Managing Leadership^®

The book by this name discussed the business world’s fear of a new phenomenon shaking up the complacency of those benefiting from the status quo of the time: the corporate raiders using leveraged buy-outs to take over and reorganize poorly managed companies in the 1980s. This was the height of the age of the “imperial CEO,” many of whom were unable to comprehend the boundaries between their personal ambitions and the needs of their companies. One key issue is that many of them were compensated in a way that rewarded them for making huge acquisitions, competing with each other to create vast empires that often made little real business sense.

Today, executive compensation schemes have changed in an attempt to link them with the long-term performance of a company’s shares in a more meaningful and profitable way (see here for a good discussion of this from The Economist). It still remains a highly charged issue, however, and there are still barbarians storming the gates. This time, the “barbarians” are shareholder activists, and the nervous businesspeople cowering inside the status quo are just as afraid of their motives as they were 20 years ago.

In order justify their resistance to the “corporate democracy” movement, some business interests make at least a couple of intriguing points. One is that most if not all of the initiatives promoted by these activists really represent Trojan Horses for far-left political and environmental agendas. The fear is that these activists aren’t really concerned about how business are run for the benefit of owners; they just want to expand their campaigns to the boardroom in a form of terrorism by corporate governance.

It is also vaguely suggested that according shareholders so active and direct a role in the governance of a corporation may lead to the removal of their current protection, behind the corporate veil, from individual liability for corporate actions. Currently, a shareholder’s only risk is the investment in shares – there is no personal liability beyond the equity position, as there would be in a sole proprietorship or partnership form of organization.

These are useful elements of the current debate over corporate governance. Taken together, they argue for limits on shareholder democracy, emphasizing a representative system in which individual owners may have input into the selection of directors, but, beyond that, none into the specifics of particular issues or initiatives the corporation confronts. The argument against even this, because it would create factionalism inside boards with directors representing particular constituencies rather than owners as a whole, is not persuasive. Boards today are hardly colleges of senators, dedicated selflessly to the common good.

A principal difficulty boards have in discharging their duties is determining what shareholder interest is in their companies. Even something as evidently simple as share value can be controversial, because it can drive a company to ignore long-term interests – even survivability – as it pursues continuous short-term upward movements in share price.

Owners must have more influence than merely choosing to buy or sell shares – and directors must have more guidance than simply observing these flows in ownership and trying to divine their meaning. Let owners elect directors. Let the various interests owners have in ownership of a company sort themselves out in vigorous boardroom debates with all directors bound by the outcome. The key to effective corporate governance is in the board, not the executive suite, and starts with corporate direction. That can only come from owner intent. Keep the “barbarians” outside the gate – but let them pick who gets in.