Leadership Vs Management : Only Half the Story

Leadership versus management captures the executive's side of the story.   If company directors have a broader role to play, the way we think about who's in control and their role in creating and protecting value needs to evolve.

The following introduction to the Value-Control Matrix is based on an article that appeared in the 2016 Better Boards Magazine.  

it’s hard to see beyond the forest from behind the trees: rethinking organisation design. 

Peter Tunjic | Organisational Design

Consider a majestic landscape. Mountain peaks set against a boundless sky. A dense forest rises up to the foothill divided by a restless river. In the foreground, you make out the individual branches. Look closer again, and you might see things hiding.

Ansel Adams' iconic photograph of The Tetons and Snake River is a symbol of the past and future of organizational design.

The Tetons and Snake River - Ansell Adams

The Tetons and Snake River - Ansell Adams

To see the past, scroll down to remove the mountains.

The half image captures the current state of management thinking - Leadership and management draws the executive's focus onto the forest and the trees.    Whereas governance or assurance, draws the eye of the board to the predators hidden in the shadows.        

Now scroll back.  The complete image becomes a metaphor for the future of organizational design - leadership, management, governance and what has been missing - the focus on what lies beyond the forest.     


To transform this natural metaphor into a diagnostic tool I created the value-control matrix.  A quadrant based framework that allows directors and executives to evaluate their competence when it comes to their focus.

It’s hard to see beyond the forest from behind the trees.

The two axis of the matrix are value (divided between the extremes of creation and protection) and corporate control (divided between the extremes of the board and the executive).

The Value-Control Matrix turns the traditional governing, leading, managing pyramid into a dynamic 2x2 business framework.  It exposes the dilemma inherent in organizational design and gives rise to the alternate acronym - DLMA Analysis:

Directorship = Board + Value Creation

Leadership = Executive + Value Creation

Management = Executive + Value Protection

Assurance = Board + Value Protection

The framework is designed to show that each discipline is important and compelling in its own right but pulls the organization in a different direction. 

The simple tool provides a way of exploring and measuring these tensions within an organization starting with the role of the board.

Getting Beyond the Pyramid

In the boardroom leadership is directorship.   That's the key.  Without directorship, organization's can lose sight of distant mountain summits and the boundless horizon .

Traditional governance approaches focus almost entirely on the board looking for what's hiding in among the trees - Independent directors managing risk through maintaining control, exercising managerial oversight and ensuring that risk systems are in place.  

Experts agree boards need to be looking at what lies beyond the forest.  Here the focus is on value creation and directorship – culture, strategizing, communicating vision, appointing the CEO and then inspiring the executive. 

Directorship and assurance are both necessary but require a fundamentally different approach and mindset.  Assurance is about protecting value, directorship is about creating it.  Assurance concentrates on risk oversight, directorship requires risk taking.  Assurance focuses on process, directorship is focused on people.  Assurance is about control, directorship is about innovation. 

Sound familiar?

For decades the c-suite has been debating the difference between leadership and management.  It turns out that the same distinction can be made in the boardroom.  The Value-Control Matrix highlights the need to split corporate governance in the same way – one discipline focused on value protection and the other on value creation.  Healthy competition between directorship, leadership, management and assurance is integral to an organization's success.  

It all starts with a simple question -  Where is the board and management focused. 

Above the Line – Directorship and Leadership


Above the line represents those quadrants that focus on value creation - the forest and what lies beyond.



Directorship and leadership are focused on doing the “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 organization.

Below the Line – Assurance and Management


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



Assurance or governance sets a managerial tone in the boardroom.  Assurance, in the form of best practice, involves formulas and processes, monitoring and oversight, setting risk appetite, etc.  From this standpoint, the board and the executives share similar characteristics captured in the phrase "things right".

Challenge yourself to answer whether your organization has got the balance between value and control right.   Is the board stuck below the line, looking at what’s hiding behind the trees or are they also looking out beyond the forest?  Is the board asking what if when they should be considering what else?

And if you're wondering about what the river symbolizes read this post that describes how corporations get direction.

Further Reading

To learn more about DLMA Analysis download my presentation from the better boards conference.



Back to the Future: Newton and the Next Economy

My latest work examines the parallels between ancient astronomy and moderngovernance - Copernican monsters, a blind spot and a futile hypothesis.  I conclude by proposing a model of governance for the next economy.  One based on the re-discovery of corporate centricity and the gravitational force that holds sovereign corporations and their many stakeholders together.  

