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Banks should serve stakeholders not just shareholders
HARRISONYOUNG,NON-EXECUTIVEBANKINGDIRECTOR&AUTHOR
Banksoccupyacentralpositioninsocietyandtheeconomy.
Peoplehavepassionateopinionsaboutthem– somearguablymisguided,somethoughtfulandchallenging.
Ihopetodothreethingsherethatmightenhancepublicdebate.
Iwishtosuggestthatabankboard’sobjectiveisbestdescribedasabalancedresponsetostakeholderclaims– asopposed,thatis,to maximizingthewealthofoneclassofstakeholders
2.
Iwillbrieflydiscussthematterofworthycausesclamoringforboardattention.Mypersonalview
isthattheycannotbewhollydismissed.
3.
3.Ihighlightthevalue-allocationdecisionsboardsmustmake,notbecauseIfavor
movingbusinessintosomenewconstruct,orexpectparliamentstoaltercorporationsacts,buttoencouragedirectorstothinkabouttheirjobdescription– includingthe
unwrittenparts.
Therehavebeenacoupleofelectoralsurprisesrecently.“Left”and“right”nolongerhavestablemeanings.Communityexpectationsarechanging.
Executivesineverysectoroftheeconomyperceivearisingtideofdistrust.Itmaymakesensetore-examinehowbusinessexplainsitselftoaskepticalpublic,andseeifwebelievewhatwe’resaying.
Abankisanenterprise.Thetaskofeveryenterpriseistooffergoodsandservicesatprices
thatexceedtheaggregatecostoftheiringredientsbutarenohigherthanthoseof
alternativeproviders.Doingthatcreatesvalue.
Some- ingredientsaretangibleandobvious:bricksto
buildahouse,claytomakebricks,menandmachinestodiguptheclay.Someareintangible:energytobakethebricks,theskillsthatoperatorsofmachinesacquire,thetransportationofthebrickstomarket.
Iliketousetheword,“enterprise,”forvaluecreation– boththeactivityandentitiesthatengageinit– becauseitisneutralastodistributionandstructure.Thepurpose ofanenterpriseisvaluecreation,fullstop.
“History”isshorthandforpoliticalarrangementsandresourceendowments– inotherwords,luck.Negotiationsareconductedinaccordancewithamixtureofwrittenandunwrittenrulesregardingprocessandentitlementthatwemightthinkofasavirtualconstitution.Everyconstitutionissubjecttoamendment.
Thetermcoversanyonewhoreceivessomeoftherevenueandotherbenefitsanenterprisegenerates,orsuffersfromcollateraldamagetheenterpriseinflicts– e.g.,bypolluting.
Shareholdersarestakeholders,ofcourse,butsoarecustomers, creditors, employees, executives, directors, suppliers, the government invariouscapacitiesandthecommunity.By
echoingtheword,“shareholders,”theword,“stakeholders,”quietlyassertsthatallthesepeoplehaveaformofownershiprights.
Addingittothemiximposesacostonthecommunity.Itmayalsoincreasetheprofitshareholdersenjoy– forexamplebecausetheyarefreenottotreattheirwastewaterbeforereleasingitintotheriver.
Every kind of freedom can be viewed as an ownership right.Somefreedomsturnouttobevalue-enhancingandsomedonot.
Bankshavealotofstakeholdersandtheymakealotofnoise.Idon’tknowwhetherthatshouldberegardedaspartofthebusinessmodel,butitisdefinitelyanimportantfactaboutbanks.Itisoneofthethingsthatmakesbankinghard.
ThetraditionalapologiabeginswithAdamSmith’s“invisiblehand”– thenotionthathonestpursuitofself-interesttakesaneconomytoanequilibriumstatethatmaximizestotalwelfare.
Thisisactuallyonlytrueforagiveninitialallocationofresources.Grosslyunequaldistributionsofwealthmeanlesstotalwelfare,andtheremedyismorelikelytobesoughtinpoliticsthaninclassicaleconomics– aswehavelatelyseen.Butnevermind.Competitionistheheroofthestoryandbusinesspeopleloveretellingit.
