  According to Stout:   

"What shareholders own are shares, a type of contract between the shareholder and the legal entity that gives shareholders limited legal rights. In this regard, shareholders stand on equal footing with the corporation’s bondholders, suppliers, and employees, all of whom also enter contracts with the firm that give them limited legal rights"

Stout systematically argues that the shareholder value norm is not supported in law or fact.  According to the professor, under the influence of shareholder primacy shareholders are suffering their worst investment returns since the 1920’s; life expectancy of Fortune 500 firms has reduced over the past century from 75 to 15 years and the number of publicly-listed companies has almost halved.

The challenge is that, such is the near universal acceptance of shareholder primacy that an illusion of invulnerability stifles debate.  Stout is more often dismissed by the self-appointed “mind guards” of capitalism as on a quixotic crusade.  Convinced by the inherent morality conferred by share “ownership”, those who don’t believe are the enemy and their arguments unworthy of serious consideration.       

Even the warning signs are dismissed.  Rather than see the global financial as an opportunity to re-evaluate the assumptions of shareholder primacy we have seen a renewed commitment to its dangerous principles.

Amongst those who subscribe to this "group think" masquerading as a paradigm, maximizing shareholder value might not be perfect, but it’s better than no alternative.  Or so the champions of shareholder value maximization think.

Stout’s dismantling of shareholder primacy is softening the ground for the counter-revolution and the return Adam Smith’s invisible hand.  The alternative is not a new form of capitalism but a return to unadulterated capitalism.  But, if you're expecting an argument in favor of the wholesale removal of state intervention in the market, for which Smith is falsely attributed, you’ll be disappointed.

Remove the excessive influence of financial corporations in the affairs of non-financial corporations and capitalism will be restored.

In the new free market capitalism every man, woman and corporation is a merchant and free.

Smith's "Everyman" does not mean every natural person and any corporation that holds a share.  It means every economic actor.  And in today’s global economy there are no bigger economic actors than non-financial corporations who we all depend on to supply us with our needs and wants.  

At the core of the counter revolution is that public corporations are separate and independent legal persons.  And, like their natural person equivalents, corporations owe nothing that they have not promised.  The counter revolution is not economic sedition it’s the forgotten law.  As Stout reminds us, corporations are real persons and their officers owe their duties of loyalty not to the shareholder but to the corporation.

I believe Polman’s call is to for directors and officers to embrace their responsibility to the corporation first.  The goal is to realize the corporation’s strength, resilience and endurance by optimizing the relationship with all stakeholders.  But not out of duty to any shareholder or responsibility to any stakeholder.  The organizing principle of unadulterated commercial capitalism is that the corporation’s actions are guided by a deep and profound understanding of it's self- interest properly understood.  It is not the ethics of duty or responsibility that serves the interests of stakeholders, but the ethics of self interest.

Freed from the distortionary constraints of shareholder primacy, the corporation through its board and management prioritize stakeholders according to their contribution to firm value over the longest time.   

If Polman has a failure as a capitalist, it may be his generosity in sharing the secret of Unilever’s success with its under performing competitors:  

“if you are single-mindedly focused on one value driver you will not be successful.  If you only focus on being sustainable, it would be wrong. If you focused just on shareholder value maximization that would be wrong. The challenge in the new world is to balance it all”.

This is hardcore capitalism because it takes insight, acumen and integrity to make capitalism work:

  • No fixed priorities.  The priority and value exchanged with each stakeholder is based on their contribution to the overall strength resilience and endurance of the corporation.  As circumstances change, the priority of each stakeholder is reconsidered to reflect their importance to the firm’s self-interest.
  • No narrow mindedness.  Stakeholders can’t be mistreated or misused lest they refuse or can’t provide what the corporations needs for its strength, resilience and endurance.  Unilever pays its tea producers fairly not out of benevolence, but because Unilever benefits by ensuring their children are in school and farmers are well trained.
  • No freeloaders allowed.  Unilever’s refusal to bend to the demands of activists and analysts reflects their value to Unilever’s success.  Remember, Smith reviled rent seekers who waste resources trying to extract wealth rather than contributing to its creation through mutually beneficial transactions. 
  • No false opposites.  The opposite of the symptom is rarely the solution to the problem.  Long-termism is not the solution to short-termism.  The solution is to make decisions in the best interest of the corporation.

No argument, however elegant or empirical, in favor of maintaining the status quo of maximizing shareholder comes close to the self-organizing principle of a market in which all its economic agents are free to pursue their interests within the law.

Who is the Capitalist's Capitalist?  

Adam Smith's  simple message to our business leaders is that capitalism is not about putting shareholders first (or second for that matter).  Nor, as Roger Martin and others argue is capitalism about putting customers first.  It’s not even about putting employees, the environment or any other stakeholder first.

The capitalist's capitalist puts their enlightened interest first.  The corporation that trades shares puts their interest first.  The Customer puts their interest first. etc.  But, given the importance of the corporation to capitalism, every director, CEO and other corporate officer must put their corporation’s interest first.  

So who wins - Polman or Monks?

It's a tie.  Monks is right to put the shareholders interest first, and Polman is right to put Unilever first.  The market settles the rest.   

The real impostors are business leaders who agree with Monks and put the shareholder's interest first too.  This is in no one's self interest - even the shareholder.

But don't be too concerned about that return of the managerial bogeyman of the 1970's.  The truth is that he retired years ago and has been working as a director ever since then.  Thankfully, he'll be retiring for good soon.  To be clear commercial capitalism does not mean putting the board and management first. Their promise is to the corporation and the corporation alone.  Remember this and Henry Mintzberg's beige turtle neck will have more chance of making a comeback than managerialism returning to the corporation.

All you need is a little faith in capitalism.  If like Polman (and, I suspect, Steve Jobs), you trust in enlightened self interest, not only have their companies prospered but so to its employees, its customers, the environment and so on.     And if the doubling of Unilever’s share price is any measure or, in the case of Jobs turning a $2 issue price (after splits) into $400 plus, it works for shareholders too.  

# This essay was freshened up in September 2014.

Governing and Directing : Are They Different? **

A recent survey of CEO attitudes to their boards by respected commentator Jeffrey Sonnenfeld and his colleagues, shouldn’t' surprise anyone:  

CEOs complain that boards often lack the intestinal fortitude for the level of risk taking that healthy growth requires. “Board members are supposed to bring long-term prudence to a company,” as one CEO says, but this often translates to protecting the status quo and suppressing the bold thinking about reinvention that enterprises need when strategic contexts shift.[i]

Consensus is growing that public company boards are too focused on compliance and are ignoring their role as creators of enduring value for the firms they direct.

But it's not for lack of will on their part.

The board’s role in strategy is considered the biggest issue for 67% of respondents to the 2012 Spencer Stuart US Board Index[ii]. PwC also report that three quarters of directors want to spend more time on strategy[iii].  Despite this, according to Heidrick & Struggles, 84% of directors of the top 2,000 largest publicly traded companies in the United States thought “they are now spending more time on monitoring and less on strategy” [iv].  This has resulted in only one-third of respondents to a 2013 McKinsey & Company report saying they have a complete understanding of current strategy.[v]

If directors have their eyes on value creation why is it that their feet are still pointing in a different direction?

It's because the system is not designed to create value.  The set of corporate governance principles and practices we call "best practice" is producing too many “governors” focused on protecting value and not enough directors focused on creating it.  Public companies have become over governed and under directed because corporate governance regulation and education is designed to ensure the "correct" board structure, process and composition rather than ensure "imagination, creativity, or ethical behavior in guiding the destinies of corporate enterprises"[vi].

This paper argues that in order to create enduring value, public company directors must go beyond governing and governance and also embrace “directing” and “directorship”.

Governing and Directing: Are they Different

Governance and directorship are two distinct systems of thought and action in the boardroom.  Their difference lies in their attitude to value.

Governance protects value.  Directorship creates it.

