How to Build Alignment Between the Board and Executive

I’m pleased to share an article published in Governance.  Considered to be the leading source of information about corporate governance world-wide, I’m grateful to Lesley Stephenson and her team for including this in their October issue.

My paper continues the theme that governing and directing are different.  In it I propose a new way to analyse how well a company manages the potentially contradictory elements of assurance and management with directorship and leadership.

Click on the image below to be redirect to the article published on Governance Issue 256.  


What Company Directors Can Learn from Sesame Street

Strategy, risk oversight and board composition are the leading areas of board focus for 2015. That's according to a survey of more than 250 public companies by Deloitte LLP Center for Corporate Governance.

Can you tell which one doesn't belong? Is it strategy, risk oversight or board composition? 

One of these things is not like the others,
One of these things just doesn't belong,
Can you tell which thing is not like the others
By the time I finish my song?

did you guess which thing was not like the others? Did you guess which thing just doesn't belong? If you guessed strategy is not like the others, then you're absolutely...right!

Governing and Directing: What's the Difference

Did you pass the Sesame Street Test?

Did you think that you were absolutely right because strategy has no real place in the boardroom?  Did you think,  it was a trick question because they're all board governance?  Or, Like me, did you think strategy didn't belong because strategy is different to board governance?

Think of board governance and what comes to mind are board structure, process and composition. The focus is on independent directors, protecting and preserving financial value through maintaining control and managing risk.  Risk oversight and board composition share a focus on value protection.

Forming strategy, communicating vision and culture, making decisions of consequence, like appointing the CEO and then inspiring management to be their best set a different tone.  These things share a focus on value creation.

Board oversight and strategy have only one thing in common - the people in the chairs.

For me, governing and directing are two distinct systems of thought and action in the boardroom. It takes a leader, not a governor to create value. In the boardroom, leadership is what I call "directorship". It's a skill and it's different to governance.

Governors protect value, directors create it. Governors exercise risk oversight, directors take risk. Governors focus on getting the process right, directors focus on motivating people. Governors try and control their firm, director try to liberate the enthusiasm and innovation within the firm. Governors financialize, directors commercialize.   Governors work for suppliers of finance, directors work the firm. Governors are looking behind trees, directors are looking beyond the forest.

What separates governors and directors is their attitude to value.

Governing for Shareholder Value Vs Directing for Firm Value

Sovereign wealth fund, Oslo-based Norges Bank Investment Management , leaves no one doubting why firms are governed:

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.

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.

It wasn’t that Apple’s board under Jobs 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.

Governors are focused on shifting value from the firm to their shareholders. Directors are focused on creating value in and for their firm.

Measuring Value Vs Creating Value

Governors measures value in dollars - creating it, measuring it, reporting it and redistributing cash 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 the firm.

Directors understand value is measured differently:

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.

Second, financial statements are not a business model. A business model describes the rationale of how an organization creates, delivers and captures value. It takes six capitals to build a viable firm - financial, intellectual, produced, human, social and environmental. Directors direct through the business model. Governors govern through the financial model.

There’s a good reason why Apple only raised capital from shareholders once.

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

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.

Risk is like Count Von Count.   Like a vampire, risk must be invited in.

Directors invite the right risk into the firm.

Every bold choice creates risk. Appointing a new CEO, acquiring a new business or pivoting the strategy all requires conscious and deliberate risk awareness and mitigation.

Governors exercise oversight, directors price risk, negotiate it, mitigate it, transfer it and then accept or reject the opportunity.


Getting the Balance Right: Right Things Vs Things Right.

Have we got the balance right between governors who focus on doing things right and directors doing the right things.

Not according to a recent survey of CEO by respected commentator Jeffrey Sonnenfeld:

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.

Heidrick & Struggles report that 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”. Resulting in only one-third of respondents to a 2013 McKinsey & Company report saying they have a complete understanding of current strategy. This, despite 67% of respondents to the 2012 Spencer Stuart US Board Index considering the board’s role in strategy is the biggest issue and PwC reporting that three quarters of directors want to spend more time on strategy.

Why have public companies become over governed and under directed?

Is it because corporate governance regulation and education is designed to ensure the "correct" board structure, process and composition rather than ensure "imagination, creativity, or ethical behaviour in guiding the destinies of corporate enterprises"? Has board governance monopolized the board room and strategy and the value creating tasks of directing become a well intentioned after thought?

One of these things is not like the other

Who knows, perhaps back in 1977 when Abraham Zaleznik was writing Managers and Leaders: are they different, one of his grand children was singing the Sesame Street classic that helps children identify the differences between things. Zaleznik knew there was a difference between managing and leading.

According to HBR, at the time of his breakthrough article management education centered on organizational structure and processes. For Zaleznik, the leadership elements of inspiration, vision, and human passion which drive corporate success were missing.

My generation of directors grew up on Big Bird and the rest of the neighbourhood who, in some way, helped raise us to see the differences in objects.  And, later we would learn from Zaleznik and others, the difference in concepts like leading and managing.

Does cramming strategy, risk oversight and board composition into the one overflowing bag of governance pass the Sesame Street test? After all, what do these things have in common? More importantly, is this year's record breaking value of buybacks and dividends declared a measure of the damage done when we ignore the difference between value creation and value protection?

It's almost forty years since Zaleznik split the c-suite into leaders and managers, perhaps it's time for the boardroom to follow and split governing and directing.  The same people performing different roles but with a different mind and skill set.  Both equally important but different.  Sure, like leading and managing, there's overlap and we'll be debating the difference for decades.  

But that's the lesson I take from One of these Things is Not Like the Other

When I was 5,  I'm guessing I knew the difference between a cow and a group of people, cutlery and a clock and three starfish and a crab.  But I still had to learn how to describe and communicate their subtle differences.  Decades on, and nothing has really changed except I've graduated from objects to concepts like governing and directing.   But understanding and communicating the differences between concepts at my age is no less difficult than objects in preschool.   Especially when the word used to describe a brussel sprout and a rubber ball are considered the same.

Understanding DLMA Analysis (pronounced "dilemma")

DLMA analysis is a structured way to analyze the four management disciplines involved in running a company - Directorship, Leadership, Management and Assurance (alternatively corporate governance).

The premise is simple.

The tool gives company directors and executives a straight forward way to categorize their roles and create a shared insight into where they're putting their time and energy and asking whether they've got the balance right.