Believingineconomicsandacquaintedwithcorporatelaw,directorsofpubliccompanieswilloftentellyou– orsomewill– that their job is maximizing shareholder wealth,with
broaderoutcomesbeingthemarket’saffair.
Self-interestmaybeconstructivefromamacro-economicperspective,asAdamSmithtellsus,butit’sunattractiveatapersonallevel.Arobustdefenseofprofit-seekingremindspeopleofhowhandsomelycorporateleadersarepaid.Morefundamentally,thisisthewrongwaytothinkaboutprofit.Anditdoesn’tdescribewhatcompaniesactuallydo.
Oneoftheingredientsanenterpriserequiresinordertodelivergoodsandservicesistheuseovertimeofacertainamountoffinancialcapital.Suppliersofcapitalmustbeadequatelycompensated– asmustemployeesandexecutivesassuppliersoftheirtimeandtalent– ortheywillnotparticipateintheproject.Profithastocoverthecostofemployingthatcapital,whichmaybethoughtofasinvisiblerent.
Ifprofitconsistentlyexceedsthatrent,thevalueofowningtheenterprise– i.e.,theshareprice– willgoup.Ifwhatbusinesspeoplemeanwhentheysaythattheirpurposeistomaximizeshareholderwealthisthattheirroleistomarshalingredientssoastoachievethatresult,Ihavenoargument.
Butthatwayofputtingitcanalienatetheirfellowcitizens,anditgivesthewrongmessagetodirectors,executivesandimpressionableadolescents.AsthemanagementguruPeterDruckerputityearsago,profit is a means, not an end.Theendtofocuson,andtalkabout,isvalue
creation.
Regardingwhatcompaniesandtheboardsthatguidethemactuallydo– asopposed,thatis,tosingle-mindedlychasingprofits– letmedrawapictureofrealityasIseeit.
Manycommunitiespasslawstolimitpollution.Alogical corollary totheassertionthataboard’sonly responsibilityismaximizingshareholdervaluewouldbeanobligationtoopposeorlegallycircumventthoselaws.Theoddacademicorjournalisticprovocateurmayarguethatsuchanobligationexists,butpractical business executives donot.
Justforstarters,theyknowthatpublicoppositioncouldentailbrand damage,andthatevenquietfoot-draggingwouldmeansignificantlegalexpensesandthepossibilityoffines.
Dependingonwhatdamagetheeffluentdoesorisallegedtodo,howmuchtreatingitisprojectedtocost,ahostoftechnicaldetailregardingthoseissues,howimportantacleanriverseemstobetothegeneralpopulation,ajudgmentabouthowaggressiveenvironmentalactivistsandrelevantgovernmentagencieswillbe,andtheirpersonalvalues,directorsmaysupport,attempttoclarify,improveorfrustratesuchlegislation.
Anyonewhohasbeenacompanydirectororservedonthegoverningcouncilofaschoolorcharityknowswhatthediscussionwillbelike.Boardsworkhardtogetahandleonthefacts,payattentiontocommunityexpectations,andtrytocomparecostsandbenefitssomeofwhichareimpossibletoquantify.Intheend,partofwhattheydoismake moral choices.Theycallthem“businessdecisions.”
Youcanbeacynicifyouwant,butdirectorswanttodotherightthing.Figuringoutwhattherightthingiscanbequitedifficult.
Shared value - AHarvardBusinessSchoolprofessorandamanagementconsultanthavepublishedacoupleofarticlespromotingastrategytheycall“sharedvalue,”whichmakesdoingtherightthingsomewhateasier.
Theirideaisthatcorporationsshouldpursueinitiativesthatbenefitthecommunitiestheyoperatein– withoutworryingtoomuchaboutimmediate returnstotheirshareholders.
Examplesincludefacilitatingtheemergenceofacluster of associated local businesses,orreducingtheamountofenergy-consumingtransportationandpackagingintheirsupplychain.Conceivingtheseasbusiness initiativesratherthancharityisthefirststepinmakingtheflowofbenefitssustainable.