Think of governance and what comes to mind are thing like structure and process.  The focus is on protecting and preserving financial value through maintaining control and managing risk.  In contrast, directorship involves bold choices that create risk.  Directing involves designing the ways in which all forms of value are created, making decisions of consequence and inspiring CEO's to lead their organizations into strength, resilience and endurance.   

Here are four tests to help you decide where you stand on the question of governing and directing.

Governing for Shareholder Value Vs Directing for Firm Value

Corporate governance is described as the system by which companies are directed and controlled.  But these definitions fail to mention who their directed and controlled for.

Sovereign wealth fund, Oslo based Norges Bank Investment Management, recently came out with a Note that should leave no one doubting the practical reality of what corporate governance means:

 NBIM's goal is aligned with a commonly accepted definition of corporate governance, namely the way that suppliers of finance assure themselves a return on their investment.[vii]

Compare this position with Apple Inc’s attitude to suppliers of finance (shareholders) under the chairmanship of Steve Jobs.

Apple was directed and controlled for Apple.

Despite regularly being marked down on corporate governance, Apple was directed into market leadership, with no debt and a bank balance that made activists green with envy.

Put simply, Apple prioritized stakeholders based on their contribution to Apple's success. 

This applied to everyone including shareholders.  Apple ceased declaring dividends when Jobs returned to the Board. He also rejected calls to buy back Apple's shares.  According to Warren Buffet: "He didn't want to repurchase stock", he continued "although he absolutely felt his stock was significantly under priced at two-hundred and whatever it was then".  What Buffet knew is that neither he nor Jobs would "buy dollar bills for 80 cents" for as long as Apple and Berkshire Hathaway owned the mint.  Though you can't blame Buffet for trying.

It wasn’t that Apple’s board was anti-shareholder – there were several lucrative share splits.  Apple's directors put Apple first.   

Jobs directed more than he governed.  We even know what Jobs thought of governance types.  When Jobs discovered that former SEC Chairman, Arthur Levitt, was a governance true believer, Apple’s board promptly retracted their invitation to join them.

Measuring Value Vs Creating Value

Governance traditionally measures value in dollars.  The conservatives in the corporate governance community think of value in terms of the share price, whereas the liberals are more inclined to consider more sophisticated financial measures.

Nonetheless corporate governance is focused on cash value.  Creating cash, measuring it, reporting on it and redistributing it in the form of dividends and increasingly buy backs.  The audit committee and strong financial literacy are the backbone of good governance and the growing financialization of corporate governance.

But here’s the rub.  A financial statement is a backward indicator.  It will show historic revenues and costs but it won’t tell the board how to create the 5 other forms of capital a company needs to grow and prosper.

Directorship takes all forms of capital into account:

  • First, cash is not a synonym for value.  Tom Graves reminds us value doesn’t mean cash.  He goes on:
It’s utterly crucial, in all business contexts, to understand that money is only one subset of value – and that whilst all forms of value may interact, and may often be convertible from one form to another, not all forms of business-critical value can be converted to monetary form.[viii]
  • Second, financial statements are not a synonym for a business model.  A business model describes the rationale of how an organization creates, delivers and captures value[ix].  That means all forms of value that a firm needs to prosper and grow.  Key to this is that the more successful a firm becomes the less cash becomes business critical and is over taken by non cash forms value such as information, relationships, culture etc. 

To create value, a director must first understand the difference between cash and value.  Then she must be able to direct through the business model.  That means that the decisions made, the support and help given to the executive and the organization are aligned with the objective of generating financial capital, intellectual capital, human capital, produced capital, social capital and natural capital needed to survive a hostile market.    

There’s a good reason why Apple only raised capital once.  After that, there were better ways to make financial capital.

Governing for Transparency Vs Directing with Discretion

Governance demands an open book when it comes to communicating the company’s ideas and strategies to shareholders.  Information is the lifeblood of the investors business model.

Directing for value demands discretion.  Again under the chairmanship of Jobs, Apple was notorious for its tight control of information and Apple prospered.   This was no quirk of genius.  The harder it is to see within a firm the harder it is to imitate its success.

Managing Risk Vs Creating Risk

From a governance perspective, risks are best managed.  Deloitte's go as far as to put risk at the core of their proprietary governance framework:

Risk intelligence is at the center of an effective framework for corporate governance - and it lays the foundations for everything the board and management do to properly govern the corporation[x]

Governing for risk involves formulas and processes; setting risk appetite, formulating risk tolerances, adopting standards, delegating responsibilities, establishing risk committees, implementing risk programs and embracing the boards role of chief monitor of the corporation's strategic, operational, financial, technological and compliance risks etc.

From a directorship perspective, risks are best made by the board deliberately, consciously and focused on the return on the risk. 

Every bold choice that is designed to create value also creates risk.  Whether appointing a new CEO, acquiring a new business or pivoting the strategy, directing requires conscious and deliberate risk making.

Directorship embraces the best possible risk.  Relying on a foundation of commercial intelligence to understand, negotiate, transfer, insure and price opportunity correctly, the director bakes the risk into all their decisions and choices.     Risk and strategy are two sides of the same coin. 

Risk management is necessary, but it is the second best solution to the problem of risk.

Governing For Value Creation

If you’re still wondering where you stand on the difference between governance and directorship, consider what happens when a governance expert sets out to create rules for creating value in public companies.

In August 2013, Professor Richard Leblanc, a popular commentator on boards of directors, published Forty proposals to strengthen: The public company Board of Director's Role in value creation; management accountability to the Board; and Board Accountability to shareholders[xi].  Following interviews with activist investors and private equity leaders, he formulated a series of reforms focused on addressing the “infirmities” identified by his respondents.

To the Professor's credit he accurately identifies that public company boards are too focused on compliance and are forgetting value creation and company performance.  But what then follows are highly prescriptive recommendations of what director "shall", "should", "must" and "must not" do to create value.

And though the words "value", "value creation" and "value creation plan" are liberally applied to each page, what value really means is to be found in a footnote.  In line with his peers, he reaches for a definition that describes value in purely financial terms.    

The Professor's recommendations to create value are formulaic - Reduce the size of the board, Increase the frequency of board meetings, Limit director and chair overboardedness, Increase director work time, Focus the majority of the Board time on value creation and company performance, Increase director roles and responsibilities relative to value creation, Increase director compensation to long-term value creation and individual performance.

At one stage, he invokes bureaucracy when he proposes the "the Value Creation Committee":

"The mandate of the Value Creation Committee shall include the development of a longer-term value creation plan, which shall include non-financial performance metrics and holding management to account; integrated reporting; and oversight of all non-financial risks"

These are recommendations that only a manager could love.     

The Professor had approached the question of how to create value as a manager might solve the problem.  Creating processes, mandating policies and emphasizing accountability.

Reading all forty recommendations it became clear that not only did a managerial thread run through his work, but that managerial type thinking ran through corporate governance.  Corporate governance sets a distinctly managerial "tone" at the top.

Has no one noticed the obvious similarities between the mindset expected of a good manager and a good governor?  I don't mean the work of the manager but the work ethic and psyche.

Governing and managing are both about creating and following processes.  They're both adverse to risk and promote control through formal structures and accountability.  They're both more comfortable counting value than creating it.  Governing is a variety of managing in the boardroom. 

Not that governing is a bad thing.  There is a time for managerial thinking in the boardroom.  But it is an expensive and counterproductive mistake to think that a director can govern for value creation.

Directing For Value Creation

To create value for their organizations directors must approach their work not as managers, but as leaders.  Directorship is a variety of leadership in the boardroom.

Great directorship approaches value creation with imagination and requires that boards design how their organization create, deliver and capture real value (including cash), make decisions of influence and inspires and motivates the CEO and their team to execute on their shared vision.

Value creation at the board level requires the characteristics of leadership, not management.  To rephrase Kouzes and Posner five characteristics of leadership [xii], exemplary directorship requires that directors (a) model the way; (b) inspire a shared vision with the CEO and their team; (c) challenge the process; (d) enable the CEO and their team to act; and (e) encourage the heart of the CEO and their team. 

