Modern business is at the crossroads.

On one hand, boards and management argue that shareholders have generic objectives, are not fully informed, have conflicting interests and suffer from a range of other attributes all of which contribute to their “inappropriateness” in determining the destiny of the organisation in which they hold ownership.

This philosophy holds that the board and management are better placed to determine the destiny of the organisation and determine the outcomes that the corporation will deliver. Shareholders who don’t like the way the company is run (so this philosophy goes) can quit the registry and take up ownership elsewhere.

The contrary view held by shareholders, regulators, and certain key associations, maintains that the organisation exists solely to deliver shareholder satisfaction. As such, the organisation is the servant of the owners and all that the organisation does, must in one way or another, enable those shareholder objectives to be fulfilled or enhanced.

Examples abound of management that has taken an organisation down a particular path for a range of seemingly admirable reasons only to find that its owners either flee the registry or whose best interests are seriously damaged.

The problem with boards and management who are beholden to no one except themselves is that they have no reference point against which decisions and strategies can be assessed and determined. An organisation whose principal accountability is to itself is not compelled to maximise owner benefit or even to avoid owner harm if it believes that such a course “is not in the best interests of the corporation.”

The reality of course is, that in some instances, the best interests of the owners are served by the organisation ceasing to exist (sell, merge, divest, etc). Some of the defensive corporate plays recently seen in the US and Australia and largely engineered by boards and management, were no more than attempts to keep the organisation intact demonstrably for board and management purposes rather than in the best interest of the owners.

Corporations that act in other than the best interests of owners represent diminished probability of satisfaction and imply higher risk to their owners. Investors denied access and input will feel vulnerable to the character and machinations of management. They will tend toward other forms of investment where probability of outcome is stronger and where the investor is offered greater accountability from the chosen investment vehicle and less susceptibility to the foibles of individuals.

The implications of this on the entire equity structure of the economy promises to be profound if this crucial issue leads to organisational empowerment from owners.

All corporations must ultimately be accountable entirely to their owners and the outcomes delivered by those organisations must be unashamedly aimed toward satisfying and/or enhancing owner objectives. It is only through the establishment and enforcement of an external accountability on a corporation that owners can start to feel some comfort (but no guarantee) that their organisation is striving to achieve that which its owners intended.

We have all heard of the “Big Bang” theory of the universe and the general diversity of opinion as to its accuracy as an explanation of how the universe started.  When we seek the “Big Bang” theory of the corporation in order to identify where the corporation “starts” we tend to observe much more agreement.

In the corporate context, most observers of and participants in business would agree that the raison d’etre of corporations (i.e. where a corporation’s efforts “start” and from where it gets its legitimacy) is identified within its mission statement. And it is from this mission statement that organisations develop an enabling vision and extract from it a set of enabling objectives and strategies that will deliver this vision and fulfil its mission.

Unfortunately this process is flawed since in most organisations the process of developing its mission is undertaken entirely by management. And it is management who, without the necessary metrics to define their owners’ objectives, make subjective assessments as to those objectives (albeit well-meaning), and incorporate them into the organisation’s strategies and plans. In other words, managers decide what it is that their organisation will do and what their organisation will deliver.

Since shareholder objectives vary significantly, management’s subjective assessments are therefore often wrong, inexact or inappropriate. The corporation’s mission then, is a statement of organisational deliverables that, because it has been subjectively derived, often diminishes the probability for owner satisfaction from the company that the owners collectively posses.

A key element of most organisations where management defines the mission statement, is that management sets the performance criteria against which it will itself be measured. These criteria may not be the criteria needed to drive toward owner objectives and owner satisfaction.

Since management is “merely” human and thus exhibits natural human traits and tendencies, the measures used to assess itself are frequently those that are less challenging, less confronting, are less risk-taking or threatening than they might be if they were set in a manner focussed exclusively on shareholder best-interest.

The question therefore is whether an organisation’s mission statement is the fundamental reason why an organisation exists. Strictly speaking, the mission statement does provide the rationale for an organisation’s existence and context to its operational and investment strategies.

However, the issue for those organisations where management subjectively develops the mission statement, is that as long as a mission statement fails to address the satisfaction of owner objectives in tangible, quantifiable and measurable ways, then the mission statement is not the definer of a corporation’s purpose. The mission statement will provide the necessary direction for the corporation as long as it is not a statement of subjective or uninformed management, but is an accurate representation of the outcomes desired by owners.

Mission Statements that speak of “quality”, “best practice”, sustained competitive advantage” and similar motherhood statements without convincingly demonstrating that such philosophies contribute to the enhancement of shareholder satisfaction threaten the use of shareholder funds toward projects that add little to the owners of those funds.

The only way to bridge this chasm between management perception and owner objectives is to quantify owner objectives in a way that enables the organisation to determine what it needs to deliver over time. Once quantified, a mission statement for an organisation needs to be “no more” than a statement of quantified owner objectives since the organisation “merely” exists to satisfy those objectives.