Anumberofmajorcompanies haveembracedtheconcept.Agroupofacademicshaveattackedit.Thereisa“SharedValueProject”inseveralcountries,includingAustralia.Thequestionofpurposeisoccupyingsomeverygoodminds.
Tobeclear,mypointisnotthatdirectorsoughttoconsidertheinterestsofallstakeholders,butthattheyalready do.
Ipersonallybelievethatcompanies have obligations to stakeholders other than shareholders.Ibelievebankshave
obligationsthatgobeyondthoseofordinarycompanies.Reasonablepeoplecandebatethosepropositions.Boardsbehaveasiftheyaretrue.That’sthewaythesystemworks.
Somepeople,observingthatbanksgrantoptionstotherestoftheeconomy,concludethatabsorbingriskisbanking’spurpose.That’sadangerousview.Banks accept risk in order to provide the services they do,buttheyshouldnotseekriskthewaygeneral
insurancecompaniesdo.
Iknowthatsomepeoplebelieveabankcantakeanyriskitwants,solongasthepriceisappropriate.Withinthenormalrangeofloantransactions,yes,alittlemoreriskandalittlemoreinterestgohandinhand.Butadequatecompensationforalotmoreriskrequiresabigdiscountfrompar.
Making– ormorelikely,buying– averyriskyloanisaformofequityinvesting. Different skills are required.Averydifferentbalancesheetisrequired.
Untilsuchtimeastheborrowerrepays,youcanhavebigargumentsaboutvaluationwithyouraccountantsandregulators,whichisdifficultforbanks.Youaretalkingabouta
differentbusinessmodel.Youwanttobeahedgefund.
Enterprise needs the right home.Theremustbeacongenialorganizationororganizationalconstructforvaluecreationtohappenin.Itsconstitutionshouldbeconsistentwiththecharacteroftheenterprise.Therighthomeisoftenacorporation,butthatisn’ttheonlypossibility.
Formuchofthe19th Century,mostEnglishbanksweresmallpartnerships,whichmadebankerscautiousbyincreasingtheirpersonalrisk.Thisworkedwhentheirbusinesswasseasonallendingagainstinventoryandreceivables– andentirelydomestic.Itdidn’tworkaswellforinternationalbusiness,whichiswhyoverseasbanksandtradingenterpriseswereamongthefirsttobegiventheprivilegeofincorporation.
Othervenuesinwhichvaluecanbecreatedinclude(withoutlimitation)ajointventure,acharitablefoundation,agovernmentagency,auniversity,apoliticalpartyandameeting.Notallofthesearebusinesses,orevenorganizations.That’swhyIusetheawkwardphrase,“organizationalconstruct.”
Acorporationhasdistinctadvantagesasahomeforenterprise,startingwiththefactthatweknowhowitworks.Ithasaconstitutionthatiswritten.Well,mostlywritten.Ithastransferableandthereforepermanentcapital,limitedliabilityfortheowners,andarelativelycleardecision-makingprocess.
Largepubliccorporationsalsohavelimitations.Quotedsharesmakefocuson current shareholderwealthinevitable– whichcangivecompaniesashort-termbiasthatputsmanyvaluecreationopportunitiesoutofreach.Transferablesharesmakeiteasyforinstitutionalownerstoselliftheysenseproblems,ratherthanstickingaroundandexercisingstewardship.
Otherorganizationalformshavetheirownstrengthsandweaknesses.Membersofaprivatepartnershipworrymoreaboutpersonalriskandreputationthanshareholdersofpubliccompaniesdo.Illiquidpartnershipinterestspromotelong-termthinking,whichinprincipleoughttobevalue-enhancing.
Ontheotherhand,themutualtrustandoversightapartnershiprequiresaredifficulttosustainaboveacertainsize,andtheentitylacksfinancialflexibility.Itsdividendpolicyisthepartners’retirementschedule.Itsconstitutionisaformofmusicalchairs.Thepartnersleadingasuccessfulfirmwillalwaysbeinapositiontoenrichthemselvesbygoingpublic– indoingsodisappointingtheexpectationsofyoungerpartnersandaspiringassociates.Thiscanmakesuchafirmunstable.Individualsmanagingsuccessfulprivatepartnershipsaddressthisissuebydescribingthemselvesas“custodiansofthefranchise.”