New research supports the need for directorship:

Directing for value requires that the board does the right things.  Governing for value protection is about doing  things right.

Once again, Apple may yet provide the proof that governing and directing are different.

The Succession of Arthur Levinson to the chairmanship of Apple’s board, has seen Apple putting its shareholders first.  Increasing dividends, retiring up to 60 Billion dollars of shares through share buy backs and raking up billions of dollars of debt in the process.  Levinson and Tim Cook are also opening the book at Apple.  Apple is now the only one of its major competitors to break down the sales of its product.  This is radical corporate governance by any measure and only time will tell if governing under Levinson will create as much value for Apple as strong directing did under Steve Jobs.

The DLMA Matrix ™

To capture the similarities between directing and leading on the one hand, and governing and managing on the other, I’ve developed the following matrix.

DLMA Matrix (v1.2(0310913).jpg

The DLMA Matrix is made up of a horizontal axis that represents Value Creation ("do the right thing") and Value Protection ("do things right"). The vertical axis has the Board on the left and the Executive on the right.

Below the line:

Assurance, in the form of best practice, involves formulas and processes, monitoring and oversight, setting risk appetite, etc. From this point, the board and the executives share managerial characteristics. While not crossing the line into management roles, boards tend to approach their assurance work with a managerial mindset.

Above the line:

Directorship means leadership in the boardroom. The Board and the Executive have complimentary and collaborative leadership roles. They make different decisions, pull different leavers, but Boards that lead and Executives that lead share the same objective of creating the greatest possible value for their firm.

Here We Go Again


Drawing a parallel between leading and directing on the one hand and governing and managing on the other will no doubt evoke the tired old debate as to which is more important.

For my part, I respect the value of appropriate governance and I’m not suggesting that one is better than the other.  Governing and directing though distinct, can still be complimentary systems of thought or action.  Each has a vital role to play in its time.  Strong directing and weak governing, though preferable to the reverse, can equally undermine or destroy value.

The challenge is that while a balanced approach to governing is not bad, the attitude of many within the corporate governance community is at best, unhelpful.  The most vocal advocates for corporate governance stubbornly refuse to consider, let alone believe:

  • There is more to the boardroom than governing and governance;
  • Their single minded "shareholder takes all" approach is distorting capitalism in ways that have sadly moved beyond imagination and into our lives. 

Until we see a change of attitude amongst these men, women and institutions,  a great many boardrooms will remain locked into the contradiction of wanting to create value for their organization but spending more time protecting value for its shareholders.

But for those who don’t need permission from lawyers, activists or any other members of the corporate governance community to compete, the opportunity is there to embrace directing, directorship and the DLMA Matrix ™ to your firms enduring advantage.

Remembering Abraham

You may recognize the debt this paper owes to Abraham Zaleznik, the Harvard Professor who, in 1977 wrote Managers and Leaders: Are They Different?  [xiii]

Though we take the difference between managers and leaders as integral to our understanding of management, the Professor’s obituary reminds us that this wasn’t always the case.

Zaleznik's analysis was so out of keeping with the common belief at the time that managers and leaders were one and the same that it evoked cries of disbelief from business people and academicians alike. In the years since then, however, the wisdom of Zaleznik's words has won acceptance, as companies scramble to fill their ranks with change agents. [xiv]

All that we need is fraction of the energy that Abraham Zaleznik released all those years ago, to start the debate about whether governing and directing are different. 


* This is a pre-print version of Governing and Directing: Are They Different. (c) 2013 Tunjic

** an updated version.  Thank you to everyone for your suggestions and improvements,  




[iv] Heidrick & Struggles, “10th Annual Corporate Board Effectiveness Study 2006-2007” (Los Angeles, California: Heidrick & Struggles and USC/Center for Effective Organizations, 2007).


[vi] Adapted from a comment by Abraham Zaleznik in Zaleznik A.Managers and leaders: Are they different?HarvBusRev2004;82(1):74-81

[vii] n%20Paper/2012/DiscussionNote_14.pdf


[ix] OSTERWALDER, A., PIGNEUR, Y., & CLARK, T. (2010). Business model generation: a handbook for visionaries, game changers, and challengers. Hoboken, NJ, Wiley.


[xi] International Journal of Disclosure and Governance advance online publication, 15 August 2013

[xii] KOUZES J, POSNER B. (2007) The Leadership Challenge. 4th ed. San Francisco, CA: Jossey-Bass

[xiii] Zaleznik A.Managers and leaders: Are they different?HarvBusRev2004;82(1):74-81.


What Boards Can Learn From Football Teams

Football fans recognize the importance of mechanics.

Who's on the field, their specific roles, the tasks to be performed and how each player approaches the game largely depends on three things - whether the teams in offense or defense, the score on the board and the time on the clock.

Mechanics are the basis of team rules.  They describe how each player must interact with each other and the game to achieve the team's objective.

But break a team rule and watch what happens.  The play breaks down, the coach throws down his headset and the players try to hide their disappointment.  And, after the game, when the team gathers for their review,  they're not reviewing the score but the broken mechanics.

Whether on the football field, the battle field or even in the boardroom if the team understands and executes on the right mechanics they're half way to success.  The other half is their combined talent, teamwork, and leadership.  Boards direct with one but not the other and wonder why they still fail.

I've coined the expression boardroom mechanics to describe team rules for directors and the remainder of what I call the directorship team (for more on the directorship team see here).

The boardroom is not the playing field but it does shares a feature that makes mechanics the ready made conceptual framework for designing team rules for the directorship team - modes.  A mode is a way or method of approaching a task.  For example, in football the dominant modes are offense and defense.  

Watching a football team you notice modes in action: 

  • the mode will change depending on the situation; and
  • the team, their tasks, their actions and behaviors will change between modes.

Modes make it possible to design the mechanics that keep the team in alignment with the objective no matter how things change.

My insight is to bring the idea of modes and mechanics into the boardroom and design tools that help directors and everyone else in the boardroom to perform at their best.  

Understanding Modes

Each philosophy of directing has its dominant modes.  This is likely to be news to many.  But I can assure you that directors operate in modes whether they are aware of it or not.

The two dominant modes of contemporary corporate governance are surveillance and interrogation or if you prefer monitoring and questioning.  Based on the objective of protecting shareholders, these two modes underpin popular governance models and frameworks. 

But these are not the exclusive modes of directing.  Directors can choose different modes depending on the chosen objective for the board.

Monitoring and questioning might make sense if the goal is to protect a shareholder value, but if the goal is to increase enterprise value I argue there are much better modes to choose from.   

I propose four alternative modes of directing designed to directly or indirectly increase the strength, resilience and endurance of the corporation:


for more on modes click here. 

Understanding Mechanics

Based on these modes of directing, I set out to answer the two questions every director should ask them self:

  • Given the situation which mode will create the greatest strength, resilience and endurance for the corporation; and  
  • Given the strategic choice of mode, what tasks need to be performed, who do we need, what are the necessary roles, information, behaviour or actions for that mode.

Mechanics answers these questions and brings the board and the rest of directorship team into alignment at every level with the goal of enterprise value. 

Here's one example of what I mean.  How the board and the CEO behaves is recognized as critical to boardroom effectiveness and efficiency.  In recent times, the approach of governance experts has been to identify the behavioral or personality types that exhibit better behaviors.  

My approach is to identify the types of behaviour that are aligned or correspond with each mode of directing.  Think of modes as providing a way of matching the behaviour of each director and the CEO to the tasks that fall within that mode.  For example, in trade mode the board might be debating a major acquisition and they need to bringing the right game to the task.  That means taking personal responsibility and asking for the right information.

Here's some basic behavioral mechanics for each mode: 


The same process applies to everything from tasks, roles, actions and even information.  Each mode has a series of mechanics that answers the question of what a director must do at any given time.  One size doesn't fit all and no size fits all the time.

To see how the tasks of directing are classified by mode click here.