DLMA analysis uses a quadrant based matrix to evaluate how well a firm is performing in each of these areas:

DLMA analysis does for organizational design what SWOT analysis does for strategy.   It provides a solid framework to analyze how board and executive roles produce positive and negative effects on business performance and reveals the competitive tensions between them.

The Dilemma in DLMA ANALYSIS

There's a dilemma at the heart of every business model.   A company needs all four management disciplines to grow and prosper.  But, the forces of value protection  pull in a different direction to value creation and they're all competing with each other for energy and attention.  

The battle between protection and creation is played out in the c-suite and the boardroom.  Directorship and Assurance are in tension on the left of the matrix and Leadership and Management are in tension on the right.  And, to some extent, all four are on a collision course.   For example, directors are faced with a dilemma of monitoring the executive in their Assurance role and inspiring the executive in their Directorship role.   Academics and experience tells us that one role creates distrust and the other relies on trust.

The key to addressing the dilemma is the idea that boards and executives work above and below the line.

Below the Line

Below the line represents the quadrants that focus on value protection. 

Boards and Executives Share Managerial Functions

Boards and Executives Share Managerial Functions

Assurance in the form of "best practice" corporate governance involves formulas and processes; monitoring and oversight, setting risk appetite, formulating risk tolerances, adopting standards, delegating responsibilities, establishing risk committees, implementing risk programs etc.

What those who put risk in the center of the boardroom don't seem to realize is that Assurance shares managerial characteristics captured in the phrase “things right”. 

Whilst most directors don't think they're managing there's a distinct managerial feel to corporate governance.     Not that there's anything wrong with managing.   There's a vital role for boards to ask "what if" and for executives to ask "what to do now".   But not all the time.   

To be clear, when the board is working below the line in their Assurance role they're not micro managing.  Instead their "macro managing".  Doing different managerial type activities but with a similar state of mind. 

Above the Line

Above the line represents those quadrants that focus on value creation. 

The Board and Executive Share Leadership Functions

The Board and Executive Share Leadership Functions

Both Directorship and Leadership share the characteristics of leading captured in the phrase “right things”.   The Board and 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.

The big challenge for many firms is that what passes as "best practice" in the boardroom falls almost entirely below the line.    This can leave the Directorship quadrant empty and companies exposed and suffering.  Worse still, if the board never gets above the line, the constant challenging and questioning of the executive can create an unhealthy adversarial relationship.  Undermining the conditions required for board to get above the line to embrace its shared leadership role.


DLMA Analysis is a brainstorming tool.  It is designed to provide shared insights and not individual solutions. 

Its value is that it provides a simple, structured and effective way to have a refreshingly new conversation at your next board retreat.  After 30 years of the same corporate governance discussion, perhaps it's time to ask some different questions.

Here's a list to get you started:

  • Where is our organization focused?  What % of time, energy, thinking is devoted to each quadrant?
  • Are we dividing our time between our Directorship and Assurance functions?  Do we understand the difference between governing and directing?
  • Are we looking beyond the forest or are we stuck in behind the trees?
  • Are we asking "what if" before we've agreed "what will be" and have we considered "what could be better"?
  • Are we conscious of the tension between our Directorship and Assurance roles and how are we dealing with it?
  • What's our SWOT Analysis in each of quadrant of the DLMA Matrix.

The process doesn't have to be fancy or need facilitation (you might struggle to find one for awhile, though as the first "expert" in DLMA Analysis I'm available).  Just jot dot down where you believe your organization fits in each category and discuss.

What you'll discover is your firm's own DLMA profile and be able to ask, perhaps for the first time, whether we're getting the balance right or whether we need a re-balance.



I hope you find DLMA analysis useful.   If you have any suggestions on how it can be improved and even whether I've got the colors right please add a comment below.

In the meantime, if you're interested in learning more about DLMA analysis you can read more here and see how the idea has developed over the years.  Alternatively,  there will be DLMA Analysis App soon to help capture, analyze and share results.   Subscribe to to get updates on the release date.


Team Rules : The Foundation of Board Leadership

Today's prescription for board leadership is a recipe of talented directors, led by an independent chair who creates the right chemistry between them.

But teamwork, talent and chairmanship are not enough to guarantee top performance.   For a board to lead, each director must ground themselves in the right mechanics.

The idea of mechanics is familiar to any football fan.   They're called the team rules.

Who's on the field, their individual roles, the tasks at hand and each players approach to the game depends on mechanics.  Mechanics are the building blocks of team rules.  They describe how the players purposefully interact to win.

But break a team rule and watch what happens.  The play breaks down, the coach swears and the players try to hide their disappointment in their team mate.  And, after the game, when the team gathers, they're not reviewing the score but where the mechanics broke down.

On the football field and in the boardroom, great talent, teamwork and leadership can only take you so far.  If the team understands and executes on the right mechanics they can go all the way.

The Mechanics of Directorship

The boardroom has its own offense and defense.

Traditional governance is like defense.  The focus is on protecting value through  corporate control, oversight of management, monitoring for risk and regulatory compliance.   The mechanics can be simple - question, challenge and monitor.

Directorship is more like offense.  The focus is on creating value by making strategic decisions, motivating management, helping out and learning how to become better at directing.

Most directors will have little trouble identifying the team rules when they're governing.  But what are the mechanics when they're directing for value creation? 

To understand the mechanics of directorship, it helps to understand the idea of a mode:  According to renowned psychologist Daniel Goleman:

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.

Modes provide the clue of how to act, behave and what to do.

Even the most contemporary approaches to better board performance ignore the concept of modes in favor of personality types.   The idea being that if you get the right personality types with the right skills, board leadership inevitably follows.

But in the spirit of the best governance solutions, the pill creates the next disease:

  • The personality approach to board performance can be inflexible.  The challenger tends to challenge all the time and fails to notice that their relentless behavior is demotivating the CEO and undermining value.    They think they're doing their job.  And they are, but only sometimes.  At other times they're undermining their own work.
  • The personality approach recruits "governance" type directors.  Whose thoughts, feelings, actions and interactions are dominated by a control and monitoring ethos.  Great in defense when the board is protecting value.   But as many now recognize, boards must not only defend value - they must actively create it.

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.

Governance has become sticky and self defeating.   An all consuming mode that creates many of the problems it has been designed to solve.  They're is a time for monitoring and questioning, just not all the time.

If the goal is top performance, the board needs to look beyond corporate governance and the usual suspects of talent, teamwork and chairmanship.   They also need to design the mechanics - their own team rules for creating value from the boardroom.

