Managing Leadership^®

Capitalism is a system of economic organization built on the insight that when owners of labor and capital are able to deploy their assets as suits their self-interest, the wider public good tends to be served, as well. It works to the extent that its fundamentals are in play.

The invention of the modern anonymous shareholder-owned corporation would seem to be a perfectly ordinary extension of capitalism. It certainly has been a boon to the world economy. It has enabled vast amounts of capital to be mobilized and deployed into commercially viable projects that could never have been conceived of, before.

Additionally, it allows for the rapid redeployment of that capital when old ventures fade and new opportunities arise. That makes it a powerful vehicle for the important phenomenon of creative destruction, funneling wind into the sails of success while dissipating the pain of failure.

And, it is in its ability to facilitate the mobility of capital that publicly-traded shareholder-owned companies retain their link to capitalist theory. Owners still own, and can still sell. Indeed, many feel that this is sufficient communication of owner intent and interest with management, much as price is in the market between buyers and sellers.

But for all that, there is no escaping the fact that ownership in capitalism is intended to be expressed not by the ability merely to sell, but also to direct. Private equity firms are excellent examples of this principle incontestably in action in a corporate setting.

Publicly traded firms lack that clarity, that unity of command. Control of boards is, for all practical purposes, out of the reach of owners, but well within that of managers.

Many people actually celebrate that, confusing unity of command with forceful arrogation of it. But the truth is that boards have an extraordinarily difficult time establishing their independence and role in the corporate governance structure in the absence of meaningful contact with the only really authentic source of that governance: owners. And we know that such contact is not forthcoming in publicly-traded companies.

So, the first and most fundamental duty of a board is to address these issues. It must answer the questions of what shareholder interest and intent are. It needs to create a viable philosophy for developing and defending those answers. Only then does it have the basis for moving on to other business.

Hopefully, we have managed to establish the core dilemma confounding the operation of corporate governance in publicly-traded companies, and that the only place where this can be addressed is in boards of directors. Now, it is time for us to move on to other business, also - although not too far afield. we will be turning our attention to the people who make up these boards: directors.

See you tomorrow!

—

This post is a part of a series. You can learn about and link to the other articles here: Corporate Governance and Capitalism

—

Today’s tip: Speaking of unity of command, possibly the earliest sponsor of this concept as applied in the administration of civilian organizations is the French management theorist of a century ago, Henri Fayol. He was followed by brilliant French planners in both the civilian and military realm. Please see Michael Wade’s use of some examples of these in his excellent discussion of planning and assumptions.

—

Please take a moment to look at the contents section on the sidebar of the main site: you will see a listing of the article series that have been published here. You can click through to view summaries of the pieces, and then read the full series or selections that are of most interest to you. Enjoy!

And while you are, please also subscribe by email or RSS reader - thanks!

Technorati Tags: Capitalism, economic, organization, owner, labor, capital, asset, self-interest, public good, shareholder, corporation, venture, creative destruction, success, failure, publicly-traded, theory, communication, intent, market, buyer, seller, direct, Private equity, corporate, clarity, unity of command, manager, independence, governance, business, administration, civilian, French, Henri Fayol, planner, military, Michael Wade, planning, assumptions