The article first appeared in the September issue of Governance - The UK's leading journal on Corporate Governance.  

Creating Sustainable Companies Summit

I am looking forward to moderating a panel discussion at the Creating Sustainable Companies Summit in Brussels tomorrow.

Hosted by law firm, Frank Bold and Cass Business School, the summit is designed to examine best practice and policy for sustainable corporate governance.   The organizers have attracted around 150 leading thinkers, businesses and policymakers to "chart the way to the next generation of corporations".

I'll be moderately a panel discussion on ways to strengthen the role of the board:

Boards play a key role in setting and steering corporate strategy. They influence crucial factors like corporate values, corporate culture, and risk appetite, and determine the attentiveness of the corporation to the interests of its stakeholders and its purpose. In order to effectively fulfill their role, boards must consider the corporate mission and long-term value creation strategy, have a good overview of the interests of the corporation’s stakeholders, understand and assess relevant risks, and decide on the objectives of the compliance and due diligence systems.

Helping to discuss a framework for the role and functions of the board in a purpose driven world will be:

  • Peter Montagnon - Institute of Business Ethics
  • Ritta Mynttinen - EcoDa
  • Emma Ihre - Head of Sustainability, Mannheimer Swartling

I'll share my notes from what promises to be an insightful discussion in the coming days.



DLMA Analysis: Can You See Beyond the Forest From Behind the Trees?

My message to the 2016 Better Boards Conference:

"From behind the trees you can't see beyond the forest."  

To learn more follow the slides below.

 A big thank you to Jo Smyth (Chair) and Andrew Hume (CEO) from Gowrie Victoria.  Who better to answer questions than those who use put DLMA Analysis into practice.

For more on this innovative tool designed to solve the dilemma at the core of organisations read Governing and Directing: Are They Different.

Do Company Directors Know Right from Wrong

DuPont’ dismantles research teams that have provided a century of competitive advantage.  Apple borrows billions to buy billions in shares that it can issue itself.  Here in Australia, a major supermarket tells their suppliers that from now on they'll get paid in 60 days instead of 30.  

What makes this behavior right or wrong?

Milton Friedman thought ethics.    Read his infamous essay " The Social Responsibility of Business is to Increase Profits" and it becomes clear that, for all the "unethical" conduct it has inspired, the vile maxim is principally about doing the right thing.   Anything else, including corporate social responsibility, was subversive and wrong because it was unethical.  

In fact, the ethical foundations of capitalism can be traced all the way to Adam Smith and beyond.  But Smith's was a very different kind of ethics.   Whereas Friedman based his ethics in obligation, the invisible hand was, and still is, guided by virtue.   One is based in duty, the other in self interest.

When we question corporate behavior,  it's worth remembering that ethics is at the core of a commercial society, and that corporate governance is fundamentally about how company directors tell right from wrong. 

At this year's annual conference for the Association for Professional and Applied Ethics (AAPAE) I presented "Duty vs Virtue: The Ethical Dilemma Confronting Corporate Governance".  With the benefit of the generous feedback from those in attendance, here are my slides:

In the months to follow I'll write more about Australian virtue ethics and how Australia can become a safe haven for corporations at risk of financialisation.      In the meantime, if you're interested in learning more contact us.

To learn more about the AAPAE click here.

It’s hard to see beyond the forest from behind the trees: rethinking organisational design.

Imagine a wooded landscape.  Bright sky and distant peaks.  A forest rises in the foreground.   All life blends into one.  But look closer and you see the trees standing alone.  Look closer again, and you see things hiding.


Nature provides a metaphor for re-framing the way we think about boards and executives:   

  • When directing, the board is focused on what lies beyond the forest
  • When leading, executives are focused on the forest   
  • When managing, executives are focused on the tree
  • When assuring or governing, the board is focused on finding the danger hidden behind the trees

If your organisation was a forest, where would you look?

I'll be sharing my insights at 10th Australasian Better Boards Conference, to be held in Melbourne on July 29-31 2016.

Considered the largest regular gathering of leaders from the for purpose sector in Australasia, the goal of the conference is to give board members, chairs, CEOs and senior managers practical solutions to take back to their organisations.