The Four Modes of Value Creation

At the core of directorship are four different modes of operating.  These modes are the basic building blocks of the board's team rules when it comes to creating value.

To be clear, these are not governance mechanics.   Governance has its own mechanics and a single dominant mode.  But if you think that scrutinizing management is the best way to create value, you're kicking an own goal.

Each of these modes represents a different way a company director can go about building business critical value in the boardroom.   Some are obvious.  Boards make decisions like appointing a CEO and choosing the right strategy and this is a distinct mode of operating.   But equally, having made a decision to delegate a role to the CEO, the board can continue to create value by guiding and motivating.  Each mode has its own goal that contributes to overall success of the firm in its own unique way.

The challenge is to create a plan that ensures that everyone in the boardroom matches their behavior and actions to the right mode at the right time.

To design the right team rules for your board focus on each mode and ask yourself these logical questions:

  •     What do we need to do ?
  •     What's our role ?
  •     What are our dominant actions ?
  •     What are our dominant behaviors ?

Then start putting them into practice.

But to do this, you must first know when its time to govern and when its time to direct.  Then, when the board has decided its time to direct, how to transition between modes to produce the greatest value as things change.  In the beginning, that can be as easy as color coding board papers to telegraph the primary mode through which the board should interpret the information.

To get you started thinking about the mechanics, here's my breakdown of the dominant or primary actions that match the objective of each directorship mode.  

Next Steps

The first step in mastering the mechanics of directorship is to recognize that governing and directing are different and that governing for value protection requires a fundamentally different approach to directing for value creation.   Read Governing and Directing - Are They Different to make up your own mind.

If you accept that like managing and leading, governing and directing are different, the next step is to design, learn and follow team rules.

Designing is the easy part.  Over the past decade I've done much of that work for you.  The hard part is learning and following the rules. It takes a special board to recognize that they need more than talent, teamwork and a great chair.  It takes an exceptional board to embrace the discipline of directorship.

But as every footballer knows, the memory of the hard work and pain of training is the strength needed to succeed. 


AICD Discovers "Good" Governance is a Team Activity

Great to see the Australian Institute of Company Directors (AICD) finally recognise that the board and executive are a team.

Released in May 2015, When does good governance lead to better performance? is a report commissioned by the AICD into the relationship between governance and business performance.

The report's authors, Dr Robert Kay and Dr Chris Goldspink conclude that good governance is a team activity:

"The key finding of this current research, that ‘good’ governance is a team activity, may initially appear almost too obvious to warrant a mention. However, this presents a significant departure from the way in which the topic has been viewed in the past."

"'The team’, as a single unit of analysis, should be conceived of as the board and the executive leadership team"

“Good governance is a team activity...taken seriously and deeply,  it represents a significant change in direction from the literature and the  general approach adopted in exploring the topic in the past, particularly as this ‘team’ is generally taken to include the executive."

The report marks a shift in thinking that began many years ago.

As far back as 2009, Andrew Donovan and myself were writing in the AICD's own journal that the board and executive were a team:

"Most directors would have few problems with the notion that directorship is practiced by a team. They may, however, be surprised to discover they are not the only ones on the team.

Corporate governance has suffered from a form of tunnel vision, only seeing the directors and the board. We suspect the cause of this is to be found in debates that isolated directors behind the line defining their role and purpose from that of management. Whatever the cause, the focus of corporate governance is almost exclusively on the board and the roles and behaviour of the directors."

A year later I travelled from Australia to both sides of the Atlantic to present the novel idea that the board and management should be studied as a team.  

From Directorship Theory presented at "Corporate Governance and the Global Financial Crisis, The Wharton School, Philadelphia September 24-25, 2010

The organisational “unit” of corporate governance is typically considered the board.

I propose that this assumption is blinding research to deeper causes of “dysfunction”. Models of corporate governance that focus exclusively on the board ignore the degree of influence that other participants, and in particular top managers, have on the performance of the roles, responsibilities and tasks associated with directorship.

Historically, the corporate governance roles of top managers have gone largely un-noticed by scholars, educators and regulators:

  • Academic literature generally re-enforces the idea that “Manager’s must [only] manage” (Drucker, 1986). 

  • Likewise, with notable exceptions (Westphal, 1999), the positive influence of top managers on the practice of corporate governance is largely ignored.

  • While Nicholson and Keil argue that “the effectiveness of the management team (and how that team interacts with the board) is a fundamental confound in any board performance relationship (Nicholson and Keil, 2007) the question of how greater effectiveness can be achieved remains unresolved.

  • Corporate governance codes and guidelines pay little or no attention to the governance role of top managers. Directors are overwhelmed with exhaustive best practice recommendations, but no equivalent guidance exists for a top manager when working with a board.

  • Management education is no better. For example, in Australia, management students generally receive little or no instruction on how to work with boards.   

Based on my observations, if a typical MBA syllabus reflected the time spent on what top managers actually did, 10% or more of the course content would be devoted to working with directors and boards.

The inexplicable absence of top managers from corporate governance theory makes even less sense in the context of the admission that directors could not do their job without the help of the CEO and her team (Carter and Lorsch, 2004) and the paradox that the two groups often do not get along (Tunjic, 2010).

I propose that the board and top managers are members of a temporal team that come together from time to time to practice directorship.

Based on the definition of Kozlowski and Bell a team is defined as a “collective who (a) exist to perform organisationally-relevant tasks, (b) share one or more common goals, (c) interact socially, (d) exhibit task interdependencies, (e) maintain and manage boundaries, and (f) are embedded in an organisational context that sets boundaries, constrains the team, and influences exchanges with other units in the broader entity” (Kozlowski and Bell, 2003).

It is arguable that the board and top managers meet many of these characteristics and are better understood and studied as a team. I adopt this approach in developing directorship theory.

To be clear, those in top management, and in particular the CEO, will occupy positions on both the management and directorship teams. For most of the time, the CEO leads the management team but for some of the time the CEO joins with the directors on the directorship team.

The team approach continues to be core to my work on directorship.  This excerpt from Reframing the Relationship between the Board and Management published in 2013:

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.

The AICD's report, When does good governance lead to better performance?  shares this fundamental insight to produce great thought leadership.

It's worth remembering though that thought leadership is not about being the first to publish a breakthrough idea or standing out as the expert.   It's foremost about standing up and explaining your ideas, year after year, even when no one's listening.  In my book, a thought leader is someone who stands up knowing they'll be "thumped" and not the person who stands out for praise. 