The intent of the independent director is to counter-balance the presumed (and actual) potential self-interest of executive Directors and ensure that all shareholder interests are dominant.

In the Murdoch case, because of the power of the Chairman/CEO/dominant shareholder, this appears not to be the case. Therefore, with News Corp, whether the directors are independent or executive is somewhat moot.

The ONLY way to ensure that a corporation is focussed on shareholder objectives is to firstly, establish the corporation's shareholders' metrics on value, benefit, growth and risk; and secondly, to have those metrics and the corporation's alignment with them independently certified.

The role then of the independent director is not so much to protect shareholder interests, because that will be done by establishing, publishing and certifying the corporation's objectives. Rather, the independent director's role will be to provide independent oversight on the processes of the corporation.

It is truly amazing how many boards and their management believe that owners are a homogeneous group who all share common objectives. And it is the belief in such common objectives that causes organisations to chase the mythical “maximisation of shareholder value or wealth” often at the expense of what shareholders actually want.

The fallacy of this belief in a unitary and generic objective can be illustrated on two levels.

Firstly, if “shareholder value” or “wealth” is represented by, say, a corporation’s net assets or dividend, and if all shareholders only sought to maximise either or both of these criteria, then even in an imperfect market, all shareholders would eventually accumulate and gravitate in those few corporations that had the highest dividend and/or net assets. Even a cursory examination of listed stock performance will confirm that this does not occur. Clearly other factors and issues impact upon shareholders that affect their investment/ownership decisions.

Secondly, research (detailed in my book) into the hypothesised homogeneous banking sector, has found that the top 20 shareholders in five banks behaved significantly differently to changes in, among other criteria, net assets and dividend. One bank’s top twenty shareholders might sell their holdings with a change in net assets while another bank’s top twenty shareholders might buy.

Interestingly also, was the fact that there was a very significant degree of overlap in ownership in the top twenty shareholders in each of the sample banks. Forty percent of the top 20 shareholders had top twenty equity in all five sample banks. Equity in some but not all of the other banks in the sample took the degree of overlap much higher as would an assessment of top fifty behaviour instead of only the top twenty.

The point here is that not only did the top twenty shareholders in Bank A behave differently to the top twenty shareholders in Bank B, but by and large, these were the same shareholders. Therefore, it is clearly erroneous to believe that all shareholders have the same generic objectives, and it is furthermore erroneous to believe that any one shareholder will have the same set of objectives across all of his/her investments.

The implications for corporations are clear. All corporations must identify what their own shareholders want from their involvement in the organisation.  Such identification must be in tangible, quantifiable and measurable terms so that boards and management can establish clear and unequivocal outcomes that the organisation undertakes to deliver.

Without a clear statement of end-of-period deliverables, effective organisational, strategic and investment decision cannot be made.

It is no longer acceptable for boards and management to use subjective judgement to determine what is a good outcome or not for shareholders.

The corporation is a “servant” of its owners. As such, and except in a purely legal sense, it does not have a life of its own outside its owner context.

Knowing exactly what its owners want, and not guessing or assuming what they want, should be a primary accountability of all boards and management.

When one examines the mission statement of many of the world’s leading corporations, one will inevitably find references to the satisfaction of stakeholder objectives. These references not only acknowledge the owners of the corporation, but more often than not, also identify other stakeholders such as employees, the community, the government, suppliers, and of course, the ubiquitous customer, among a range of stakeholder communities.

When one then examines the operating strategies employed by these corporations, one regularly finds that investment and operational decisions are made that attempt to maximise stakeholder satisfaction: i.e. they attempt to maximise the “benefits” provided to each of the corporation’s stakeholder constituents.

Philosophically, it is hard to argue against maximising value to stakeholders. The reality however, is that decisions to maximise stakeholder value never occur in an implications-vacuum. There are always implications and most often costs, associated with keeping stakeholders happy. And most frequently, one finds that to keep one set of stakeholders happy is inevitably at the expense of other stakeholders.  Who then gets primacy over the organisation’s efforts in satisfying its stakeholders?

If one is both honest and rigorous, one must recognise that no organisation exists to satisfy its non-owner stakeholders, per se. Rather, organisations must satisfy their non-owner stakeholders in order that the owners’ objectives can be satisfied. 

Business is all about delivering the best possible outcome to the owners of the organisation, whatever those desired owner outcomes may be. An owner never invests in a corporation because of the stakeholders or in order to satisfy them. However, owners know that in order for their objectives to be fulfilled, stakeholders must be “appeased”.

Generally speaking, and from an owner’s perspective, non-owner stakeholder satisfaction is about delivering the “lowest level of satisfaction” that the organisation, management and owners can “get away with” while still delivering the over-riding owner objectives. That does not imply that owners “abuse” non-owner stakeholders, but rather that any effort and resource applied to non-owner stakeholder satisfaction over the “minimum” needed to deliver owner objectives will detract from those objectives.

Although this may appear apocryphal and certainly politically incorrect in today’s environment, business is not about delighting stakeholders (customers or others) per se, but about satisfying owners in order to secure their desired benefits.