A Copernican Revolution In Corporate Governance


2016 feels a lot like 1543.

In the time before Nicholas Copernicus:

“Astronomy’s complexity was increasing far more rapidly than its accuracy and that a discrepancy corrected in one place was likely to show up in another.” (Kuhn 1972)

In an age and a discipline far removed from medieval astronomy, history is repeating.

Despite no empirical connection between "best practice" and performance,  good governance grows more complicated each year:

At present, corporate governance has no broadly held theoretical base (Tricker, 2009) Rather, it is overwhelmed by multiple and polarizing theories (Letza and Sun, 2002) and whilst a number of broad or even global theories have been proposed (e.g.Hilb, 2006; Hillman and Dalzeil 2003; Nicholson and Kiel, 2004) to date none have gained universal acceptance. More importantly, agency theory, widely recognized as the dominant theoretical perspective of corporate governance (Durisin and Puzone, 2009) continues to suffer from empirical research unable to validate its claims or accurately predict outcomes (Daily, Dalton and Cannella, 2003).

The only thing academics can predict with any certainty is that the solution to one governance problem will become the next.

In 1976 the biggest problem facing capitalism was aligning the interest of managers and shareholders.  Solved when Jensen and Meckling came up with the idea of paying managers in securities.  But this led to exorbitant executive remuneration, financial engineering and artificial ratio manipulation.  Solved by ensuring that there are more independent directors.  Which in turn has lead to Boards lacking sufficient industry knowledge and experience to provide sufficient directorship and assurance which in part led to the global financial crisis. Solved by greater oversight.  Which in turn has produced greater levels of distrust between boards and managers.         

Corporate governance has become a "Copernican Monster"

In the preface to his most famous book the Revolutions of the Heavenly Spheres,  Copernicus (though there is some argument whether he said this or the publisher) comments of his contemporaries: 

“Nor have they been able thereby to discern or deduce the principal thing – namely the shape of the universe, and the unchangeable symmetry of its parts. Within them it is though an artist were to gather the hands and feet head and other members for his images from diverse models, each part excellently drawn, but not related to a single body, and since they in no way match each other, the result would be a monster and not a man” 

Copernicus thought that an honest appraisal of contemporary astronomy showed the earth centered approach to the problem of the planets was hopeless. Traditional techniques had and would never solve the problem; instead they produced a monster (Kuhn, 1957). 

It takes little imagination, to see a Copernican Monster lurking within corporate governance codes and guidelines than share no common theoretical foundation other than to force the shareholder into the centre of the corporate universe.

Ironically, Copernicus' contemporaries papered over the flaws in their theory with things called epicycles.  Patches (that look a lot like piecemeal governance reforms) that worked for a time but were fundamentally flawed.   More independent directors, more committees, more rules will not solve the problems of corporate existence whilst academics, regulators and even directors labor under the impression that corporations exist to maximize the wealth of shareholders.  These will become the next problem.  Epicycle on Epicycle.  Reform on Reform until, as we saw in 2008, the system almost collapses.  

The solution to the mess is to follow the astronomer's lead.

Substitute the corporation for the shareholder at the centre of the corporate universe encircled by stakeholders.  Each held in an elliptical orbit by the ever changing gravitational pull of both the corporation and the stakeholders self interest rightly understood.    

It's not hard to observe this principle in practice.

Watch a healthy company and you may notice that interests (defined as all the capitals - human, intellectual, financial, natural, produced and social) are prioritized in a way that contributes to the strength, resilience and ultimate longevity of the corporation as a sovereign legal entity.   Financial and non financial capital constantly being traded for all things that are needed to sustain a company into perpetuity.   And, as promised by Adam Smith, the interests of stakeholders are obliquely met in proportion to their contribution to the corporation's self interest.

But why has it taken so long to notice?

Another ancient astronomer may have the answer.   Johannes Kepler, who went on to perfect the laws of planetary motion, understood his discipline's blind spot.  When questioning why Copernicus had not seen that the planets moved in ellipses he responded “Copernicus did not know how rich he was, and tried more to interpret Ptolemy than nature”.   Likewise,  to understand the nature of the firm, it is far more productive to study what real corporations do and not what economists or law professors say.