The AICD is to be applauded for supporting Dr Kay's and Dr Goldspink's research and bringing new ideas to a broader audience.  Research that advances and improves our understanding of the relationship between the board and management is cause to be celebrated. 


Stealing From the Devil's Playbook: A Blue Print for Investor Domination

At their most fundamental level(3).png

It's said that the greatest trick the devil ever pulled was convincing the world he didn’t exist.   He's not the devil of course, but I suspect Carl Icahn and his fellow activists have read the playbook.

Management are "rotten", mutual and pension funds are "lazy" and bosses "clubbable".  That's the framing for a recent article entitled Capitalism’s unlikely heroes: Why activist investors are good for the public company.  No, this isn't a hedge fund press release- it's surprisingly a work of journalism.  

February is "hero" month at The Economist.   Around this time last year, the same newspaper wrote a set-up piece called How activist shareholders turned from villains into heroes.    This year they've delivered the punchline.

But calling activists heroes is no joke to Yvan Allaire, Executive Chair at the Institute of Governance, who believes The Economist is running infomercials for activist hedge funds:

"On a topic requiring sober, balanced coverage, The Economist cuts logical corners, tramples contrary evidence, ignores a vast store of scholarship, and conjures up an empirical “study” to produce misleading data."

Inexplicably, journalists appear to have joined scholars in promoting what is just a money making venture.  How a paper that sells itself as taking "part in a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progresshas ended up on the wrong side of intelligence is remarkable.  

But this is Icahn and his fellow activists' greatest trick.  To conceal their strategy to dominate capitalism in plain sight.

The conceit of corporate governance heroics hides the truth that activists only compete for money once it's made.  

Samsung and Apple fight for the customer with risk-fraught strategies.   But when the dollar's won, the activist attacks Apple for the spoils.   There's nothing noble about buying shares on-market and then crying mismanagement for profit.   Nor are common activists particularly courageous.  The fact they're called "hedge" funds is a good gauge of their commercial bravery.   

At their most fundamental level, activists are not heroes but a company's coldest competitors.   Waiting off-registry for the value to be created then exploiting the cover of failed governance and questionable academic research to help themselves to the opportunities created by so called "mismanagement". 

But whatever you may think of the ethics, shareholders competing for the wealth of companies is neither unlawful or wrong.   It's just their business model.   Affectionately described by the Economist in these terms:

"Instead of loading up on debt to finance the takeover of entire firms, they get the work done with a stake of, typically, just 5% or so. That means activists are good value because they use less debt, pay no takeover premium and extract far lower absolute fees."   

Some businesses figure out how to sell technology for value.  Other businesses buy shares and try and figure out how to use them to take value for themselves.  In the end, they're both just business.  The only difference is how they choose to make money.  One through hot competition in the market.  The other through cold competition within the firm.

Corporations are filled with cold competitors from employees to managers, to suppliers who wage a sort of cold war for the firm's scarce resources.   The key to every successful business is knowing when it's in the firm's interest to push back and when to fold to a cold competitors demands.   Not out of duty or responsibility but out of the firm's self interest properly understood.

The problem with cold competition is that it's no fun when the contest becomes so one-sided that the firm - and every other stakeholder - is guaranteed to eventually lose to one competitor.

How the playing field was tipped so radically in favour of activists and investors trying to take value is the subject of a twelve part series written over 2014/15.  Each part exploring a different strategy used by the investment industry to win over the public in their PR campaign that has redefined capitalism.

The purpose of the Marketing MSV Series is to help return a bit of balance by providing the insights directors and regulators need to go head-to-head with activist and investor business models.  

But with hundreds of billions in funds at their disposal, activists aren't going to give up easily.  And nor should they.   Every business has the right to win and lose on a level playing field.  To even things up, here's a list of the twelve techniques that are giving activists the edge over corporations.  After all, it's better the devil you know.

TWELVE WAYS TO HAck the corporation

(and not get noticed)

Get Them Young

Teach business students that the goal of business is to maximise shareholder value

Read more

Stay On Message

Mould public opinion by repeating the three core messages of shareholder value consistently throughout the media and across all platforms.

Have journalists act as if they were under a duty to maximise shareholder value.

Read more about staying on message

Win Their Hearts

Associate shareholder value with broader societal values - democracy, property rights and accountability.

Read more on the linguistic strategies used by the investment industry.

Play Mind Games

Use psychological techniques to promote the goal of maximising shareholder value and suppress discussion of alternatives.

Read more to learn what shareholder primacy has in common with the psychological phenomena of groupthink.

Lose Their Minds

Have sympathetic friends in universities who act as if under a duty to maximise shareholder value

Read more on the curious relationship between Wall Street and the ivory tower.

Exploit a Little Truth

Imply that investors bankroll capitalism when nothing could stretch the grain of truth further.

Argue that because shareholders own something that means they own everything.

Available April 2015

Make it Personal

Create the impression that shareholders are people when the overwhelming number are corporations that buy and sell shares as part of their business model.

Available May 2015

Change the Law

Change the law to give the investment industry a competitive advantage over other industry segments

Available May 2015

Re-frame the Problem

Appear on the side of long-term value creation when that's not the real problem.   

Available June 2015

Divide and Conquer

Pit managers and directors against each other

Available July 2015

Open New Markets

Encourage investment industry serving "good governance" in new and emerging markets throughout the world

Available August 2015

Use Fear as a Last Resort

Create fear that if companies act in anyone but the shareholders' best interest, capitalism will collapse.

Available September 2015


2003 - The Living Board

Corporate governance is not simply, as the ASX Corporate Governance Principles of Good Governance and Best Practice Recommendations defines it, “the system by which companies are directed and managed”.

Bold Idea

I wrote this article for Company Director Magazine in September 2003.   Ten years ago, applying the new sciences to the boardroom was science fiction.   At the 2014 NACD Board Leadership Conference, mindfulness was being taught as better practice.

Corporate governance is the outcome or product of a living system called the board.

Post HIH, One.Tel and other recent corporate failures, you could be excused for thinking that the problem with governance in Australia was that there was simply not enough instruction on the subject. The solution lay in the stricter adherence to better-designed systems.

Ignored in the rush to write the new systems, guidelines and recommendations designed to overcome the limitations of self regulation is the possibility that the drivers of board performance may lie elsewhere. Beyond the systems designed to prevent failure or encourage success. Beyond simply functions and structures.

