My research on shareholder, corporations and managers illustrates that managers are “merely” people with their own attitudes, perceptions, biases and fears. These human traits, when allowed to dictate corporate policy, will inevitably impact the quality and robustness of decisions made – and ultimately will impact on shareholder outcomes.

Take a manager faced with a decision that involves a significant risk to the corporation. If the culture is one that is quick to blame, then the personal risk that the executive faces if the risk turns sour, may result in the executive losing career opportunities – let alone his job.

If the executive has a young family, mortgage and private school fees, then that executive, only because he is human, is likely to shy away from taking the risk – even if it is the appropriate thing to do from a corporate perspective.

Therefore on one level, managers by their humanness, make decisions that may not be in the best interest of the organisation and its shareholders. On another level, managers will be attracted to things they know, and away from things they don’t know – again only because they are normal. A manager familiar with the 360 degree review technique, for example, will be attracted to it because, in his knowledge, he feels safe. Whether the 360 degree review technique is the optimal technique needed for the manager’s context may be a question that the manager won’t ask and the corporation may be oblivious to.

The choices that managers make everyday are always made with someone’s subjectivity playing an role – sometimes a minor role and sometimes a major one.

The old adage that one can’t teach an old dog new tricks is a wonderful metaphor for this situation. 

What earlier discussion clearly conclude is that no tool or technique is always the right technique for every situation.  Managers are affected by their subjectivity; organisational tensions, competition and conflict; and the normal dynamic of aspiration and success, that comes to play in deciding corporate strategies. 

Sustained Competitive Advantage, World’s Best Practice, TQM, 360 degree reviews, Innovation, Re-engineering, Teaming, Knowledge Organisations, Learning Organisations, Quality Circles and so on are all techniques that suit a certain context. Used inappropriately, they can cost millions, defer desired outcomes or even compromise permanently the organisation – all at the expense of the poor shareholder who has entrusted the management to perform as required.

Since, as my previously discussed research demonstrates, shareholder objectives vary within the same company, and between companies within the same industry, an industry-based generic ratio will disadvantage those corporations who, based on their own shareholder objectives, do not pursue that ratio as their principal outcome, or who rank that ratio in importance below other outcomes.

The preferred and more effective method for assessing CEO and corporate performance is by assessing their ability to deliver those outcomes that are specific to it, its shareholders and its context. It is considerably easier to assess a company against its own specific performance objectives, even though it might then be more difficult to establish cross-corporation relativities and comparisons.

In a competitive environment, it is easy to state that company 'A' is superior to company 'B' based on sales, market share, number of customers, etc. Biggest, highest or most, normally wins. However, when one factors in shareholder objectives, or what the company is trying to achieve within known constraints, then comparisons become more tenuous. Is a company that deliberately pursues and excels in dividend generation superior to a company that deliberately seeks long-term positioning? Is a company which pursues dividend maximisation with a gearing constraint of 25% superior to a company that pursues dividend maximisation with a gearing constraint of 75%?

Based on the model proposed, cross-corporation comparisons are only valid when the corporations involved in the comparison are trying to achieve the same outcomes based on the same constraints.

Pressure by institutions, analysts or an unsophisticated Board for a CEO to lead his organisation to a “best in sector” based on industry ratios risks focusing the organisation on outcomes that are not related to its shareholder requirements.

Much movement on the share registry of a corporation is commonly interpreted as representing instability and is therefore seen as negative. Boards and CEOs therefore attempt to “quieten” their registries, using a range of techniques including, promotion, advertising, communication to shareholders, communication to analysts, promise of bigger benefits, etc..

Although volatile movement on a registry may be unfavourable, it should by no means automatically suggest that all movement on a registry is negative and that stability of the registry, per se, should be aspired to. Except in a market in free-fall, every transaction has a buyer and a seller. Where an existing shareholder is selling because of the corporation’s inability to provide a high probability of satisfaction, then it is likely that the shareholder may discount the sale price asked in order to cut “losses” and reposition in another registry that offers greater probability of satisfaction. If many of the company’s shareholders feel the same way, then prices will fall.

Conversely, an investor wishing to gain entry into a registry or wishing to buy a greater holding will see additional value in that stock over the purchase price. If there is no such perception of “extra” value, then there is not much point in the purchase. When there is “extra” value perceived by the intending investor, and when many investors perceive such “extra” value, then there is a likelihood that prices will be pushed up to a level that equates to the perception of value.

This is no more than normal supply and demand mechanics at work. Therefore, when existing shareholders wish to sell their holdings due to a negative perception of the future, then prices will tend to be depressed. When external shareholders want to enter the registry, then they tend to push prices up. Depressed share price causes market capitalisation of that company to be depressed while rising prices enhances market capitalisation.

Companies therefore should attempt to minimise all churn on their registry caused by disenfranchised shareholders because this will constrain share price and market capitalisation. The methods used by companies to achieve this might vary, but can be summarised as methods that enhance shareholder satisfaction and positive perceptions of future performance.

On the other hand, all companies should “chase” positive churn, i.e. registry churn caused by investors wishing to enter the registry. Particularly when fewer existing shareholders are prepared to exit the registry. This forces share price up which is to the advantage of all existing shareholders. One is not able therefore, to deduce merely from the existence of churn, whether the instability is “positive” or “negative”. One conclusion is clear however, positive churn is very much to the advantage of existing shareholders.