But the last word goes to Copernicus,  whose advice to his deniers applies equally to those who would deny corporate personhood as the organising principle of the corporation: “The hypothesis of this book need not be true, nor even probable. It suffices if they make possible calculations which fit with observations. We may confidently place them alongside older hypothesis which are no more probable.”


Based on Directorship Theory: Kuhn, the Copernican Monster and the Crisis in Capitalism.  Presented by Peter Tunjic at "Corporate Governance and the Global Financial Crisis", The Wharton School, Philadelphia September 24-25, 2010


The Economist Promotes Shareholder Primacy: It Must Be Spring in the Northern Hemisphere

Around the same time for the past three years, the Economist has published an article that praises the virtues of shareholder value maximization.

While, the publication describes its goal to "take part in a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress.", it appears to take a spring break.

Last year, in Capitalism’s unlikely heroes: Why activist investors are good for the public company, management were described as "rotten", mutual and pension funds were "lazy" and bosses "clubbable".  The year before that, The Economist wrote a set-up piece called How activist shareholders turned from villains into heroes.   

But calling activists heroes was no joke to Yvan Allaire, Executive Chair at the Institute of Governance, who believed The Economist was 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."

This year, The Economist is at again. 

If the 2014 article was journalism and 2015 was an infomercial, this quote from Analyse this: The enduring power of the biggest idea in business, suggests that in 2016, The Economist has a deliberate agenda:  

Today shareholder value rules business.....  The only boardrooms that shareholder value has not reached are those of China’s state-run firms, whose party-appointed bosses look baffled if asked about return on capital and buzz for more tea.

The article describes shareholder primacy in literally glowing terms "These ideas lit up corporate America first" before taking aim at those who would criticize the biggest idea in business at "This moment of ascendancy".       

Ironically, having mocked the communist failure to embrace shareholder primacy, The Economist has no trouble channeling the apparatchik's defense of its failed ideology:

The outbreaks of madness in markets tend to happen because people are breaking the rules of shareholder value, not enacting them.

In more familiar words, it's not the system that's the problem, its just that people aren't doing it right.  The second line of defense is equally naive, and can be summed up as its just too hard "the trouble is identifying a goal that could replace the pursuit of shareholder value."    Add these two arguments together, throw in Larry Page's re-organization of Google and The Economist concludes "For these reasons shareholder value - properly defined - will remain the governing principle of firms".  

Job done until next spring.

Jokes aside, The Economist's editorial calendar reminds us that words do the heavy lifting for the shareholder primacy movement.   Indeed, if corporate governance is power, as their leaders openly admit, language is the key way the shareholder primacy movement has taken it for their own business objectives over the past four decades.  If you have any doubt, I recommend reading The Economist alongside Tamara Belinfanti excellent paper, Forget Roger Rabbit—Is Corporate Purpose Being Framed?.    

23rd Australian Association for Professional & Applied Ethics (AAPAE) Annual Conference

  Click to Learn More


Click to Learn More

I'm pleased to advise that my paper "Duty Before Virtue: The Ethical Dilemma Confronting Corporate Governance" has been accepted for the AAPAE annual conference to held in Adelaide, South Australia on 15–17 June.

The theme of the conference is Responsible leadership and ethical decision-making:

There is an emerging consensus that a key challenge for responsible leaders is to build and cultivate sustainable relationships with stakeholders, whether in business, politics or other parts of society. Rather than a preconceived construct or predefined remedy to leadership failure and organizational ills, responsible leadership is seen emerging as a multilevel theory that connects individual, organizational and institutional factors, including values, virtues and ethical decision-making on the individual level; the interplay of social responsibility, stakeholder theory and leadership on the organizational level; as well as contextual factors such as power distance, collectivism and humane orientation that indicate the extent to which social concerns are part of cultural practices.

My paper (abstract below) considers the notion that self interest rightly understood provides an alternative ethical decision making framework for company directors. 


At the core of modern business practice is an unspoken ethical dilemma.

DuPont’ dismantles its research team that for a century has provided its competitive advantage. Woolworths extends supplier payments by a month undermining the viability of those upon whom it relies. Apple assumes a billion dollar liability to tear up its own shares through a buy back.

Company directors are torn between a duty to maximise shareholder wealth and the virtue of acting in the self-interest of the corporation rightly understood.    

When Milton Friedman declared in his New York Times article that "the social responsibility of business is to increase its profits" he wasn't changeling the ethics of Adam Smith, but the 10 commandments.    