Boards are ultimately living systems that cannot be explained let alone changed by the level of thinking that underlies current governance strategies. After all, recent US studies show companies that performed well — and those that performed poorly — adopted similar practices in terms of board attendance, skill, age, independence and size.

A deeper level of thinking is required. One based on the assumption that the performance of boards has as much to do with the principles of living systems or complexity theory as the essential corporate governance principles.

What are the principles of a living board? What is the pathology of Australian boards and what strategies are available for creating a healthy living board?

Deeper Thinking

A living or complex adaptive system is defined as a network of processes in which every process contributes to all other processes. The entire network is engaged together in producing itself. Living systems do this without the influence of lawyers, accountants or other experts. Examples of such systems include everything from the smallest organism to ecosystems to the organisation to the largest capital markets.

The way such systems sustain, grow and adapt by themselves in the absence of experts and administrators is underpinning the new sciences from physics to biology.  Predictably, the new sciences are beginning to drive the science of management and commerce. In a recent book by Richard Pascal and others, the authors suggest four principles of living systems which are applicable to a business:

  • Equilibrium is a precursor to death. A living system in a state of equilibrium is at maximum risk because it is less responsive to change.
  • Faced with threat or opportunity, living things move to the edge of chaos — a state in which living systems evolve, develop and are revitalised.
  • At the edge of chaos, the components or processes of living systems self-organise and new forms and processes emerge from the turmoil.
  • Living systems cannot be directed along a linear path.  Unforeseen or unintended consequences are inevitable. For Pascal, the challenge is to disturb the system, so as to bring the system out of equilibrium into the edge of chaos and desirable emergence.

These principles or insights into the way living systems behave provide an alternative to the dominant view that systems such as organisations and boards can be managed and directed through the tools of accountability, transparency and oversight.

The science of living systems provides both a new framework for exploring why some boards work and some do not and suggests new strategies for maximising board performance.

The Pathology

In her recent book The 21st Century Board, published by AICD, Ann-Maree Moodie concludes: "The world of directors portrayed by those interviewed for this book can be interpreted as an exclusive club that recruits from within ... In this world it is unnecessary to review performance of the board as a whole or its individual members, because the subjective judgments of peers will ensure that those who do not 'fit in' will be culled".

The consequence of this behaviour is intuitively recognised if you walk into a boardroom and are overcome by a sense of lifelessness. Meetings move with mechanical precision, business becomes a matter of toil and nothing unexpected or unintended occurs except failure.

From a living systems perspective, the behaviour of Australian boards consciously denies the principles, discussed above, which define the way successful living systems operate. In seeking to ensure the minimum level of disturbance, whether in recruiting like-minded men and women, or relentlessly following board protocols and rules, boards unwittingly expose themselves and their companies to the risks of equilibrium. Risks borne out in corporate failure. This is not to mention the stress and loneliness of working in a lifeless board environment.

Conversely, as argued by Jeffrey Sonnenfeld in his refreshing article "What Makes Great Boards Great" published in Harvard Business Review, it is the way people work together as a social system that is at the core of great boards. For Sonnenfeld the real need is not rules and regulation but "strong, high-functioning work groups whose members trust and challenge one another and engage directly with senior managers on critical issues facing corporations".

Again from a living system perspective, what Sonnenfeld suggests and what great boards have done since the creation of the limited liability company is embody the principles of living systems. Avoid the comfort of equilibrium and disturb the system of the board and of the company with healthy intention.

The Strategy

Sonnenfeld points to five characteristics as hallmarks of good governance: trust and candour; open dissent; fluid portfolio of roles, individual accountability and evaluation of board performance.

Our own work, based on the divergent fields of biology, ecology, systems theory and religious tradition, points to four strategic behaviours for building healthier living systems such as boards:

Diversity: Engage with uncommon ideas, people and circumstances. Diversity brings systems to the "sweet spot for productive change".

Connectivity: Seek uncommon connections. In living systems too few connections means stagnancy.

Generosity: Practice generosity of spirit. Generosity combats the enemy of living social systems: overwhelming ego.

Mindfulness: Practice awareness without judgement. Nothing in a living system can be understood by studying the various parts in isolation. The parts of a living system "only make sense within the context of their relatedness to the whole".

Both approaches are an uncommon way to look at governance.

Indeed if success in the marketplace is built upon product, brand and strategy differentiation why would we want to create commonality in Australia's boardrooms by homogenising governance arrangements? It would mark the death of value at board level.

From a practical perspective, the use of living systems to develop new models of governance requires debate about such an approach. This is a debate that seeks to see the forest of strategy for the trees of compliance. Indeed to explore the very heart of governance: Do boards matter? What is their role and purpose?

However, there is a more immediate application for the use of living systems by boards. Highly effective boards, confronted with the requirement to disclose the extent to which they have not followed the ASX best practice recommendation may look no further than the science of living systems to explain why they work so well without the latest systems of direction and management.

78% of Directors Don't Fully Understand Their Business Model

At their most fundamental level(4).png

More than three quarters of directors surveyed by McKinsey admit they don't fully understand how their firms create value.  

In Where Boards Fall Short (HBR 2015) the global managing director of McKinsey and the president and CEO of Canada's largest public pension fund argue this is another sign that boards aren't working and that its time to start firing:

Invest more effort in attracting the right expertise.  Hire board advisers with deep specialized knowledge.  Apply retirement rules in a way that balances the need to refresh the board with need to retain valuable insight. 

Before we churn a generation of directors, perhaps we should focus on the problem and not the symptom.

If most company directors don't understand, they're not the problem - it's their training.   Directors aren't taught to understand how their business creates value.  And even if they have some idea, chances are their business models are outpacing the language they have to describe them.

The solution for the 78% is to start building new tools and language to help them see how their business really works.

Bold Idea

To understand how firms create value, see it as a system designed to create sufficient business critical value to survive, grow and prosper in its own right.   There is no customer other than the corporation at the centre of this system.

Start Drawing

A business model describes how a firm creates life-sustaining value.  It's different to a strategy.   Strategy tells you how you'll beat the competition. 

What the business model tells you is how you'll be in business tomorrow to beat the competitor tomorrow.   Spending time on strategy is not the same as spending time on the business model. 

Porter's 5 forces helped visualise strategy.  What directors need is a way to visualise their business.

Most business model templates only focus on how firms plan to make money.   Business Model Canvas is wildly popular and a great tool if you want to understand how a firm makes money from its customers. 

