What does the future hold for boards? It’s an apt question to ponder as Directors & Boards, founded 1976, and the National Association of Corporate Directors, founded 1977, together mark a total of four score years of history. I’d like to take this occasion to address a disquieting new view of corporations — and boards.
The Big Bang in the corporation universe was probably the Sherman Anti-Trust Act of 1890, used by Teddy Roosevelt to break up trusts. The Sherman Act ushered in the modern era in which ownership and control were separated and there became a need for directors to represent owners. The law outlawed a mechanism that allowed executives who ran corporations to control the vote of owners through trusts. After that, owners needed a voice and that voice was the corporate boards. The separation of ownership and control was first identified in 1932 by Adolph Berle and Gardiner Means, in their book, The Modern Corporation and Private Property. Their ideas came to be called “agency theory,” which identified the board as a necessary agent of the owners since they could not meaningfully control management.
But this shareholder-centric concept is changing. Directors are now being asked to represent more than owners. The corporation is a creation of society, and today capitalism and its vehicle, the corporation, are struggling to adapt to shifting societal expectations. There seems a growing desire to have current political agendas hitch a ride on the economic corporate agenda.
For quite some time there has been a civilized discourse about directors being there for shareholders vs. stakeholders, and it always has a nice resolution because in the long run, what is good for corporate stakeholders is good for corporate shareholders. The problem is that some political forces are setting both shareholders and stakeholders aside in a broader political agenda.
Corporations are blamed for social ills, taxed to cure them, and regulated into a corner — all to please voters who are unhappy with companies whose purpose they may not know or understand.
The capitalistic model is efficient and effective at economics but ill-suited for politics. This I believe leads to a monumental challenge. You see, corporations are pretty adept at engaging the 100 or so large institutional investors that own them and have a common goal to create wealth. But society? In the 2016 presidential elections, more than 100 million citizens voted, each with equal power. Their goals and aspirations were quite disparate, and there are a lot more of them than 100 or so institutions.
We may face the end of our current role: boards as agents for owners, to take on a broader role. We must do so with care.
I have five deceptively easy recommendations:
1. Stop/look and listen: Come to understand how your company is perceived generally, but especially how it is perceived in and out of your communities.
2. Begin the journey: Meet with your fellow directors to assess and improve their level of sensitivity to key political issues facing your company and industry.
3. Call for reinforcements: Encourage company and board leaders to engage in dialogue with stakeholders about economic issues (not just political ones). If changes are required, are your shareholders on-board?
4. Talk to the owners: Make them aware of changes you may be making and why.
5. Change perceptions and reality: Through enhanced communications and actual changes, make sure your economics are understood and make good sense in a social context.
It may take effort, but our political economy depends upon it
2016 Fourth Quarter