Managing Leadership^®

In “The Rise and Fall of the Great Powers,” an economic and military interpretation of modern history, Paul Kennedy made the observation that commerce flows around taxes like water flows around high ground. This is an excellent image, and it can be used to illuminate many events that occur in the economic life of the planet, even as they are occuring.

Indeed, it can be extended from strictly commercial activity and taxes to other areas of business direction and management. One thing that managers are woefully unaware of, for example, is that work tends to flow around regulation. If it has to get done, it tends to; but a lot of workers who agree that the work has to get done do not agree that the regulations have to be followed. In fact, managers sometimes devise rules in a way that turns out to obstruct – rather than facilitate – the execution of an organization’s work. This of course, just sets up the high ground that the work struggles to find a way to bypass.

The image can also be extended to the upper levels of directing and managing. The recent rise of shareholder activism illustrates this. Many activists are pressing the SEC to impose regulations that force boards to open their doors to directors representing the concerns of shareholder groups when certain threshold events are surmounted. This has set off a bit of a fight. Would such directors really represent owner economic interests, or the political, environmental, or social agendas of focused activists who have decided to move their fight into this arena?

The SEC has been struggling with this issue for several years. Buffeted by powerful advocates on both sides of the issue, it has yet to finalize its position. The question of whether or not the government should impose regulations on how publicly traded companies select their boards has been given rhetorical charge by its characterization by one side as a fight for “shareholder rights.”

Who can argue with that? I argue on these pages that corporate governance cannot seriously be addressed until we have come to an effective understanding of how to properly assess and represent shareholders’ interests.

But I’ve also argued that we don’t yet know how to do that. There are a lot of issues involved that are not receiving proper attention in the public debate, or in the debate within the SEC on this issue. These range from what owners’ rights legitimately are (calling for a wide interpretation), what directors’ rights and responsibilities are (calling for a somewhat narrower view), to what managers’ responsibilities really are (narrowest of all). We are a long way from delimiting these and learning how to give them expression. We will discuss these in the coming year.

For now, note what is already happening: corporate organization is flowing around actual or anticipated regulation. More and more outfits are going private in order to avoid the burdensome and distracting demands made from so many quarters of publicly traded companies. Indeed, there is even the suggestion that some will choose to abandon their listings on US stock exchanges for more commercially hospitable ones offshore.

Companies used to aspire to listing on US exchanges because that is where the moral high ground was. Listing there meant you were unarguably world class. Now, that high ground is evolving into a nightmarish regulatory and social advocacy battleground that is an impediment to doing sober and rewarding business – another sort of obstacle that commerce may find itself flowing around.

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