Institutionsthatpoolanddeployacommunity’sresourcesaresometimesseentodobetterwithout shareholders.Manysavingsinstitutionsandlifeinsurancecompaniesusedtobemutualentities.Withnoshareholderstochallengethechiefexecutive,however,sometookegregiousrisks.
Othersbecamehopelesslybureaucratic.Amanwhoknewtheinstitutionwelloncetoldmethatthethen-mutualMetropolitanLifeInsuranceCompanywas“owned”byitsownlawdepartment.MostmutualorganizationsintheU.S.andU.K.havebeenconvertedtonormalcorporations.
ThecorporationsactsofAnglo-Saxoncountriesareprettystrictaboutownershiprights.Theworldisnot.Thatbeingthecase,lookingatthingsexclusivelythroughaWesternlegallensdistortsreality.IlearnedthatlessontwentyyearsagoinChina,whereIhelpedestablishthecountry’sfirstinvestmentbankingfirm,ChinaInternationalCapitalCorporation(“CICC”).
IassumedbeforeIarrivedinBeijingthatmuchofCICC’sworkwouldberestructuringstate-ownedenterprises(“SOEs”).
SowhenIhaddinnerwithaviceministerofplanning,Iaskedhimwhatthehardestpartofrestructuringwas.Heansweredimmediately:“Findingtheowner.”HewentontoexplainthatownershipmeantinfluenceonoperationsandaccesstosomeofthevalueanSOEgenerated.Thatdidn’thavetoinvolvecommonshares.Intheabstract,andasagoodCommunist,heregarded“thepeople”astheowners.Buthehadtoidentifytheonestotalkto.
Commonsharesdohavetheiruses.CICC’smainworkturnedouttobetakingSOEspublic,whichcreatedownersintheconventionalsense,andgaveeveryoneaninterestinfacilitatingthechangesthatmadeaninitialpublicoffering(“IPO”)possible.SOEshadtobe“corporatized.”PrivilegesenjoyedbyindividualsandcommunitiesassociatedwiththeSOEhadtobecoveredbycontracts.
Newshareshadtobesold,sotherestructuredSOEhadtobeprofitable.Itwasassumedthepricewould“pop”upwardthedayofthelaunch,sothenewshareshadtobeallocated.Allthisinvolvedpoliticaldecisions,whichforeignbankerscouldnotadviseon.Butwatchingtheprocessgavemeanewunderstandingofanenterpriseasanarenainwhichstakeholderscontend,andanappreciationofthedifficultyandimportanceofabalancedresponsetotheirclaimsonvalue.
Iexpectarangeofreactionstotheaccountofownershipinthelastfewparagraphs.Agenerationafterthebirthof“capitalismwithChinesecharacteristics,”afewreadersmaystillbeoutragedbycommunism.Otherswilllaughandpointtomystoryasevidencethat“eventheCommunists”seethemeritsofunambiguousownership.Mostwillinsistthatdirectorsofcorporationshaveaclearandsimpledutyandcannotstartrewritingthelaw.
Alltheseviewsareunderstandable.Notallofthemarevalid.Full-onsocialismhasbeenafailuremostplacesitwastried,andI’mnotendorsingit.Privatepropertyisthehookintheceilingthatthetinklingchandelierofenterprisehangsfrom– withself-interestintheroleofgravity– butmutualityexistsinmanyforms.Anddirectorsdonothavesimplejobs.
Thelawtreatscorporations(includingbanks)as sentient beings empowered to pursue their own self-interest providedtheyobeywhateverrulessocietyhasmadeforthem.
Theirself-interestisidenticalwithshareholders’interest.Whatinterestsshareholdersisprimarilydividendsandpriceappreciation.Thearenainwhichcorporationsseekprofitis“themarketplace.”Good outcomes are the product of competitionamongcorporations,asperAdamSmith.Itisnotthatcomplicated.
