THE ERROR AT THE HEART OF CORPORATE LEADERSHIP

HBR ARTICLE BY JOSEPH L. BOWER AND LYNN S. PAINE, MAY–JUNE

The idea of shareholder primacy is rooted in agency theory, laid out by academic economists in the 1970s. Simply put, the notion is that shareholders own the corporation and, by virtue of that, have ultimate authority over its business. The authors demonstrate the laws in the theory, particularly its inability to deal with the “accountability vacuum” that arises because of shareholders—many of whom are merely short-term investors—have no real responsibility to the companies whose stock they own. They argue that the current orthodoxy is an “extreme version of shareholder centricity” that is “confused” as a matter of law and harmful to society. It forces executives to focus excessively on the short term, weakening companies’ long-term prospects and damaging the overall economy.

I would add that we also have to consider that companies drain a lot of resources from the system:

They borrow money from banks that is provided by account holders; they benefit from regulations, laws, and market structures to sell their products, which are also provided by the system; they hire employees who are trained and educated with funds endowed by governments and the private sector; they use physical infrastructure and utilities that are built with public funds; and so on. From an economic point of view, companies have an objective to maximize social returns by behaving as citizens. Manuel Lafuente, freelance consultant in strategy and innovation necessary returns to shareholders, you must take into account a broader stakeholder perspective. The point made by the authors and the online commentators about the diversity of shareholders on the register is important. In serving the interests of “all” shareholders or the company “as a whole,” my approach is to interpret the obligation as serving the long-term interests of shareholders: In other words, boards and management should make decisions not on the basis of short-term holders’ desires but, rather, according to the interests of those likely to be holding the stock longer. Nora Lia Scheinkestel, associate professor, Melbourne Business School; nonexecutive director, Telstra Finally, a cogent, persuasive, compelling set of arguments that show why the current version of short-term, maximize-share holder value capitalism is wrong and dangerous. Might this be the moment when the scales begin to tip back toward a form of capitalism that can, will, and should survive the onslaught of negative impacts we see today? As the former CEO of five companies, and having served as a board member of 11 organizations, I applaud this effort. Bob Vanourek, president, Vanourek & Partners

For a long time cities have

been told to operate more like

a business. Professionals in

public administration and public

service have wrestled with how

terms such as “customers” and

“shareholders” can apply to citizens

and elected officials. This new

model can open discussion about

how a company-centered model

might be encouraging business

to acknowledge its role in the

community. And it might bridge

a key gap that has long frustrated

and distanced the private sector

from the public sector: sustaining

social and community objectives

for the long term.

Ann Pappert, former CAO,

City of Guelph, Ontario

Working primarily in the Australian

market, I am not quite as pessimistic

as Professors Bower and Paine about

the prevailing model; I believe it has

evolved to take account of many of

the issues they raise.

I believe that the agency model— and the creation of independent boards as the representatives

of shareholders—were adopted principally to counter the moral hazard of managers’ acting to

benefit themselves rather than the funders of the firm. (In Australia we overwhelmingly adhere to

separating the independent nonexecutive chairman from the CEO.) Regrettably, corporate scandals

still occur, which shows that risk is alive and well. But the real point here is about the funders of the

firm. If boards and management don’t address their desire to get an adequate return on their invested

capital, no other stakeholder interests can be met, because there will be no firm, let alone funds to

dedicate to this purpose. In recent years in Australia, however, the concept of “social

license” has become increasingly prominent in business circles:

a realization that failing to take appropriate account of stakeholders other than shareholders can

create an existential threat. If the community in which your key assets are located is strongly opposed

to your operations, you will not succeed, no matter how many laws are passed in your favor. If

Millennial employees feel that the firm is socially or environmentally irresponsible, you will not be able to attract the talent you require. Thus, in order to deliver the

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