But how you'll make money from customers doesn't explain how you'll stay in business.  These tools are great, but can leave business leaders blind to how build a firm that lasts.

X Marks the Spot

To start understanding how a firm creates value, and not just money, over the long term take a pen and paper, draw X in the centre and follow along with this thought experiment.

Start with the firm

Start with the firm

X marks the spot and the firm as independent and sovereign.   An entity its own right that's in the business of staying in business. 

The biggest difference between my model of a business model and others is that I put the firm in the centre.  Other models focus on how to create value for customers and stakeholders.  Mine focuses on creating value for the firm.

Now draw a big circle aroundX.  

Culture surrounds the firm

Culture surrounds the firm

Culture surrounds the firm.  As Drucker said, culture eats strategy for breakfast.   Everything done in the name of the firm is invested with culture and it can be the silent agent - or enemy - of value creation.

Insert four Ps within X

People, promises and processes

People, promises and processes

Firms are made up of people, processes and most importantly the promises made in exchange for the money and things the firm needs to survive over the long term.

[Tip - Driving people, process and promises are four forces - directorship leadership, management and governance.   In the centre of X where the two lines meet represents a gateway to a second dimension of my model.  A 2x2 Matrix that explains how these four forces shape and distort the business model.  More on the DLMA Matrix here ]   

Now, draw an infinity loop that follows the lines of X.

The trading loop

The trading loop

This loop is at the core of every business model.  It represents four types of trade a firm makes to get what it needs to survive -  things for cash,  cash for things, things for things and cash now for cash in the future.  Each type of trade delivering different life sustaining value to the firm.   The strength and integrity of that loop is the measure of a firm's sustainability.   

On the right of the loop are trading partners that supply things - ideas, time, labor, data, products and services. Everything the firm needs other than cash.

On the left of the loop are trading partners that supply cash - customers, shareholders and financiers.  To the firm cash is cash.  It doesn't matter where it comes from.  What matters is the cost of buying it. 

[Tip - traditional value chains have suppliers on one side and customers on the other.  One half focuses on the supply side - making something to sell.  The other focuses on the sales side - selling the thing that's made to customers.  These models are useful for simple business models but break down when trying to understand business models like LinkedIn, YouTube and Google where understanding who the customer is is almost impossible.]  

Next draw a line above.

Paul Polman says we don't treasure what we don't measure.  

Treasure or value is represented above the line.  This is where business critical value (cash and things) is stored for the future.   

Business models create treasure.   When a firm trades it exchanges one form of value for another.   It also creates new value like brand and trust in the process.  Each store of value creates a new opportunity to use that value (and combine it with other value) to support the growth and prosperity of the firm.   More than anything else, a firm's treasure determines the shape of a firm's business model and its next pivot.   

[Tip - First, cash is not a synonym for business-critical value.  It's a subset.  Second, you need to look hard to see the value created that was not intended.   Some of the best business models were created off the back of accidental value.  Third, and perhaps key to understanding the concept of value is that everything can be something else of greater value - that half-empty glass makes a perfect vase. Fourth and most importantly there a six different kinds of treasure needed to stay in business.

What Does the Firm Need

Now ask what does the firm need to survive and prosper- cash or a thing?

Now connect the person with that cash or thing to the business through a series of algorithmic assumptions:.  

1. identify the need of the firm > 2. identify the market where that need is held > 3. identify the value proposition required to acquire that need > 4. identify the channel to the supplier of that need > 5. identify the supplier > 6. identify the value exchange to and from the supplier.  

The Value Chain

The Value Chain

The goal is to create alignment between each of these elements.   If there is one thing to take away from this post it's this sequence of assumptions.

[Tip - the value chain can be geographically interdependent.]

The key to understanding modern business models is to flip the customer relationship from a linear relationship between supplier > firm > customer to a 'virtuous loop' between $ trading partners > firm < non-$ trading partners.    Google has advertisers on the left and users on the right.   For its business model to work it needs to understand its markets, value propositions, channels etc on both sides.  The right of the model delivering the value that it delivers to advertisers for cash.  

The perpetuity model gives new meaning to Drucker's saying that “The purpose of business is to create and keep a customer.”   In this model the firm is the customer and everyone else is seen as a supplier of what it needs.  This flip is essential to understanding contemporary business models.  The customer is the firm and the board's role is to create it and keep it going.

To be clear, this model doesn't replace the linear value chain and the financial spreadsheets they produce.  What it does do is provide the opportunity to gain insight by viewing the firm from a different angle.   But remember, many of you have been looking at the firm from the same angle all your professional lives.   Like a new pair of glasses, things will start off a little hazy but eventually everything should come into focus.

Now draw a line below.

The resources that support the firm

The resources that support the firm

Below the line are the resources required to support the business.  Everything above the line rests on the foundations provided by a firm's resources.

Finally, take a different colour and trace the infinity loop over and over.  This represents the invisible imperative that drives the business model into perpetuity.  It can't be seen because as Adam Smith said, it's invisible.  Coursing through an unbroken loop is the firm's self-interest rightly understood. 

The invisible hand determines whose needs are met and in what priority based on the needs of X - the firm.   

The invisible hand at work

The invisible hand at work

All that's needed to stretch and break the infinity loop is for the firm to prioritise the interest of a stakeholder above that of the firm.   Adam Smith called it rent seeking.   You know it as shareholder activism and the principle of maximising shareholder value.

Make no mistake, transferring value to anyone out of a sense of duty for little or no contribution to the needs of the firm eventually leads to weakness and vulnerability.   Break the laws of capitalism and the firm spirals downwards. 

Now draw this 100 or better still 1,000 times.  Are you are an artist after one drawing?  It takes practice.  The more time you draw your business model, the more things you'll see and the more connections you'll make until, one day, you'll understand what your business could do tomorrow, what it should do today, what if you're wrong and what your managers should be working on right now.

Why does THIS Matter?

Building a firm for the long haul requires that management and the board understand and "work" their own unique business model.  Everything a board does revolves around that logic and their algorithm (yes, all business models are fundamentally algorithms):    

  • choosing a CEO that can best "work" the business model
  • deciding what information they need
  • making key capital and other decisions knowing how these will impact on the business model
  • manipulating the parts of the business model to come up with better alternatives
  • testing the logic of value creation and looking for where that logic is breaking down
  • describing their business model to key stakeholders
  • comparing their business model against their competitors and understanding where competitors are vulnerable

If the business model is so important to board choices, why not teach directors to draw rather than hiring new directors who might not know how to draw either?  