Exceptthatitis.Youcanalsoregardacorporation,andespeciallya bank, as a parliament of stakeholders,aninternalmarketplace,aclearinghouseforstakeholderinterests.Employeeswanthighersalaries;shareholderswanttocontrolcosts.
Politicianswanttheeasycredittheybelievewillrevivetheeconomyandgetthemre-elected;prudentialsupervisorsarerisk-averse.
Environmentalactivistswantbanks tostopfinancingcoalcompanies;managementwantstorespectlong-standingrelationships.Abankchiefexecutivetriestodeliverforshareholdersbutencountersastreamofdistractions.Eventuallyhecomestounderstandthatcopingwith“distractions”ispartofhisjob.Heisanswerabletoeveryone.Theoutcomehemustdeliverisbalance.
Marketsandintelligentmarketparticipantsaregoodatfindingthepointofbalanceinacomplexsituation– anactivityeconomistscall“price discovery,”politicianscall“consensus-building”andinvestmentbankerscall“deal-making.”
Boardsperformasimilarfunction.Theyrepresentshareholders,tobesure,andfavorthemwhentheycan,butinsidetheboardroom,directorsarearbitratorsasmuchasadvocates.Smartboardstrytounderstandthemoralforceofstakeholderclaimsandanticipateshiftsincommunityexpectations.
Implicitintheuncomplicated,sentient-beingviewofcorporateentitiesisanassumption thatthepricesofmostingredientsaresetby“themarket.”Thechallengeistocombinethemefficientlyandmarkettheresultingproductsskillfully.
Competitionisexternal.Banksarecross-subsidymachines,however,sothereisalsointernalcontentionamongstakeholderswhowantoutcomesforwhichthereisnomarket.Adirectorofabankcanseeherselfasazoo-keeperwhocaresforthesentientbeingorasspeakeroftheparliament.Ithinksheisboth.
“License to operate”isacurrentlypopularnameforthemixtureoflegalauthorizationandpublictrustbanksmustmaintaintobeinbusiness.(Allmajorpubliccompaniesneedsomeformofsuchalicense.)
Abank’slicensecomeswithfiduciaryobligationstoshareholdersasagroup,butalsotounsophisticatedretailcustomerswhobuyproductstheywillneverfullyunderstand,andtothecommunityatlarge,whichwantsfinancialstability.“Maximizingshareholderwealth”isatbestapartialjobdescription.
Thelicensealreadyrequiresabankchiefexecutive,asprimeministerofhis/herenterprise,tosubmittoquestiontimeonaregularbasis.Theevolutionarypathbanksareonwillmaketheparliament-of-stakeholdersmetaphorincreasinglyappropriate.
Historically,bankshavepresentedthemselves,andthoughtaboutthemselves,assafelysituatedbehindthickwalls.Morerecently,theirboundaries have grown porous.
Examplesofthisphenomenonincludethemigrationofdatatothecloudjustasthevalueofdataisbeingrecognized;thepropensityofyoungpeopletovieweveryjobasagig,givingbanksaworkforceofstrangers;andthegrowthofcyber-terrorism,whichmakessharedinterestinprotectingfinancialinfrastructureoutweighcompetitiveinstincts.
Ifyoucarrythesetrendstotheirlogicalconclusions,thedistinctionbetween“internal”and“external”becomesquitefuzzy.Mutualitygrows.Everyoneiseveryoneelse’stakeholder.Ambitiousbusinesspeoplemayobjecttothis“vegetariancapitalism,”asitmightbecalled,butforthevulnerable,politicalcreaturesthatbankshavealwaysbeen,“servingstakeholders”istherightmotto.
HoldthosethoughtswhileIdescribeanenterprisethatwasn’tanorganization,andintroduce(ifyouhaven’theardofit)theconceptofamixedgame.Asithappens,thisstorycomesfromtheworldofbankregulation,butthere’snomessageinthat.