His was a duty ethic. For the Nobel prize winner, a corporation acted ethically when it maximizes shareholder value within the constraints of the law.  From then on, Adam Smith's most famous quote would read:

It is not from the self-interest of the butcher, the brewer, or the baker that shareholders expect their dinner, but from their regard to their duty and responsibility.  
This is a reformulation of the most basic organising principle of capitalism.

For Adam Smith, the invisible hand was a virtue ethic because a person’s actions are not motivated by obligations or duties, but by an internal motivation directed at realizing a person's self-interest rightly understood.

Drawing on developments in corporate law and governance, this paper will examine: 

  • the tension between the deontological ethics of modern financial capitalism and the virtue ethics that was the defining feature of its predecessor;
  • the application of virtue ethics to the corporation as sovereign legal entity; 
  • how pursuing the interests of a corporation rightly understood may produce better social outcomes than those associated with duty based ethical frameworks.

Cotard's Syndrome and the Modern Corporation

Mademoiselle X was dead, or so she thought.   According to her medical records she was convinced that “she has no brain, no nerves, no chest, no stomach, no intestines… only skin and bones of a decomposing body”.

Her neurologist diagnosed “délire des negations”.

Cotard’s Syndrome, named after the 19th century doctor who first treated the unfortunate French woman, is a condition whereby sufferers believe they no longer exist.   Left untreated, the afflicted, believing they have no need to eat any more, eventually starve themselves to death.

While dying from this bizarre psychosis is rare among natural persons, for corporations, a Cotard like condition may be a silent killer.

THE Curious Case of DuPont

Label unmarked samples and leave everything else in place”.  No sooner had DuPont announced its merger with Dow Chemical, than the scientists working at Central Research & Development were being told to halt their laboratory work.

The company that invented and commercialized nylon, rayon and Teflon was changing its business model from chemical engineering to financial engineering.   

“We are taking our costs down to align with what we think is affordable in the current business environment that we are facing and the challenges we have,... It is not what you spend. It’s what you get for what you spend”.

Motivating this change of direction was not the interests of the centenarian but the desire to “drive better returns on R&D by aligning what we work on with what has commercial potential”.             

Abraham Lenoff, a chemical engineering professor at the University of Delaware, describes the madness:

It takes an enormous effort and a lot of time and a large infrastructure, especially human infrastructure, to create value in a large company like DuPont. The financial community doesn't know how to do that. Hedge-fund managers know how to extract value from a company, and leave an empty shell, so they can build their houses in the Hamptons.
DuPont had one of the premier engineering units anywhere in the world. They knew the principles and how to apply them. Without people like that you can't develop, design, and start up plants. It's an enormous loss to science and engineering.”

Like Mademoiselle X, DuPont’s leaders appear to be starving the corporation by denying its critical need for human and intellectual capital required to maintain a viable system of innovation.   Jeffrey Sonnenfeld, an influential academic on the work of boards, sums it up in terms of self-harm: “What they’re cutting now is muscle and bone – not fat”.

If Cotard were not a neurologist but a board doctor he might wonder if his patient had lost its mind. 

The Delirium of Negation within the Boardroom

No doubt, Mademoiselle X thought her doctor was sick.   Could he not see that she was no more?

Likewise, there are those who are adamant that lawyers who consider that corporations are real, and have interests of their own, are mentally deficient :

"a requirement to benefit an artificial entity, as an end in itself, would be irrational..."

But to my mind, and that of many of my learned colleagues, the suggestion that a corporation does not exist is as implausible as a walking talking corpse.   However widely held, the belief in non existent corporations does not conform with well established legal principles.

And, whilst there are many law school professors keen to argue otherwise, denying that corporations are separate legal and commercial persons has done little to arrest their ever increasing mortality rates.

Indeed, if the deniers who promote the exclusive interests of shareholders and others were conducting a clinical trial rather than best practice, the experiment would have been stopped years ago on ethical grounds.

With this is mind, let's consider the three symptoms of this novel corporate condition.

The DELUSION THAT Corporations Don't Exist

Among experts in corporate governance there is a widespread belief that corporations don't exist other than as a legal fiction.

Shareholder primacists are convinced that corporations are an aggregated body of the shareholders and that company directors are their agents.  As such, these officers have a duty to use the corporation as means to maximize the interests of the shareholders.