But the true potential of modes and mechanics is to change the way boards are evaluated.  If a board or CEO is misbehaving the chances are they're bringing the wrong game to the task.  It's what I call broken mechanics and there are at least eight different types of broken mechanics where the symptoms are well known but the cause is a mystery.

Modes and mechanics provide a real alternative to current board evaluation tools.  Rather than benchmarking just the board against so called best practice for the 10th time, my approach enables boards to design their own team rules and, like the football team, systematically evaluate the effectiveness of the rules and identify who's breaking them.  But more importantly, it provide the tool to repair the mechanics to improve performance the next time.     

The Future of Directing

The least innovative solution to the challenge of continual innovation is to form a new innovation committee.  

True innovation requires the courage to embrace imagination and to design creative strategies and tactics that your competitors thought was impossible.  

The above is just a small glimpse of my imagination and a taste of what is possible.  Be assured my model of means, modes and mechanics expands into a systematic framework of directing that answers the question what must a director do.

Directorship might not be the innovation you expected but it may be the inspiration your boardroom needs.



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.


New Directions in Directing - Sketches and Summary

I spoke at Australia's premier non profit conference for leaders and directors over the weekend.    More information on the conference here.

Corrinne Armour captured the spirit of the event in a series of great sketches available for download at

Here's her visual notes on my presentation, New Directions in Directing:


click on the image for the full gallery.

For those who prefer words here's the short paper that accompanied my talk. 

“Nothing destroys the spirit of an organization faster than focusing on peoples weaknesses rather than on their strengths, building on disabilities rather than abilities.  The focus must be on strength…the greatest mistake is to try to build on weakness”

Peter Drucker

Today’s boardrooms are increasingly governed for weakness.  Many directors no longer direct their organisation into strength but monitor and cross examine their management out of fear and an unchallenged acceptance of a failing model of corporate governance.

This must stop. 

Experts and regulators cannot be allowed to fashion the boardroom through their distorted vision that focuses on individual and organizational weakness.  We must build a new vision for the boardroom that concentrates on what directors can do to foster the strength, resilience and endurance of the organisation. 

To stop governing for weakness and start directing for strength consider these 9 innovative steps:


Step 1: Get Clarity

An organisation is a separate legal person. It has personal/individual sovereignty and owes nothing to any person that it has not promised.   

An organisations' objective is to survive and grow in its own right.  Start measuring for:

Strength (S)

Strength is a measure of intrinsic value created by trading through the best possible business model.

Resilience (R)

Resilience is a measure of the organisations' ability to make and keep the best possible promises. 

Endurance (E)

The stronger and more resilient an organisation the longer it is able to fulfill its purpose.

Whatever an organisation’s individual and unique purpose, they all share the same S.R.E objective.


Step 2: Get Commercial and Committed

Whether for profit or not, all organisations rely on trade and their commitments for S.R.E.  Commercial is just another word for sustainable. 

 Get commercial by:  

  • calling "Stakeholders" what they really are TRADING PARTNERS
  • exchanging the best possible promises with all TRADING PARTNERS
  • prioritizing TRADING PARTNERS based on their contribution to S.R.E
  • making the BEST RISKS

Learn to direct by commitments to your organisation’s members, each other, the state, your employees and all other TRADING PARTNERS.


Step 3: Get Beyond the Numbers

Get beyond numbers by focusing on assets then cash.  Seek out and understand your organisation’s assets and ask whether they are both valued and valuable to your trading partners.


Step 4: Get Perspective

No board can trade blind.  Boards must work from business models and trading frameworks then financial models. 

Financial literacy is pointless if a director cannot read the business model from which it is derived.

Every director must share an understanding of how the organisation works and how best to trade its assets.  You can’t imagine a team of surgeons having their own opinion of a patient’s anatomy, so why accept each director having a personal view of their organisation.


Step 5: Get Past Duties

Aim for S.R.E.  Personal duty sets the bar too low.  Direct within the law but not too the law.


Step 6: Get a Third Team

Boards do not direct alone.  Everyone knows there is a line that divides the board and management.  What we don't realise is that for some of the time they’re on the same side of the line and need a plan to work together.

Directors are part of the “Third Team” made up of the board, the CEO, the executive and others.  The Third Team is vital to an organisation’s success and arguably the most neglected and misunderstood.


Step 7: Get on Board with Mechanics and a Plan

All teams needs need team rules.  Rules are the mechanics that connect the Third Team to an organisation’s S.R.E.   

Get Strategic

To realise an organisation’s S.R.E directors must be strategic in the way they spend their time and energy.  Deliberately choose when to guide and motivate, when to commit, when to help and finally when to build and develop the board and the rest of the Third Team.

These are the four “Modes of Directing”.  Switch the Mode of Directing to match the organisation’s circumstances and realise your board’s potential.   

Get Tactical

Shakespeare wrote “all the world’s a stage, and all men and women merely players. They have their exits and entrances, and one man in his time plays many parts”.

So it is with the board and the Third Team.  Every member of the Third Team has a different part to play depending on the Mode of Directing.  The key is to adapt roles, behaviours and tasks to ensure everyone is aligned.  Fail to adapt and you will break the mechanics.


Step 8: Get Fit

Get fit by:

  • Testing for broken mechanics in your Third Team.  What you think is a personality problem is probably broken mechanics.
  • Learning and practicing the right mechanics.  My steps won’t fit into an orthodox worldview.  You’ll need learn and adapt before you can put my steps into practice.


Step 9: Get Competitive

Get competitive by:

  • Forgetting most practiced corporate governance.  It was never designed for the not profit sector and, if you look at the evidence, much of what passes for best practice doesn’t work.
  • Focusing on S.R.E
  • Using mechanics to develop a unique plan for your Third Team
  • Building the talent, teamwork and leadership to execute on the plan

Remember talent and diversity is not a strategy.  No amount of talent will save a Board who’s only plan is to watch in fear.

It’s your choice to take these steps and set out in a new direction or continue down your current path.  As James McRitchie explains:

"Unlike the natural sciences, where paradigms are used to explain and predict, corporate governance is socially constructed. Paradigms in our discipline are normative models, used to discipline and guide. The major stumbling block to shifting paradigms is recognizing the element of choice. We aren’t stuck with what we have. We can choose to move to a whole new paradigm, if it offers a better foundation for building the kind of world we want."

What kind of boardroom do you want?  One governed for weakness or directed for strength?


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.”



Better Boards Conference 2013 : New Directions in Directing

New Directions in Directing is a workshop I'll be presenting at the 7th Australasian Better Boards Conference.

The conference is for executives and directors in the non profit sector and will be held at the Melbourne Convention Center from the 5th to the 7th of July 2013.

To learn more or register click here. 

What My Workshop Will Cover 

Who should your football team play for?

The board, the members, the fans or all the stakeholders including the opposing teams.

To those who know the game, the answer is the jumper - the history,  the culture and the club.  The jumper is what great teams play for.


Why then are all our theories of corporate governance based on governing for someone or something else?  Why govern for others when directors can direct for the strength, resilience and endurance of their organisation.



New Directions in Directing begins with the game changing idea of sovereignty and logically and systematically builds into a new and practical approach to directing that works:

Step 1: Get Clarity

Organisations are separate legal persons.  They are sovereign and owe nothing that is not promised.

Organisations may have a different purpose but they all share a universal objective - to survive and grow in their own right.  Measure for:

Strength (S)
Strength is a measure of intrinsic value created by trading through the best possible business model.
Resilience (R)
Resilience is a measure of the organisation's ability to make and keep the best possible promises.
Endurance (E)
Endurance is a measure of strength and resilience.

Step 2: Get Commercial

All organisations (and particularly not for profits) rely on trade and their commercial acumen for S.R.E.  Get commercial by:

  • calling "Stakeholders" what they really are TRADING PARTNERS
  • exchanging the best possible promises with TRADING PARTNERS
  • prioritizing TRADING PARTNERS based on their contribution to S.R.E
  • making the best possible risks

Step 3: Get Beyond the Numbers

Get beyond the numbers by focusing on core assets.