WhenanAmericanbankexhaustsitscapital,itissupposedtobeclosedbyitsprudentialsupervisor– theOfficeoftheComptrolleroftheCurrency(“OCC”)ifit‘sanationalbank,otherwisebythestatebankingcommissionthatcharteredit.Whenabankisclosed,theFederalDepositInsuranceCorporation(“FDIC”)automaticallybecomesthereceiver.From1991to1994,IranthedivisionofresolutionsattheFDIC.
Ourjobwastopersuadeanotherbanktoassumethedepositsofafailingbankandtopurchaseasmanyofitsassetsaspossible.Ittooksixweeksto
arrangeeven the simplest resolution,andfourorfivemonthsincomplexcases.
Ifthebankinquestionwasstate-chartered,theFedoftengotinvolved,andif,assometimeshappened,abankexperiencedliquiditypressureasitwaitedtobeputoutofitsmisery,theFedalonecouldprovidesupport.
Anyonewhohaseverworkedinabureaucracyknowsthatoverlappingpowersandinterconnectedresponsibilitiesofthissortcanresultinfrictionandturfwars.Thatsimplywasn’tacceptablein1991and1992.Fourorfivebankswerefailingeveryweek.Abungledtransactionhadthepotentialtostartacascadeofbankruns.Preventingpaniccreatedvalueforthewholecountry– nottomentionpreservingregulatoryreputations.
Thesolution,inventedbymypredecessor,was a weekly breakfast,attendedbytwo
orthreeseniorcivilservantsfromeachagency.MostbanksareclosedonFridayafternoons,sothebreakfastwasonFridaymorningtopermitlast-minuteupdates.
TheOCCwasalwaysthehost– Ineverfoundoutwhy– buttheyneverclaimeditwas“their”meeting.The“constitution”wasentirelyunwrittenandtherewereonlytworules:nosurprisesandnofeuds.Youwereexpectedtotellyourcolleagueswhatyouwereplanning,andmentionanylurkingpolicyissues.Andifyouwereangryaboutsomethingthathadhappenedduringtheweek,youhadtoputitonthetableFriday.
Youmightnotcallthatweeklybreakfastanenterprise.Officially,itdidn’tevenexist.Notexistingwascrucialtoitssuccess.Butitprovidedahomeforthevaluecreationofsmoothresolutions,anenterpriseinwhicheachoftheattendeeshadastake.Ithelpedtomaketheresolutionprocessa“cooperationgame,”inwhichnoneofthethreefederalagenciessoughttolookbetterthantheircousins.
Theoppositeofacooperationgameisthe“zero-sum game,” in which every gain is a loss toanotherplayer.Inbetweenare“mixedgames,”the
objectofwhichistoagreeonadivisionofvaluewithoutdestroyingtoomuchofitnegotiating.
Morefundamentally,gettingtheotherplayersinamixedgametoagreetoaparticulardivisionofwhateverprizeyouarefightingoverrequiresyoutoconvincethemofyoursincerity inmakinga“final”offeror“drawingalineinthesand.”Todothat,youmustdemonstrateawillingnesstosustainlossesiftheofferisrejectedorthelineiscrossed.Anexamplewouldbeacompanythatabruptlycutspricesandincreasesitsadvertisingspendtoprovetoaninterloperthatitwilldefenditsmarketshare“atallcosts.”
Competitionwiththeothercompaniesinamarketcanbeazero-sumgameandbegoodfortheeconomy.Competitionlawputslimitsoncooperation.Ontheotherhand,stakeholdersofthesameenterprise“ought”tobeplayingacooperationgame.Lifeteachesusnottoexpectthat.Mostlyweplaymixedgames.
Inbetweenalargepubliccorporationandaweeklyget-together,thereisawiderangeoforganizationalformsandconstructs.Theconceptofamixedgamehelpsusunderstandmanyofthem.
Out-sourcingisagoodexample.Bankshavedonealotofit– andsomearebeginningtowishtheyhadn’t.Thevendorhasaninterestinminimizingthecostoffulfillinghiscontractualobligations.Thepurchaserofserviceswillhaveputservicestandardsintothecontract,andwillholdthevendortothem.