It is necessary sometimes to “delight” stakeholders (when “delight” is the difference between participation or purchase an non-participation or non-purchase) in order to satisfy those owners. Owners generally recognise however, that “unbridled” owner satisfaction is not possible in developed Western societies, and as such, it is widely accepted that owners must “invest” in non-owner stakeholder satisfaction in order for their own objectives to be satisfied.

Organisations that “elevate” non-owner stakeholders to primacy in their raison d’etre, risk making operational, management, strategic and investment decisions which maximise stakeholder objectives at the expense of owner objectives.  Non-owner stakeholders are, from an organisational perspective, enablers. Maximising (rather than optimising) enablers risks significant organisational misalignment.

One major global chartered accounting and consultancy had as part of its Mission Statement the “maximisation of customer satisfaction”, and coincidentally no mention what-so-ever of partner profits. Logically, the quintessence of “maximising customer satisfaction” must inevitably be the provision of service at no cost to the customer – clearly an inanity. When asked how much investment in customer satisfaction was needed to deliver partner objectives, no partner could provide an answer, yet hundreds of millions of dollars were spent on enhancing customer satisfaction.

Responsible management is all about “optimising” non-owner stakeholder objectives in the context of, and in order to fulfil (and maximise where possible), owner objectives. It is not about treating owners and other stakeholders as equal (as is being mooted by certain vocal community interest groups).  No owner will remain an owner if non-owner stakeholders secure their own objectives at the expense of owners.

Strategy review has always been a role of the board as have their other compliance, oversight, director and CEO selection responsibilties. Whether they do it well or not is another matter entirely.

The need to review/develop strategy varies within companies, industries and economies. One school of thought argues that the strategy process is linea and programmable (i.e first you analyse, then you develop the strategy and then you implement it - in that order).

The other school of thought argues that strategy is "emergent", that is, it needs to change with context and circumstance. Therefore the frequency that you review/develop strategy will constantly change with changing circumstance. Also you may review one part of your strategy while you are implementaing another part.

To add another complexity, the term "strategy" is a generic term. A successful strategy is never merely a high level statement of direction. It necessarily must be accompanied by a clarifying statement explaining how the elements of the organisation are going to be afected by the higher-level strategy.

As an example, to move into a new sector, a company must explain how that will impact its market definition, products and services, channel to market, support mechanism, communication to market, HR, IT and systems, management structure, and its KPOs.

Without such a statement, management will guess (inevitably incorrectly) the way the new strategy is to be applied. What happens therefore, is that each of these "sub-elements" of the corporation represent a level of strategy too.

Many boards are focussed on the initial strategy without a lot of thought about the critical supporting strategies or their implications.

There is no right or wrong - it's a matter which best works for your company in its context. In reality, most organisations fall between the two extremes.

I think that the need for directors to be more "financially literate" and "financially inquisitive" is self-evident. Undoubtedly, this will happen because directors and boards will "over-weight" financial literacy in order to manage their own perceptions of risk.

The issue is this, and it's serious: an eye for detail and a 'beyond-average' ('pathalogical'?) pursuit of financial robustness is a left-brain attribute. In time, boards will be dominated by a left-brain board member profile.

It's not that a left-brainer can't do the creative, innovative, out-of-the box type thinking that most organisations need, but the likelihoood is that the "average" left-brainer has considerable discomfort in focussing on long-term right-brain activities.

This spells long-term trouble for companies. What dies, is entrepreneurship (and the business intuition that underpins it) and the ability to handle comfortably, highly complex, ambiguous and unclear situations - characteristic of right-brainers who are much more comfortable in that space. Many HR issues, for example, are typically right-brain activities. Relationship management, crisis management and inter-personal facilitations are all right-brain skills (predominantly but not exclusively).

With the greatest of respect to the honourable judge, a board needs to have a range of skills - and they NEVER EVER all reside in the one person. If you have a number of similar people all sitting on the board - you are going to experience significant skill gaps.

I think the board needs a variety of skills and it also need a very robust Audit/Finance Committee. Maybe when the board doesn't have those skills in requisite numbers or in sufficient depth of skills, the board should be able to retain independent financial experts to ask the hard questions on their behalf.

The judgement does three profound things: It yells to all existing directors, "Beware, you are in extreme risk."

It also says to prospective directors, "Unless you are an 'expert' in financial analysis, don't even think of taking a board position in any type of company."

Finally it says, "Any director willing to take on the personal risk (i.e. those who have transferred all their assets to their spouse, children, trust or elsewhere) can ask any price and they will get it."

Furthermore, it says something fairly pointed about financial advisers and consultants: It has been overheard that, "You can't trust them anymore, you can't rely on them anymore, and hiring a top-line Chartered Firm won't anymore protect the directors or the company."

What's that going to do to the financial advisory business?

This ruling will have major impacts - some of which we won't see clearly for a couple of business seasons - but they are on the way. Stay tuned for the episode entitled, "Who the heck is prepared to be a director and where do I find one? Name your price!"