Opponents argue that company directors have a responsibility to use the corporation to advance the interests of a broader range of stakeholders, that include, but are not limited to shareholders.

What both shareholder and stakeholder theorists share in common is the delirium of negation.   Both equate the corporation as a thing, a form of technology rather than a legal and commercial person.  As one commentator puts it:

Corporations are, in effect, a social technology, a form of organization that has evolved -most especially over the last century to serve human interests. Those interests are many and varied. for the most part, corporations serve the interests of those who create them, although of course those that are successful at earning profits in the long run are successful at doing so precisely because they are able to serve a range of other parties interests, too.

Conceived as a technology (and to shareholder primacists, property), the corporation has no intrinsic existence other than to satisfy the extrinsic interests of others.

Australia’s leading legal text for company directors makes no mention of what a corporation’s “interest” is or might be. The financial interests of shareholders are often treated as synonymous with those of the corporation.   Whereas, the when the word “interest” is debated among lawyers and academics, the question is whether directors can have regard to the interests of stakeholders over and above the shareholders. 

In all cases, the focus is not on the interests of the corporation as conceived by the law as a separate person, but on extrinsic purpose.

The DELUSION that Corporations Don't Have THEIR OWN Interests

Yale Law professor Jonathan Macey illustrates the second aspect of the delirium, the denial of the corporation's interests:  

“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”.

The Professor forgets that it's not because of the shareholder's needs that shares are issued but because the corporation needs money.   If it were not for the needs of the corporation, they would not be shareholders.   The board issues shares when the company needs financial capital, not when an investor needs somewhere to put their money.

In fact, in nearly all cases,  stakeholders owe their relationship to the corporation based not on their needs, but the needs and necessity of the corporation to possess a form of capital required for its continued existence. 

The basic building blocks of corporate life are the capitals:  intellectual, human, produced, environmental , social and financial.  The only capital it does not acquire from some one else is its unissued share capital.    Depending on the sophistication of its business model, a corporation must continually acquire these capitals.  

Employees, customers, suppliers, shareholders, corporations, institutions, groups and communities are just other names for these treasures.   Each stakeholder holds some form of vital capital that the corporation, as a sovereign entity, requires to sustain its existence.  In this sense, the corporation's interests are defined by what it needs to remain a vital legal person.    DuPont needs them all.   Investors only need one. 

The proposition that a corporation has its own interests can be tested.

How long can a corporation continue to survive by denying its interest in maintaining viable suppliers, funded research and financial savings to name but a few? 

The answer for a public company is about 10 years and declining. 

Put simply, a board that denies the needs and necessities of its corporation, out of the mistaken belief that it is a mere tool to serve others, will eventually starve the corporation of its business critical value needed to remain in existence.    That is until, like Mademoiselle X, it is no more.


The third, and most disturbing symptom of the delirium of negation is the tendency to self-harm.

“Everyone who has worked with American management can testify that the need to satisfy the pension fund manager’s quest for higher earnings next quarter, together with the panicky fear of the raider, constantly pushes top managements toward decisions they know to be costly, if not suicidal, mistakes,”

For Peter Drucker, the business of business was to stay in business.  Rationally, that objective requires that the corporation prioritize stakeholders based on its self interest as defined in terms of both financial and non financial capital.   What a stakeholder receives is a function of their importance to the survival of the corporation.    As the needs of the corporation change, so does the importance of each holder of financial and non-financial capital. 

The idea that a corporation can stay in business through financial engineering designed to maximize the financial interests of shareholders who (in the main) are not contributing to the viability of the corporation is illogical.  

The essence that preserves and maintains corporate existence cannot be mastered, let alone understood, by studying the purpose of the corporation through the pocket of the shareholder. 

But for the 20th Century's most influential corporate denier, that's precisely his logic: 

The firm is not an individual.  It is a legal fiction which serves as a focus for a complex process in which the conflicting objectives of individuals (some of whom may “represent” other organizations) are brought into equilibrium within a framework of contractual relations.

To Michael Jensen,  the only legitimate interest is the financial interests of shareholders:

I argue that since it is logically impossible to maximize in more than one dimension, purposeful behavior requires a single valued objective function. Two hundred years of work in economics and finance implies that in the absence of externalities (and when all goods are priced) social welfare is maximized when each firm in an economy maximizes its total market value.