Only a bad teacher would suggest that the solution to poor grades was new students.

If McKinsey's can't teach directors how to draw their own business model, the directors just have to take a pen and paper and learn to draw for themselves.  

Learn more about the perpetuity model and what happened when I tried to get business modelling included in a director training program here.  

The perpetuity model has been evolving since 1998.  I'm looking forward to launching the 2015 version later this year.  It's a major upgrade but based on the principles in this article.  Subscribe to learn more.



Do Scholars Have a Duty to Maximise Shareholder Value? *

If Lucian Bebchuk still thinks he's "mainly a kind of ivory tower academic", his record as a shareholder activist is up for a long fight.

Considered one of America's leading scholars in law and economics, the director of Harvard's Program on Corporate Governance has a reputation for aggressively championing the cause of big companies with big share portfolios and their attacks on public companies.

He might insist he's living a life of the mind, but the Professor can't run away from the pin striped shadow cast by his many papers - "The Case for Increasing Shareholder Power". "The Costs of Entrenched Boards", "The Myth of the Shareholder Franchise", "The Myth that Insulating Boards Serves Long-Term Value", "The Long-Term Effects of Hedge Fund Activism" "Toward a Constitutional Review of the Poison Pill".   You don't have to share the Professor's obvious intellect to appreciate his radical corporate governance agenda.

To a critical eye, the goal of Bebchuk's econometric research seems more about business than scholarship.   Delivering the good news to Bill Ackman, Carl Icahn and their fellow hedge fund managers.  First, that they're the good guys and second, the "proof" needed to convince institutional investors and policy makers to dismantle the corporate defenses that stand in the way of the activists' latest business strategy.

The Professor even invited his students to join him in the pursuit of greater shareholder power.

The Shareholder Rights Project was established by the Harvard Law School Program on Institutional Investors to "contribute to education, discourse, and research related to efforts by institutional investors to improve corporate governance arrangements at publicly traded firms."  Omitted from the project's benign mission was "to change real world election policies to reflect their professor's research and their client's commercial objectives".

In 2014, the Shareholder Rights Project at Harvard boasted that more than 60% of companies that received their proposal had agreed to move to annual elections.  Opening the door to investor business strategies is harder to execute when directors have staggered tenure.

Unexpectedly for a project sponsored by a lauded professor and an elite university, the Shareholder Rights Project actively prosecuted the investor's agenda despite a substantial body of academic research which was contradictory to their claims in support of annual elections: an omission that now has an SEC Commissioner and a Stanford law professor publicly questioning whether Harvard violated US Federal Securities Law by not disclosing the full body of evidence.

But, that's the side issue.

The much bigger question is why the world's most famous university appears to be pushing the interests of big investors on to its students, regulators and public companies

This is the fifth in a series dedicated to the 6th Global Peter Drucker Forum that examines the twelve ways shareholder value is marketed as the goal of public companies.   It briefly looks at the relationship between university research and shareholder primacy and questions the conflict raised when scholars get involved in maximizing shareholder value.

The Ivory Tower on Wall Street

The Ivory Tower moved into Wall Street forty years ago and the neighborhood has never really looked back.

The head of the Chicago School of Economics arrived with an unlikely promise - liberation from the tyranny of the free market.  For centuries, companies relied on their value proposition to assure their success.   In the free market, no company had a duty or responsibility to assure the profitability of another.  This was the moral framework that greetedAlexis de Tocqueville when he arrived in America 1831.

Milton Friedman undermined the foundations of capitalism with his remarkable academic discovery -  the duty to maximize shareholder value.  In the future directors and managers would willingly yield their firm's interests to Wall Street based not on self interest rightly understood, but out an invented moral obligation.

Even better news for investors came in 1976.   Rochester finance professors Michael Jensen and William Meckling published the "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure".    Relying on the same now-discredited assumptions as Milton Friedman had 6 years earlier, their paper set out a practical guide to increasing shareholder wealth by paying managers in securities.

Companies like IBM turned Jensen and Meckling's math into their mantra.   James Montier writes "IBM's mission statement was outlined by Tony Watson (the son of the founder) and was based on three principles...1) respect for individual employees, 2) a commitment to customer service and 3) achieving excellence".  By the early 1990's not only had IBM had been transformed to fit its new-found function as the creator of shareholder value but so too had business schools

Though executives are portrayed as the beneficiaries of this intellectual revolution, with Bebchuk himself leading the attack on executive remuneration, the real winner has been the investment industry and the industrial complex it spawned.

At the time Jensen and Meckling's findings were first published, US Corporate equities - as a percentage of US GDP - was around 32% - it's now over a 120%.  Their research had managed to do for the investment industry what performance enhancing drugs had done for the 1976 Olympics.        

How could share based business models not rise to the dais of capitalism when producing leaders perfectly sympathetic to the needs of Wall Street became the principal goal of the modern business school.  Investors have become the opportunistic beneficiaries of an education system that inexplicably tilts the playing field in their direction.  For more on the relationship between business education and investment business models please read here. 

Even today, Wall Street can still count on having strategic friends in high places.

A decade ago activist hedge funds held around $US12 billion under management.  That figure is now estimated to be over $US200 billion.  Activism has become an asset class in its own right with pension funds piling into activist business models over the targets of their attacks - Apple, Microsoft, Sony, DuPont, and PepsiCo.   

Quick to assist hedge fund activists prove they're running benign businesses worthy of encouragement is a group of academics led once again by Professor Bebchuk.  In the paper titled “The Long-Term Effects of Hedge-Fund Activism”, the Professor and others considered nearly 2,000 activist interventions by activist funds from 1994 to 2007.  They claimed triumphantly that, based on their analysis:

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.

This partisan conclusion begs the need for another paper:  What are the long term effects of academic activism on the fortunes of Wall Street?

To rephrase de Tocqueville, the virtue of shareholder activism is incessantly talked about, but its utility is only studied in secret.  It's time we understood and weighed-up the other side of the Ivory Tower's relentless pursuit of the truth about Wall Street. 

The Financial Post reports that activists are the fastest growing in the hedge fund industry.  Another report indicates activist funds have earned an annual return after fees of about 20% on average, compared with 8% for all hedge funds and 13% for the stock market as a whole since 2009.  Not to (re)mention the explosive growth in funds under management.   Then there are the non-financial measures of value such as the radical makeover from "green mailers" to "democratic capitalists".  