Step 4: Get Perspective

No board can trade blind.  Work from business models and trading frameworks then financial models.

Step 5: Get Past Duties

The goal is to direct within the law not too the law.

Step 6: Get a Directorship Team

Boards do not direct alone.  They rely on a team made up of the CEO, the executive and others to fulfill their purpose.  Everyone knows there is a line that divides the board and management.  What we don't realise is that for some of the time they are on the same side of the line and need a plan to work together.

Step 7: Get on Board with Mechanics

All teams needs need team rules.  Rules are the mechanics that connect the directorship team to the organisation's S.R.E.

Step 8: Get Strategic Mechanics

Choose the mode of directing and corresponding tasks that will realize the organisation's S.R.E based on the situation at the time.

Step 9: Get Tactical Mechanics

Match team member roles, behaviors and actions to the board's choice of mode and the tasks at hand.

Step 10: Get Fit

Get fit by:

  • Testing for broken mechanics
  • Learning and practicing the right mechanics

Step 11: Get Competitive

Get competitive by:

  • Forgetting most practiced corporate governance
  • Focusing on S.R.E
  • Using Mechanics to develop a unique board plan
  • Building the talent, teamwork and leadership to execute on the board plan.

What Resists Directs: How Corporations Get Their Direction*

Nature is said to be the greatest teacher and it has a lesson for boards and directors.

The Australian desert is hypnotic from the air.  Its hues of dusty brown broken only by the occasional ruffle of a mountain range and the long thin lines of ancient, and as I would come to realize, wise waterways.

Rivers hold a secret.  Standing on the banks the eye is drawn to the water and the movement.  The force of the flow appearing to carve the river’s direction.   But looking down it’s a different story.

At 10,000 meters, the directing is being done by the river banks.  My small epiphany was that direction is as much a function of what doesn't move as what does.  Whether the river moved left, right or held its line depended on what was in its way - the soil and the geology.  You can do this experiment for yourself.  Next time you’re walking in a crowd just stop and watch how you start directing the flow.

Rivers follow the path of resistance.  In other words, what resists directs.  That’s their secret.  It’s what doesn’t move that matters as much as what does.  And, in some way, the same might hold true for corporations and their direction.

Culture, ethics and habits share similar characteristics with the banks of a river.   They are repeated so often and for so long that they are invested with a solid and permanent quality and are hard in the sense that they don't change easily.   And like the river, they direct the flow of our wants and desires in a way that can’t be seen from the ground.  

Why did AIG have a massive exposure to the sub prime risk and other insures did not?  Why did Lehman and Bear Stearns collapse and other commercial banks survived?  In part, the answer lies in resistance.  Their culture, ethics and habits were directing them into the path of the global financial crisis years before the implosion of the financial systems.  Made of weaker stuff they yielded to false opportunities and there was nothing to direct them in another direction.

But others resisted and even became stronger.  They were made of tougher stuff.  Many were exposed to the same pressures but ended up going in a different and better direction.  This was not just good fortune.  It was their culture, ethics and habits at work.  They were directed out of harm’s way by their resistance to the forces of change.

The point of my reflection is twofold.

  • Directing is not just about whether you split the chair/CEO or whether directors should come up for annual election.  Directing is foremost about understanding the corporate condition and using this insight to build better corporations.  Caught up in the human condition, governance activists forget this.
  • Second, if we want to change the current trajectory of capitalism and regain confidence in the acumen of our business leaders, it might help to search for fresh insights on how corporations get direction.


Nature's lesson is that like the river in flood, once all the energy of the latest change management program dissipates, we return to the same path and direction.  That is, unless we learn from nature and form new banks in the process (no pun intended).



*updated 31 May 2013


Risks Are Best Made

Few corporations set out to make risk.  But that's what happens every time a decision is made.

Appoint a CEO and a risk is made.  Approve the strategy and a risk is made.  Acquire abusiness and a risk is made.  It's hard to imagine any meaningful board decision that doesn't simultaneously create the hope of strength, resilience and endurance and the fear of weakness, vulnerability and insolvency.


Risks are best made and then managed. 

Despite this, the focus of the governance community continues to be on managing the risk rather than the causes of the risk. 

Risk now occupies the center of governance frameworks.  According to Deloitte: 

Risk intelligence is at the center of an effective framework for corporate governance - and it lays the foundations for everything the board and management do to properly govern the corporation.

What follows is a logical system of defining risk, setting risk appetite, formulating risk tolerances, adopting standards, delegating responsibilities, establishing risk committees, implementing risk programs and embracing the boards role of chief monitor of the corporation's strategic, operational, financial and compliance risks.

And, its hard to argue with this logic.  But is it a false opposite?  The argument seems to be that to solve the problem of excessive risk we need more risk management.  But what if excessive risk was not the cause but the symptom.  What if the real problem is underwhelming commercial acumen?  Would the solution be the same?


Risk management is the second best solution.  The best solution is to ensure the risks we fear don't find their way in.


If it's our decisions that make the risk, commercial intelligence should be at the core of the corporation.


To rephrase Deloitte (with apologies):

Commercial intelligence is at the center of an effective framework for directing - it lays the foundations for everything that board and management do to properly direct the corporation into strength, resilience and endurance.

Commercial intelligence is old fashioned good judgement - the ability to weigh up the competing forces of risk and reward and to use a variety of techniques to bring them into the best possible balance.  Commercial acumen is what identifies the value and simultaneously creates the risk.  With good acumen you get commercial risk.  With bad acumen you get  false opportunities and excessive risk.


So how do you use commercial intelligence to make the best commercial risk and avoid false opportunities?

Start by managing promises.  Corporations are mostly promises and the people who keep them.  Every thing a corporation owns can be traced back, in one shape or another, to those two things.  And, every thing a corporation will be can be traced forward to promises and people.  And the most effective way to lose all that value is by making bad risks by making a bad promise.

Even reputation risk can be managed by promises.  One measure of brand is the difference between promises made and promises kept.  The gap is your brand delta.  The bigger the gap the bigger the risk to your reputation.

Next time you are called on to make a promise for your corporation, mind the gap, and ask whether these questions might help you to make the best risk.

  1. Do we intend to keep our word?
  2. Can we make the promise?
  3. Why exchange promises?
  4. What value is received?
  5. What value is given?
  6. What are the assumptions behind the promise?
  7. What constraints does the promise put on future choices?
  8. What's the risk of a failed promise?
  9. What's the risk of a failed promise leading to weakness, vulnerability and/or insolvency?
  10. Is the risk "baked" into the promise?
  • has the risk been "priced"
  • has the the risk be shared appropriately
  • has the risk be mitigated
  • has the risk be traded to a third party
  • is the remaining risk worth it.


When Governing and Directing Collide*

Norges Bank Investment Management (NBIM) know what they're talking about when it comes to corporate governance.  With US $650 billion to invest it's their business to know:

"NBIM's goal is aligned with a commonly accepted definition of corporate governance, namely the way that suppliers of finance assure themselves are turn on their investment".

To this pension fund, and investors everywhere, governance describes the many ways in which they manage their investments.

And what better way to manage their investments than by having their "men" on the inside.

Under the cover of agency theory, the boardroom has been transformed into an extension of the investor's business model.  In fact, the two are becoming one.  Board structure, composition and process are now designed to align the interests of directors with those of shareholders.  Directors are becoming investment managers fully integrated into the goals of investors.

I get this.  Governance is a good idea for investors.  What I don't understand is who's left to do the directing.  And if no one is doing the directing, perhaps governance isn't such a good idea after all.

Directing predates corporate governance by a 100 or more years.  Directing is what directors did before the rise of "best practice" and what directors continue to do in the shadows of the boardroom.

Directing is what directors do to create value in and for their corporations.

If the board is just one way investors assure their investment, it's the only way corporation's assure their strength, resilience and endurance.  The board is still at the forgotten core of the corporation's business model.