According to Jensen’s thesis the greatest challenge faced by capitalism was not figuring out how a corporation stays in business by prioritizing stakeholders based on their contribution to the firm survival.   The challenge was getting managers to maximize profits on behalf of shareholders by aligning their financial interests.

A proposition that is now described as “the Dumbest Idea In The World" and widely acknowledged as the leading cause of chronic short termism.  A condition that causes business leaders to focus on quick financial results and meeting short term financial expectations to the firm's long term detriment.  For example, 80% of US financial executives surveyed in 2006 said they would decrease spending on research and development to meet a short term earnings target.

But turning corporations into cash machines is not really about the short or the long term.

What short term decisions have in common is the pursuit of financial capital to benefit another person at the expense of the capital required for a corporation to stay in business.   To understand why Drucker thought financialization was suicidal you need only to consider the idea of borrowing vast sums of money to buy back shares that are promptly torn up.  How does increasing debt, incurring interest expense and assuming onerous lending covenants contribute to the viability of the firm?   

What we call short-termism might better be described as the corporate equivalent of Cotard’s syndrome.    Time is not the issue and it's a red hearing.   The real problem with the financialization of corporations is the detachment of the action from its probable harmful consequences to the firm as a legal and commercial person.

How to Treat Delirium

Is there a cure?

We know shock therapy isn't the answer.   The global financial crisis of 2008 didn't work and neither have successive corporate scandals caused when companies put the interests of others ahead of their own.  The paradox of the condition is that failure appears to reinforce the delusion. 

It begs belief that the most notable response to the world's worst liquidity crisis caused, in large part by companies not acting in their own interest, has been a re-commitment to the primacy of shareholder financial interests measured by the ever increasing influence of activists over the affairs of corporations.

My solution is cognitive.  Let's talk openly about what causes the condition, how it spreads and why it is so resilient.   

Fortunately, while the causes of Mademoiselle X's delusion remains a mystery to the medical profession, the cause within the boardroom seem more obvious.    The idea that only shareholders exist and have interests have been at the core of management education, academic research, journalism and management consulting for over 30 years.    Perhaps it's sensible to start the intervention there.










Better Boards Conference 2016

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Click here to register

I’m excited to announce that I’ll be speaking at the 10th Australasian Better Boards Conference, to be held in Melbourne on July 29-31 2016.

Considered the largest regular gathering of leaders from the for purpose sector in Australasia, the goal of the conference is to give board members, chairs, CEOs and senior managers practical solutions to take back to their organisations.

This year theme is Game-Changing Moves... Governing for Maximum Impact.   Presentations will focus board and leadership discussions on four key areas that support successful outcomes in contemporary game plans: Strategy, Innovation, Entrepreneurship and Technology.

My presentation is on DLMA Analysis.

Pronounced “dilemma”, DLMA stands for  directorship, leadership, management and assurance (or governance).  Developed here in Melbourne, DLMA analysis provides a window into the way boards and managers must balance the tensions between all four management disciplines to assure success.  The interactive presentation is designed to help attendees understand their role as value creators and protectors as well as helping them to produce their own DLMA profile.  Download more here as published in Governance.  

Thanks to the organisers for allowing me the opportunity to share my insights.

Story Telling and Business

Well before the current fascination with story telling and business, the Melbourne Company of Friends held its own special forum.

It was March 2002.

I'd founded a group of readers of Fast Company Magazine a few years earlier and we'd meet monthly to discuss the future of business.  On that night the invite read:

Why is it that business struggles to maintain culture whilst indigenous Australians appear, at least to me, to have developed and maintained a cultural unity for generations. I suspect part of the answers lies in story telling.
Joy Murphy Wandin an Aboriginal Elder of the Wurundjeri people, businesswoman, Chairperson of the Australian Indigenous Consultative Assembly and... has agreed to lead us in a discussion on the importance of story telling.

But by 6pm Joy had not arrived.  She wasn't going to make it.  We were in the Bunjilaka Aboriginal Cultural Centre within the Melbourne Museum and I had 30 people and no speaker.  Or so I thought.

Our security guard for the night was Brendan and, as luck would have it, he was an elder and an exceptional teacher.