Butif,astheyearspass,thevendorfindshecannotmakeaprofitwithoutcuttingcorners,heislikelytoconcludethatcuttingcornersis“fair.”Maintenancewillgetdeferred.Staffqualitywilldecline.Evenwithcontractualinspectionrightsandremediationmechanisms,thepurchaserislikelytosuffer.Theagreementbetweenthepartieswillhavetoberestructured.Signinganout-sourcingcontractamountstocreatingajointventure.Ajointventureisanagreementtoplayamixedgameforanindefiniteperiod.
Theymaybeshareholderswhocaremoreaboutsomeaspectofcorporateconduct– thecompany’scarbonfootprint,forexample– thantheydoaboutthedividend.Theymaybecommunityleaderswhowanttoseetheirtribeorgenderbetterrepresentedinseniormanagement.
Manyexecutivesandnon-executivedirectorsbelievestronglythatburdeningcorporationswithsocialobjectivesisinappropriate,nomatterhowworthythoseobjectivesmightbe.Itwillmaketheenterpriseinefficient,theyargue.Doingmorethanthelawrequiresmaysoundvirtuousbutitisnotwhattheothershareholderssignedupfor.Andtobehonest,moderatingclimatechangeisnotourcorecompetence.
Otherscontendthatlargepubliccorporationsareamongsociety’smostimportantinstitutions.Theirlicensetooperatecreatesanobligationtohelpsolvesociety’sproblems.Thereisnoreasontheyshouldn’tbeconscripted,justasindividuals
areintimeofwar.Globalwarmingisanexistentialcrisis,afterall.
Therearetwoargumentsgoingonhere.Onehastodowithcapability,theotherwithduty.Theanswertothefirstiseasy.
Tothosewhoseethestatement,“Weserveshareholders,”asanadequate descriptionofwhatboardsdoandarecapableof,myfirst
responseistoask,“Which shareholders?” Thechoiceofacorporatestrategyisalsoadecisionaboutriskappetite,andappetitesvary.
Someshareholderswantreliabledividends.Somewantgrowthandpriceappreciation,evenatthecostofincreasedvolatility.Shareholdersmayalsobesortedintogroupsbyreferencetotheirtimehorizonsandtaxpositions.Somewantaquickprofit.Thosewhowouldfacesignificantcapitalgainstaxesiftheysoldwanttocollectdividendsforever.
Ifboardscanmakechoicesaboutwhichshareholderstosatisfyandwhichtodisappoint,banksclearlyhavethecapacitytoallocatevalueamongstakeholdergroups.Theydoitallthetime,infact.
Whenacentralbanklowersitsbenchmarkinterestrate,bankshavetodecidehowmuchbenefittoconferonborrowersbydroppingloanrates,howmuchtoclawbackfromdepositorsbyloweringdepositrates– andwhetherintheprocesstowidenthespread,whichwouldbenefitshareholders.Thesearequestionsofstrategybutalsoofpolitics.
There’sanegotiationaboutherpay.Andthere’samarketfortalentthatcanbecitedtojustifytheoutcome.Headhunterswillgiveyoucompensationfiguresdisclosedbyothercompanies.
Butthereisanallocationdecisionburiedinthisprocess.Theboardhastodecidewhatmanagerialskillsandrecordofpastsuccessthenextchiefexecutivehastohave,whatpartofthemarketfortalentthatmeansthecompanyisin,whatshareofthevaluethecompanycreatesinthenextfewyearswillgotothechiefexecutiveascompensationratherthantotheshareholdersasprofit.
Whenevercurrentvalueisallocatedawayfromshareholders,whethertocustomersorexecutivesorenvironmentalprotection,thedecisionislikelytobedescribedasbeing“intheshareholders’long-runbestinterest”orasrepresenting“enlightenedself-interest.”
Atbestthesearestatementsofintent.Thefutureisprofoundlyuncertain.Long-runbestinterestisharder to calculate thanwepretend.Judgmentisrequired.