Directors are the ones that commit the corporation to its future.  They agree strategy and strategize, approve major acquisitions and divestments, select, supervise and reward the CEO, declare dividends and bear the risk of broken promises to the state and to these members.  These are just some of the tasks of directing.

The paradox is that they've all become governance mechanisms too.

To some extent each task of directing has been reprogrammed to become a lever in the investor's bag of tricks.  Under the spell of shareholder primacy the traditional tasks of directing have been re-purposed.  Once upon a time CEO's got paid just like other employees.  The rate was different but the methodology was similar.  But ever since the late 70's, when CEO pay first started to be aligned with shareholder value,  it's risen over 100 times faster than their employees.

The challenge is that reprogramming directing into governing ignores the reason for the task in the first place.

As mentioned, directing predates governance by years.  The tasks of directing came about because corporations needed them to be done to achieve their objective of strength, endurance and resilience.  Nothing has changed in business to alter this commercial reality.  What has changed is that directors have become investment managers and what they do is being turned into an investment tool.

The challenge of directing and governing can be seen in the oversight of management.

Corporate Governance holds that the goal of oversight is to monitor management.  Due to a widespread belief in agency theory, the board has become the principal mechanism by which investors manage their risk of management misbehavior.  In "monitoring mode" delegates become the target of intense, active and vigorous surveillance and the language reflects this.  It's not uncommon to hear directors describe their role in terms of  "cross examining" and even "interrogating" management.     

Directing approaches oversight from an entirely different direction. 

Directors cannot delegate management to managers and then monitor in the interests of investors. Instead directors must continue to guide and supervise management in order to achieve the corporation's objective.  The goal of oversight from the perspective of directing is to provide the CEO with the necessary support, encouragement and direction to ensure the required work gets done.  In many respects it's the opposite of the governance version of oversight.  I doubt any director consciously sets out to undermine their delegations, but there is enough evidence to support the view that this is the unintended side effect of turning boards into monitors.

What this shows is that corporate governance and directing are two different tasks masters and they're pulling the boardroom in different directions.  Great for your competitors, but a problem for you.

My solution is that if you get the directing right the governing will follow.  Investors don't need directors governing to manage their investments.  They need directors directing for strength, resilience and endurance.

I admit this is probably going to take a decade or more.  After all, this generation of directors have been raised to govern.  For some, surveillance is all they know and, if you believe the leading lights of the governance industry, all they will ever know.

But I argue directing can prevail.  It will take a leap of faith.  But faith in reason and the human spirit are more the drivers of corporate prosperity, than the fear and paranoia that drives corporate governance.


 *an updated version.


Using Modes to Improve Boardroom Behaviour



How directors behave has long been recognized as a key factor in predicting boardroom performance and effectiveness.

One popular idea is that certain behavioral types make better directors.  According to Canadian academics Richard Leblanc and James Gillies, "challengers", those who ask the tough questions are essentially good and "critics",  those inclined to destructive criticism are essentially bad.  In all they identify 5 effective and 5 ineffective personality types.

No doubt they're right.  But it's one thing to have the insight and another to get the right personalities on the board.

Fortunately, whilst we might not be able to change behavioral types, research into the concept of "modes" and neural plasticity suggest we can change our type of behaviour.  The good news is that better boardroom behaviour may be closer than the next proxy battle.

Daniel Goleman recently described modes as follows:

"Modes’ are a new concept that lets us understand how and why we actually are diverse people at various times. A mode orchestrates our entire way of being: how we perceive and interpret the world, how we react – our thoughts, feelings, actions and interactions."

But modes are not limited to our personal interactions.  

Modes can be used to improve boardroom behaviour by providing the clue to the right type of behaviour at the right time.  This is new.  The personality type approach can be inflexible.  The challenger tends to challenge and fail to notice that their behaviour is demotivating the CEO.  The concept of modes opens up the boardroom to new solutions to old problems.

Goleman again:

"The liberating effect of thinking about modes rather than 'personality types' is that modes come and go.  We can learn what triggers our modes, what makes some self-defeating ones so sticky, and what can help us loosen their grip and get into the best modes for top performance."

In today's boardroom it's arguable that there is one dominant mode.  It's the control or monitoring mode and it's characterized by intense scrutiny of management and their activities.  But as has been argued recently there is significant downside when the boards thoughts, feelings, actions and interactions are dominated by this one mode.

I propose an alternative set of modes designed to get the boardroom in the best mode for top performance. 

Based on the idea that the board's role is to create value, I've identified four "good" modes of being in the boardroom:

  1. TRADE - In trade mode the board is strategizing and making commitments on behalf of the corporation.
  2. GUIDE - In guide mode the board is guiding and supervising the CEO and other delegates.
  3. HELP -  In help mode directors provide access to resources.  
  4. BUILD - In build mode the board is developing the talent, teamwork and leadership to working each of the other three modes.

The goal is to ensure that everyone in the boardroom matches their behavior to the right mode at the right time.  This includes management and the rest of the directorship team.  I call this process of matching behavior to modes "mechanics" and its critical to good directing and directorship.  

Here's my breakdown of the types of behaviour that match each of the modes for both the board and the CEO.  The "Better Behaviours" are the types of behaviour that, based on my research and reflections, are best suited to the objective of the mode.

So next time a director or the CEO misbehaves ask whether the problem is their behavioral type or their type of behaviour.   If their behaviour doesn't match the mode then you'll experience dysfunction and broken mechanics,

The good thing it's much easier and quicker to improve boardroom performance by changing types of behaviour than trying to change someones personality or waiting for a director to resign or be removed.   A quiet word from the chair to tone down the questioning when the board moves into guide mode can make all the difference to the performance and effectiveness of the board.

Reframing the Relationship Between the Board and Management

In the 1970's a CEO might have spent up to 10% of their time on board related activities.  Today, that figure can be closer to 20%.

In the age of corporate governance, leading and managing have become part time pursuits.

Managers are the silent victims of the governance revolution.  Forced to split their time between their traditional roles and supporting the board to meet the increasing demands of regulators, analysts and activists.  They feed the board's growing appetite for information under relentless "cross examination".  And they must do so under a presumptive cloud of suspicion that they're up to no good.

Whilst I can't turn back the clock or the tide of expectation of what boards should do, I can offer a way to re-frame the relationship between the board and management so that, for the time they are working together, they are more effective.

But to do this it's necessary to go back to square one and reset the relationship.  

First, let's lose the attitude.   

If a board is truly interested in a stronger, more resilient and enduring corporation then stop de-motivating management through excessive monitoring.  Management scientists have long known that surveillants come to distrust their targets as a result of their own surveillance and this leads to a downward spiral in the relationship between them and their target.  Now new research suggests that oversight can be bad for business:

"Corporate innovation suffered when the boardmonitored intensely. Companies with such boards invested less inR&D, received fewer patents overall and received fewer influentialpatents as measured by the frequency of citations of the patents theyreceived. In addition, company value was lower when the board devotedgreater time to oversight."

Second, let's recognize what's staring us in the face. 

It takes more than a board to direct a corporation.  Boards of large corporations would cease to function without the support of the CEO, the broader management team and a host of other board room participants.  But read any book on corporate governance and it's all about the board.

The time has come to realize there are three teams at the top of the corporation - the board, the management team and the two together.  When the board and management are working together in the boardroom they're on the same team.  I call it the "Directorship Team".

Directors direct but managers don't just manage.  Managers aren't directors but they are part of the team responsible for directing.  Once you get this idea the stumbling blocks that have plagued the relationship between the board and management start to disappear.  

Third, let's get deliberate.  

If up to or more than 20% of management's time is spent on the boardroom you'd expect that working with boards would make up a large part of an executive education.  No.  In fact there is a dearth of material on how to work with boards.  If there's an MBA course out there that includes a course on working with boards I'd love to hear about it.  

The reality for most CEOs and management is that working with the board is ad hoc and improvised and exercised under a cloud of distrust.  That's not to say that managers aren't doing a great job in the circumstances.  Just that there's no end of best practice on what boards should do and very little on what the rest of the directorship team should be doing.