It was a long time ago and I remember more about the way he made me feel than what he said.  But my notes tell part of the story.  He referred to us as tribe and spoke about timeless things:

  •  the difference between elders and leaders
  •  the purpose of story and culture
  •  the link between rhythm ( heart beat ) and community
  •  looking and listening before thinking
  •  the importance of walking together in business and all looking and listening

He shared many stories.  But looking back, the most important one was the one I've forgotten.  I don't remember it because it wasn't the story that was important but the lesson he shared.  He separated the tribe by gender.  He told his story and then asked the two groups to discuss what it meant.  The same story was described in two very different ways.  One was "men's business" and the other "women's business".

Brendan ended by getting us all to sing a traditional aboriginal song and do a dance to sing our way home if we were ever lost (in life as much as the Australian bush).

For all the stories on story telling,  it's the one told that night by our accidental leader that holds most true and still exercises an important influence on my work on directorship. 


About the Company of Friends

The Melbourne Company of Friends disbanded in 2003 following 4 years of monthly events.  What we had in common was that we all read Fast Company.  

We were disruptive.  Never meeting in the same place.  Never covering an idea covered somewhere else.  Never following the same format.  Just to be surprised by what would happen - even when 50 people turned up knowing there was no agenda.

Our themes would not be out of place tomorrow - story telling and business,  the role of mindfulness on strategy and how the work place was a self organizing system.   I'll share my notes on some of these events as they seem far more relevant now than they did over a decade ago.  


Duty Before Virtue : The Real Ethical Dilemma Facing Corporate Governance

“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 were that capitalism was intended for the greater good”.

Since Polman's appointment, 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 elite academics like Professor Macey from Yale Law School who teaches that “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”.

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

But this CEO is no phony.    He's more capitalist than any shareholder activist and he's bringing the magic back .

The 10 Most Important Principles of Directorship

The old ideas aren't working.

Confidence in capitalism is collapsing.   The gap between the 1 % and the rest has been growing for forty years.  And, corporations are six times more likely to die in 2016 than in 1976. 

The old theories of shareholder ownership, good governance and profit maximization are making a mess of things.

But these are not theories.  Theories are meant to explain things, not change things for the worse. No, they're the pillars that prop up the investment industry. 

Agency theory is their improbable mission statement.  Maximizing shareholder value was never the moral responsibility of a corporation. It's the vision statement on the desk of every hedge fund manager.  Good governance is not a virtue, it's little more than the codification of their investment strategy.

Time for company directors to start again with a different set of first principles based on the law and capitalism's original ethical framework:

1. Corporations are not property or a technology . . .

It is a universal affront to the rule law to conceive of a corporation as property. No one can lawfully own a corporation. A corporation cannot be bought and sold or compelled to work for another.

Corporations are distinct, separate and sovereign persons.

What makes a corporation a person ? It’s not biology. In the eyes of the law, flesh and blood are not the markers of personhood. A person is anyone or anything to whom a state grants the rights of personhood: the right to own property, the right to make promises, the right to sue and be sued and the right to be responsible for wronging another.

Nor, is sentience a barrier to personhood. The law has long recognised that those who cannot act for themselves may act through agents, such as a board of directors. Who, historically, had an unequivocal duty of loyalty to the corporation.

If corporations are not property, how can they be considered a mere tool or technology. While a technology is created to achieve an objective, a person cannot be brought into being for an objective. In any other context, this suggestion would be abhorrent and offensive.

Yet, despite their personhood, corporations are still treated and mistreated as technologies. According the norms of corporate governance, corporations exist to enrich other persons (both corporate and human) Misconceived as nothing more than elaborate cash machines, they are denied their most fundamental right: the right to choose and realise their own purpose through their agents.

2. Corporations are entities with whom humanity has a vital symbiotic relationship. . .

3. The purpose of a corporations is to be a corporation. . .

4. Corporations shall not act out of an artificial duty to shareholders or a responsibility to stakeholders. . .

5. The organizing principle of a corporation is self determination, not profit maximization. . .

6. Corporations shall be directed according to the moral principle of self interest rightly understood . . .

7. It is in the interests of corporations to prioritize stakeholders based on their contribution to the well being of the corporation. . .

8. It is not in the interest of corporations to harm people or the environment. These are a corporations's life support . . .

9. Corporations Shall be governed in a way that protects them from expolitation from shareholders and others. . .

10. Profit at the expense of self interest rightly understood, is self harm. . .