Peter Drucker said, "the best way to predict the future is to create it".  He was referring to business managers, but he could equally have been referring to his academic colleagues in economics and law.

When Friedman and his fellow economists put shareholders in the center of the corporate universe encircled by all other stakeholders, they crossed the line from disinterested scholars pursuing the truth to the co-creators of that "truth".  It is no accident of nature that scholars profess:  

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

Bebchuk takes it a step further.   He wants to create the future in the image of his own research.  

Not content to inquire into how managers maximise shareholders' value in line with his predictions,  the impatient professor feels compelled to give activist hedge funds the intellectual ammunition and student army to breach the defenses of their public company prey.       

Bebchuk even demands that his critics yield before his paperwork:

Wachtell should engage with the evidence, not use the “opinions of wise people with considerable experience” to run away from it. To be a constructive contributor to policy debates, Wachtell should stop asserting that the professed beliefs of its partners or clients should serve as the factual premises of policymaking.

Friedrich von Hayek warned us about economists saying things like "Empirical studies are better than anecdotal evidence and real-world experience".  In his 1974 Nobel Memorial Lecture the famous economist and philosopher outlined the danger posed by scientific pretensions in the analysis of social phenomena.  Blaming those who use the "pretense of knowledge” in their research as the reason why “as a profession we have made a mess of things”.

Donald Campbell expressed a similar fear:

"if we present our resulting improved truth-claims as though they were definitive achievements comparable to those in the physical sciences, and thus deserving to override ordinary wisdom when they disagree, we can be socially destructive.”

A concern that grows more ominous when the line between activism and scholarship appears forgotten.   Lost in the pursuit of a man made truth that does not serve those to whom the scholar owes their duty.   


If the conclusion were not absurd, I'd think that Milton Friedman and all those who have stood on his shoulders had lost their minds and were under the mistaken impression that they too were under a duty to maximize shareholder value.

The scholar's duty lies elsewhere.

In 1837 Ralph Waldo Emerson delivered to Harvard's Phi Beta Kappa Society what is now referred to as "The American Scholar" speech.  Considered by Oliver Wendell Holmes, Sr. to be America's "Intellectual Declaration of Independence", the speech sets out the obligations that come with scholarship.

Howard Mumford Jones recounts the duty - "The Scholar, said Emerson, is Man Thinking; and the principal instruments of his education are three - nature, books and action.  From nature rightly understood, he will learn that the laws of the universe are also the laws of the human mind.  The office of books is not to create book-worms but independent souls.  The life of action is not to be swallowed up in business, but to translate intellect into character.  And the final object of education is that the soul may be weaned from a passive clinging to what has been said and done in the world and prefer a vigorous intellectual independence".

Two hundred years on and the focus is back on Harvard and its Shareholder Rights Project and I ask what has become of the scholar's duty and the declaration of intellectual independence?

Witness as senior corporate and securities law professors from seventeen leading law schools at Boston University, Chicago, Columbia, Cornell, Duke, George Washington, Georgetown, Harvard, Michigan, New York University, Northwestern, Stanford, Texas, UCLA, Vanderbilt, Virginia and Yale defend students who tell half-truths and seek to silence those who pursue the truth:

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.

How do we reconcile the goal of the American Scholar with these 34 self-appointed arbiters of merit who invite comparison to a psychological phenomena?

In the last in this series, I asked whether corporate governance was groupthink masquerading as a paradigm

First described by social psychologist Irving Janis in 1972, groupthink is characterized by a group that sets itself above the law and will try to protect itself at all costs.  Typically associated with what goes on in the boardroom, the telltale signs of groupthink also exist in the way people think about the boardroom and its role in assuring a return to investors.

The seventh sign of groupthink is that members are under pressure not to express arguments against any of the group’s views.   Social pressure is applied to members who stand up and question the group’s judgement.  The eighth and last sign of groupthink is the emergence of self-appointed “mindguards”.  Individual members are said to take it upon themselves to protect the group and the leader from information that is problematic to the group’s decisions, cohesiveness and/or views.

Do those, like Yale Professor Jonathan Macey, who led the assault on the Gallagher-Grundfest paper, not see the problem?  By defending shareholders from managers and attacking those who stand in their way, like Lynn Stout and now the Commissioner and his co-author, he is choosing to side with one industry over the rest of the economy.  

Remembering the Scholar's Spirit

In this centenary year of the 1915 Declaration of Principles being published by the American Association of University Professors, both the duty and the accountability of the scholar are at risk of becoming a myth:

Since there are no rights without corresponding duties, the considerations heretofore set down with respect to the freedom of the academic teacher entail certain correlative obligations..... The liberty of the scholar within the university to set forth his conclusions, be they what they may, is conditioned by their being conclusions gained by a scholar's method and held in a scholar's spirit; that is to say, they must be the fruits of competent and patient and sincere inquiry, and they should be set forth with dignity, courtesy, and temperateness of language. The university teacher, in giving instructions upon controversial matters, while he is under no obligation to hide his own opinion under a mountain of equivocal verbiage, should, if he is fit in dealing with such subjects, set forth justly, without suppression or innuendo, the divergent opinions of other investigators; he should cause his students to become familiar with the best published expressions of the great historic types of doctrine upon the questions at issue; and he should, above all,  remember that his business is not to provide his students with ready-made conclusions, but to train them to think for themselves, and to provide them access to those materials which they need if they are to think intelligently.

The AAUP's 1915 Principles go on to describe to whom the duty is owed.   The drafters were unequivocal.  The scholar's duty then, as it remains now, is owed to the community at large:

The responsibility of the university teacher is primarily to the public itself, and to the judgment of his own profession; and while, with respect to certain external conditions of his vocation, he accepts a responsibility to the authorities of the institution in which he serves, in the essentials of his professional activity his duty is to the wider public to which the institution itself is morally amenable.

A message that is repeated on the AAUP's website today - "The university is a public good, not a private profit-making institution, and corporations or business interests should not dictate teaching or research agendas".

Reading these principles and reflecting on much of the state of corporate governance research it is clear that scholarship takes more than just rigorous empirical inquiry.   Evidence that activist hedge fund attacks benefit the investing classes does not clear the bar set a century ago.  Neither does taunting those who express divergent opinions.

The integrity of truth in every field of university research, including corporate governance, depends on the allegiance of the professor to the public as a whole and their accountability to their duties.   Namely, the scholar's rigorous method and, what sadly seems to have been forgotten in the pursuit of shareholder value, the scholar's spirit.  




* A work in progress