One solution is to use my concept of modes of directing to create a practical guide that reframes the relationship between the board and management. 

To remind you there are four modes of directing are the ways in which the board and directorship team create the greatest value: 

  • TRADING - Directors directly influence Strength Resilience Endurance (SRE) through the commitments (promises) made on behalf of the corporation.
    • GUIDING - Directors influence SRE by guiding the CEO and other delegates in the way they lead and manage the corporation.
    • HELPING - Directors also influence SRE through their help and support to the corporation.
    • BUILDING - Finally, directors influence SRE through building boardroom talent, teamwork and leadership to work in each of the other three other forms of directing.

    Over the course of a board meeting and throughout the year the board will move in and out of these modes.  The catch is that each mode has a different profile in terms of role and behavior suited to that mode.  The goal of an effective boardroom is to ensure that everyone in the room matches their role and behavior to the mode.  This includes management.

    In each mode, the whole directorship team will have different role to play.  But get them wrong and you'll have dysfunction and what I call "broken mechanics".  This is the secret of mechanics.  Static approaches captured in slogans such as "noses in fingers out" are outdated in the modern boardroom.  What is needed is flexibility and adaptability to ensure the team is in the mode that will create the greatest value at the time.

    Here's my brief breakdown of the board's roles and the CEO's roles based on the modes of directing:


    If you want a better relationship with your board or CEO why not start by talking about your modes and mechanics and seeing how well you're aligned?



    Direct For Strength Govern For Weakness

    Directors have become defined by their weaknesses and the vitriol of their critics.

    This must stop.

    No director should be subjected to constant taunts of inadequacy or worse.   Likewise, no CEO or executive should be subject to the character presumptions upon which shareholder primacy is founded.  In the work place it’s called bullying.  In the boardroom it’s called best practice.

    But there is more to this than self interested trash talk. 

    The governance industry has become obsessed by weakness and devising new ways to fix what’s wrong with boards.  Directors are accused of being ignorant, neglectful, self-interested, spineless, delusional, inexperienced, and even conflicted if they need the money.  Whereas CEO’s are presumed to warrant constant monitoring and challenge on the basis that they’ll take off with the silver if no one’s watching.

    The bias to weakness pervades the Anglo/American model of corporate governance at many levels:

    • At a theoretical level, managers are seen as self interested and are only interested in using a corporation's resources for their own purposes.
    • At a director level, non independents are presumed to be biased towards managers.
    • At an executive level, boards are encouraged to relentlessly monitor and challenge their executives.
    • At an organizational level, board must focus on uncovering weakness in the form of risk.

    You need only review the headings to the many online governance forums to get a sense of how the concept of weakness and failure define so much of the discussion of what good governance means.

    But by governing for weakness, whether in the boardroom or the c-suite, do we end up with weaker corporations.

    According to Marcus Buckingham (and others) focusing on weaknesses is a mistake.  As Drucker put it:

    “Nothing destroys the spirit of an organization faster than focusing on peoples weaknesses rather than on their strengths, building on disabilities rather than abilities.  The focus must be on strength… the greatest mistake is to try to build on weakness”

    Though he was talking managing, I see no reason why the same could not be said of directing.

    Directors are told to focus on their own weaknesses and the weakness of others.  The governance industry is quick to highlight examples of corporate failures as evidence of an epidemic of weakness and mediocrity amongst directors.  But none stop to ask whether they and their prescriptions for improving the performance of boards are part of the problem.    

    Evidence is mounting that governing for weakness does not improve performance.  Recent studies have concluded that “best practice” can lead to higher executive salaries and lower performance and innovation.  Despite this experts in governance continue to promote the practices and principles of contemporary corporate governance and deride anyone who would offer an alternative.

    But there are signs of vulnerability.  Nell Minow, credited as one of the founders of the governance industry, has recently come out with this justification for director independence:

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

    Is this not the traditional defense of a failing ideology - It’s not the theory that's wrong, they’re just not doing it right.

    This must stop too. 

    The governance industry must not be allowed to continue to fashion the boardroom through their distorted vision that focuses on weakness rather than strengths.  We must build a new vision for the boardroom that concentrates on what directors can do to foster the strength, resilience and endurance of the corporation.  We must remember what it means to direct again.  Then let directors and shareholders choose whether corporations should be governed for weakness or directed for strength.



    The Tasks of Directing

    Directing is primarily about getting things done.

    Someone has to do the things that either haven't or can't be delegated away.  These things are the tasks of directing.  As Peter Drucker put it:

    "Somebody has to approve the decision what the company's business is and what it should be.  Somebody has to give the final approval to the objectives the company has set for itself and the measurements it has developed to judge its progress toward these objectives.  Somebody has to look critically at profit planning of the company, its capital investments policy, and its managed expenditure budget... Somebody has to watch the spirit of the organization, has to make sure that it succeeds in utilizing the strengths of people and neutralizing their weaknesses, that it develops tomorrows managers and that it rewards to managers, its management tools and management methods strengthen the organization and directs it toward its objective".

    That somebody is the board working with management as a team.

    But nothing gets done by just watching and waiting for management to make a mistake.  That risk can't be ignored, but there are much greater risks to the corporation if the tasks of directing are ignored or done badly.  The strength, resilience and endurance (SRE) of a corporation depends on the board getting the right things done.

    To ensure the right things get done in the right way and at the right time I use my model of directing that pivots on the four modes or forms of directing:




    • TRADING - Directors directly influence SRE through the commitments (promises) made on behalf of the corporation.    
    • GUIDING - Directors influence SRE by guiding the CEO and other delegates in the way they lead and manage the corporation.  
    • HELPING - Directors also influence SRE through their help and support to the corporation.  
    • BUILDING - Finally, directors influence SRE through building boardroom talent, teamwork and leadership to work in each of the other three other forms of directing.    

    Using these four modes of directing I've set out below headings for tasks that share similar characteristics.  

    But this is not just another list of jobs.  Lists won't tell a director how to approach a task or when to do it.  A list is not a plan.

    Historically the tasks of directing have been understood one task at a time.  For example, capital strategy and approving a major acquisition are seen as two distinct and unrelated tasks of which there are many.  But, using my model it's possible to relate these tasks in a way that will help directors and executives to better understand their work.

    Both capital strategy and approving an acquisition are example of commitments that impact on SRE.  One to commits the corporation to its shareholders and the other commits the corporation to a vendor.  In both cases the boards role is similar, designing the commitment, deliberating whether to make the commitment, deciding on the commitment, delivering on the commitments (if not delegated), delegating the commitment and deeming the performance criteria.  In other words, though the tasks look different, because they fall into the Trade Mode the role is identical. 

    What I have created is a simple taxonomy of directing around the four modes of directing.  It is a scheme of classification that permits fresh insights into directing.  Grouping things collectively rather than individually means it's possible to think creatively and progressively about how to best direct a corporation.

    The Tasks of Directing when combined with the Roles of Directing begin to form the base for a systematic plan for ensuring the right things get done in the right way.



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    A Model of Directing

    Contrary to popular opinion, directing is not concerned with ensuring investment returns to investors.  That is the domain of corporate governance.

    Good directing is concerned with the actions that a board and each director can take to ensure a corporation realizes its objective and purpose. 

    I propose a model of directing based on the idea that the objective of the corporation is the realization of its own strength, resilience and endurance (SRE).  Regardless of a corporation’s unique purpose, whether selling advertising or educating children, all corporations share the same basic objective.

    Not to be confused with managerialism or board primacy, SRE places the interests of the corporation in the center of the model.  This decision is primarily commercial.  Though there are both legal and philosophical arguments in favor of corporate sovereignty, the best argument is commercial pragmatism. 