Well-constructedboardsaregoodatmakingdecisionsthatcallforjudgment.Onemightalmostsaythat’swhatthey’refor.These“complexriskdecisions,”togivethemaname,involveapples-and-orangessituationswherefinancialorlegalanalysesarenotsufficient.Science,ethics,reputation,brand,staffmorale,politicalreactionandchangingindustrystructuremayalsobeconsiderations.
Definingacompany’sstrategyisacomplexriskdecision.Choosingorfiringachiefexecutiveisacomplexriskdecision.Thequestionsadvocatesofcausesraisearesimilar.
Theyneedtobeconsideredfrommultipleperspectives.Onadistribution-neutralbasis,whatvaluecanbecreated– forthebankanditscommunity?Whatorganizationalarrangementsarelikelytomaximizethatvalue?Howcantheallocationofburdenandrewardbesquaredwithrelevantstakeholders?Whatisfair?
Thebestboardslistentoexpertsifsuchexist,butknowtheycan’tout-sourceresponsibilityforimportantchoices.Theybringtothesedecisionsdiversityofexperienceoutsidetheboardroom,themutualrespectthatcomesfromwrestlingwithdifficultquestionsinsidetheboardroom,abitofdistancefromtheproblemandwithluck,collectivewisdom.That’smyanswerregardingcapability.
Butshould boardsengageinthesedebates?Mypersonalviewisacautious“yes.”Toreinforceanearlier
observation,largepubliccorporationsarethemostimportantinstitutionsinmodernsociety.Theirlicensetooperatemakesthemapublicresource.
Ifthereissignificantinterestinanissue,boardsmightchoosetoinvestigateit,commissioningmanagementandoutsideexpertstohelpasnecessary.Ifdirectorshaveconviction,theymightspeakout,andencouragetheirpeerstojointheconversation.
Iacceptthattherecouldbecoststospeakingout.Aboardshouldprobablyrationtheoccasionsonwhichitdoesso.Butthisisarolelargepubliccompaniesareunderincreasingpressuretoplay.Therewillprobablybecoststoshirking.
Everyenterpriseisajointventureamongitsstakeholders.Theycometogethertocreatevaluebutfightoveritsdistribution.Theyaresimultaneouslyalliesandopponents.The work of a board involves satisfying, and by definition therefore disappointing,all
stakeholderstosomedegree.It’spoliticalwork.Wemightcallit“honoring”claims.
Acompany– oranindustry,orbusinessingeneral–mustconvinceeveryclassofstakeholderthatitunderstandstheirfrustrations,thatitknowswhattheywantandknowswhythey’reangry.Thismaysoundambitious,butitismoreachievablethanconvincingpeopleofyourvirtue.
Ifitcanfindtherightvoice,businessmightspeakpubliclyabouttheethicaldilemmasitwrestleswith.Manybusinesspeoplewillrecoilfromthissuggestion,fearingtheywilllosecontroloftheconversation.Butwhosayswehavecontrol?
I’llendwithsomethingquirkyandhopefullythereforememorable.Ireadanarticlenearlyfortyyearsago– I’vesavediteversince– thatdescribesa(presumablyimaginary)gamecalled“Chinesebaseball.”ItdiffersfromtheAmericanversioninonlyonerespect.Whenevertheballisinplay,anyplayermaymovethebases.ThismakesChinesebaseballmorelikelifethanmostgamesare.
Theauthorcallsthegamean“art.”Herecommendsthatplayers,“Actfromaninstantaneousapprehensionofthetotality”–advicemakingthepointthatweallhavemorecapacitytoimagineandshapethefuturethanwesometimesadmit.
“We serve shareholders” is akin to “I was just following orders” – a dumbing down of the job, and an abdication of responsibility.
Banksareservantsofthewholecommunity.Thereisnoescapingtheattendantcomplexity.Butyoucanfindthepointofbalanceifyouwantto.Anditispossibletocultivategoodjudgment.Honoringthelegitimateclaimsofallstakeholdersiscommonsense. Itiswhatboardsdo.Itiswhattheyoughttodo.