    A corporation run for its own interests seeks to optimize, individually and collectively, the relationship with each of its shareholders, directors, managers, customers and all other trading partners with the goal of SRE in mind.  A corporation run for its own interests will also countermand un-commercial rent seeking by any trading partner that undermines SRE.  Pragmatism demands that trading partners interests be prioritized according to their contribution to SRE. This spirit of commercialism runs through my model.

    I also propose that the purpose of directing is to directly and indirectly assist corporations to realize this objective?

    How then does directing lead to SRE?

    To explain, I use the same model used for centuries to organize the conduct of war.

    Waris perhaps the most complex of all team work.  Whilst the boardroom isnot a battlefield it does share a common feature.  The work can be divided into "forms" or "Modes" based on actions.  For example, attacking and defending are formsof war.  This may seem obvious but it's genius.  By separating war into its forms it became possible to develop the mechanics of waging war:

    • form is determined by the situation and the objective; and
    • form then determines the personnel, their roles, their tasks, the required information and the types of behavior aligned to that form.

    If the equivalent of attacking and defending could be identified in the boardroom it would be possible to build a new model of directing based on a similar framework.  My ambition is to develop the mechanics of directing:  

    •  a strategic model to help directors identify the right form of directing at the right time given the objective of SRE; and
    •  a tactical model that helps both directors and management to align their roles, tasks, inputs and behaviors with the right form of directing. 

    Unfortunately, you won't find the concept of forms or modes of directing in governance literature or codes of best practice.  Most models of directing are input based ie. structure, process, composition etc.  Others amount to little more than thematic lists - a shopping list with no recipe.  Others abandon mechanics all together.  Seemingly arguing that provided a board member has the right psychological profile it will all work out for shareholders. 

    My model is based on the actions a board can take to realize SRE.  I focus not on inputs/inferences but on actions/outcomes to come up with four forms of directing: 


    • TRADING - Directors directly influence SRE through the commitments (promises) made on behalf of the corporation.  Hiring a CEO is a commitment that only the board can make.  Likewise, a board makes commitments to a corporation’s members.  In both cases the wrong commitment will enhance or undermine the SRE of the Corporation.   Similarly the optimization all trading partner relationships falls within the Trading Form of directing.
    • GUIDING - Directors influence SRE by guiding the CEO and other delegates in the way they lead and manage the corporation.  By guiding, motivating and developing the CEO and other delegates the directors take indirect action to ensure SRE.
    • HELPING - Directors also influence SRE through their help and support to the corporation.  For example, directors can provide access to their networks and personal brands in support of SRE.
    • BUILDING - Finally, directors influence SRE through building boardroom talent, teamwork and leadership to work in each of the other three other forms of directing.  Concepts such as composition, process and structure fall within the Build form of directing.      

    Progressive directing pivots on these four forms of directing and makes it possible to begin to build a model to help directors:

    1. Match the form of directing to the corporations circumstances to ensure the board becomes strategically aligned with the corporation's SRE.
    2. Match the board and management's roles, tasks, inputs and behaviors to the right choice of form to ensure they are tactically aligned with the corporation's SRE.

      To illustrate the process I've created a simplified model that matches the roles of directing to the forms of directing outlined above.  

      You'll notice I don't mention monitoring.  A staple of most governance models, monitoring has come to define the modern boardroom.  But it is neither a form or role of directing.  Directors direct through information in much the same way as Mintzberg argued that managers manage through information.  Information encircles all forms of directing and all roles of directing.  To argue that the board should be "monitoring" for agency costs misses the point of directing. 


      Forms of Directing

      Roles of Directing




      • Designing/Optimizing Organizational Strategy
      • Deliberating
      • Deciding
      • Delivering
      • Delegating/Designating
      • Deeming KPI’s
      • Representing
      • Persuading
      • Defending the organization
      • Recruiting CEO
      • Communicating (primarily with members)


      • Communicating with CEO and other employees
      • Guiding (with expectation)
      • Coaching and Motivating delegates
      • Developing delegates
      • Evaluating
      • Strengthening culture
      • Defending Delegates


      • Resourcing
      • Advising (without expectation)
      • Promoting
      • Networking
      • Lobbying


      • Designing Board Strategy
      • Structuring
      • Developing
        • Talent
        • Teamwork
        • Leadership
      • Prioritizing Tasks/Trading Partners
      • Evaluating
      • Recruiting directors




      What Ever Happened to Directing

      Sovereign wealth fund, Oslo-based Norges Bank Investment Management (NBIM), has recently come out with a Note outlining its expectations when it comes to the board and corporate governance. 

      The discussion paper makes clear what corporate governance means to one of the world's largest shareholders:

      "NBIM's goal is aligned with a commonly accepted definition of corporate governance, namely the way that suppliers of finance assure themselves a return on their investment".

      What we see here is that corporate governance is little more than an instrument of investment strategy.  Corporate governance is a continuation of investing by other means.  It is what is done to ensure a return on a decision to buy shares.  

      NBIM then goes on to affirm this conclusion by describing its "universal" role for the board:

      • The board must act as a representative of the owners of equity capital
      • The board is responsible for establishing a corporate governance system that alleviates agency costs
      • The board must ensure adequate and honest information to the market and the shareholders

      To NBIM's credit, they acknowledge that the board has two roles that might be considered traditional "directing" - appointing the chief executive and approving and overseeing strategy.  But even then, the fund qualifies that role by saying that the board shall approve overarching strategic decisions without being distracted from its monitoring role

      I read this last line with disbelief.  Could they really be saying that directors must not be distracted from their role as investment managers* by their role as directors of a corporation? 

      Is this really what a director must do?

      The note is the latest in an industry marketing campaign that stretches back 30 years. By convincing the world that directors work for shareholders, share holding/trading has become the apex business model of capitalism.  Investing is a business model like selling software or making cars.  And for much of the 20th Century it was an unspectacular business model.  That is until the proselytism of the new trinity - ownership, agency and agency cost.  It's been a brilliant pivot for the investment industry.  Make no mistake, the most successful takeover of the 1980's was the boardroom.

      The challenge for NBIM, its 7000 "investments" and the rest of us is that corporations that trade things other than shares rely on directorship to ensure their success.  Somebody has to motivate management, somebody has to approve acquisitions and capital requirements, somebody has to do all the other things that a board must do to assure the strength, resilience and endurance of the corporation in which they own shares.  These things require commercial directors focused on the corporation's business model - not proxy investment managers working to justify the investors decision to buy shares. 

      Instututional shareholders forget that non share trading corporations don't expect someone elses board to manage the sucess of their business (you may need to read that a couple of times).  Corporations that manufacture things or sell services expect their own board to do that job.  And they can ill afford to share, let alone surrender, that scarce resource to an wealthy investor.      

      The other challenge is for the non profit sector.  They have been swept up in the success of the shareholders campaign to takeover the boardroom.  All too often directors in the non profit sector behave like institutional investment managers despite having no owners investments to manage.  It's a disaster.

      As is the case with marketing campaigns, the reality can be more of an empty promise:

      • NBIM acknowledges that its fund is dependent on companies' sustained profitability but then expects the team ultimately responsible for that profitability - the board - to work for them as their investment manager.  If sustained business success is the goal perhaps the NBIM might consider other ways to assure their return that would free the board to get back to the work of directing.
      • NBIM acknowledges that there is a lack of evidence to support the value of corporate governance codes but appears to adhere to the fundamental tenets of such codes.  Moreover, NBIM argues that investors should depart from best practice if well thought out and persuasively justified. But then relies on the trinity of ownership, agency and agency cost to support their expectations.  None of which are universally recognized as well thought out or persuasively justified.

      But perhaps the emptiest promise is corporate governance itself.  Have institutional investors been too successful in their campaign to assure themselves of their investment?  By robbing corporations of their directors and installing their managers in their stead, are investors losing far more than they could ever gain from protecting against agency costs.

      If governing is investing by other means who is doing the work of directing?

      More importantly, if directors are mere investment managers who will stand up to challenge NBIM's expectations and reject them if unrealistiic or unjustified?  Who will speak on behalf of the corporation to say no - there is a better way?   

      *my emphasis