Many CEOs and senior managers make fundamental changes to their organisations based solely on existing performance. They may divest or cease operations of a product or division that has not achieved, for example, the corporate ROI expected. Other measures may be chosen as the criteria that dictates whether an activity is continued or ceased.

The issue is not that such deliberations are made, because that is exactly what management is paid to do - to ensure the viability of operations. However, the reality is that management often makes these decisions in an inappropriate context. The following quote by Hamel and Prahalad illustrates this point:

“ROI (or return on net assets or return on capital employed) has two components: a numerator - net income - and a denominator - investment, net assets or capital employed. Managers know that raising net income  is likely to be harder than cutting assets and head count. To increase the numerator, top management must have a sense of where new opportunities lie, must be able to anticipate changing customer needs, must have invested in building new competencies, and so on. So under intense pressure for a quick ROI improvement, executives reach for the lever that will bring the fastest, surest result: the denominator.” [Gary Hamel and C.K. Prahalad, Competing for the Future, Harvard Business Review, July-August 1994]

One of the key issues about such decisions are managers who chase the wrong performance measures. More often than not, these performance measures have been internally determined (i.e. by management) and do not necessarily directly address shareholder objectives. This is because most organisations have no verifiable and quantified view of their own shareholder objectives and therefore need to make a subjective assessment of what will please shareholders. Such subjectivity inevitably leads to management comparing themselves to peers and setting generic ratios and performance measures as their own performance criteria. The chase for performance based on inappropriate performance measures will negatively impact upon real shareholder satisfaction.

The second issue is that in chasing the wrong measure, often core assets are cut or jeopardised. If ROI is determined by management as the key measure, then they may cut products and/or activities that the company has been seeding for some time and at considerable cost that haven’t as yet achieved the desired ROI. Management action may certainly enhance ROI, but it may also destroy shareholder funds invested in new product development over many years.

Thirdly, undertaking efficiency reviews and actions solely on the basis of current operational performance is not sufficient or adequate. One must also know where the organisation is “travelling” (or more specifically, where it would like to “travel”) in order to determine whether the intended cuts will aid or hinder the company’s future aspirations. All too often, corporations with no vision to the future, or a vision that is largely undefined, undertake significant organisational change only to find that that which has been eradicated or changed is that which is needed for future operations and success.

Corporate improvement must be determined by the context within which the corporation operates: i.e., what outcomes are needed to satisfy shareholders and what attributes of the current operations are required to satisfy the vision for the future.

As with many enabling strategies adopted by organisations, World’s Best Practice (WBP) is often elevated to the corporation’s mission and vision statements. The corporation then inevitably chases this objective because the mission statement implies that being “best” is why (or one of the reasons that) the organisation exists.

The reality is that few if any shareholders make their investment on the basis of the best practice position of their intended investment. They may however, make their investment on the basis that best practice brings an outcome that the investor seeks. But it is not the best practice per se, that is the attraction but rather the outcomes from best practice to which the shareholder is attracted.

As with most corporate strategies, there is a cost associated with their choice and their implementation. When the choice of a strategy such as WBP is made because it is only through being at WBP that shareholder objectives can be satisfied, then the decision is rational.

It is when management likes the concept of being at WBP and chases such a standard for reasons other than enhancement of shareholder objectives, that dysfunction and tension (and conflict) occurs between organisation and owners.

Many organisations chase WBP because they see that WBP is a status position they would like to aspire to and have for their own organisation. Yet the WBP standard is often far in excess of the standard required in the corporation’s own market place to satisfy its current or potential customers.

Where a company operates or intends to operate in a global market then WBP may be a relevant differentiator in the company’s market place. But then again it may not.

If WBP in say, the order-to-deliver process in a certain industry, is half a day, and the industry’s best practice in a company’s market place is 5 days, then there is no justification in chasing WBP unless at half a day, the company will be able to secure additional advantages (such as increased sales or economies of scale) that will lead to enhanced shareholder objectives.

If such “elasticity” does not exist in this particular market, then the investment (and other costs such as organisational change) required to achieve a half-day standard will detract from that which shareholders desire.

As with all such generic corporate aspirations, they, and WBP is no exception, are not a standard panacea for corporate visioning or mission definition. Such enablers must be determined by their suitability, their context and their ability to deliver or enhance defined shareholder objectives.

Three important issues surface when considering the use of “quality” strategies for organisations.

Firstly, much has already be discussed in this book about the folly of chasing an enabler as an end in itself, rather than using the enabler to achieve a specific desired outcome. Many, if not most, corporations have the concept of a “quality organisation” identified somewhere in either their mission, vision or operating statements and strategies. This implies that they will “chase” quality as a desirable outcome. Quality is expensive of time and resources, generally has a longer-term payback and it carries a risk element. It also compromises in the short-term, other outcomes such as profit, investment, etc.

Secondly, organisations should never chase quality because “it makes management and staff feel good about themselves”. This is never a sufficient justification to adopt any strategy.

The only legitimate reasons for a corporation to embark on a quality path is that quality is (proven to be) the differentiator in the mind of the customer between choosing or not choosing to buy; and quality assists the organisation to satisfy specific shareholder objectives, such as the minimisation of risk (caused by poor product or processes).

Because of the financial and other implications of “quality programs” or “quality accreditation”, such decisions should never be taken lightly nor should it ever be assumed that the pursuit of quality is a “given” in any situation.

It is not suggested however, that companies should be content with shoddy products or processes, but that quality programs have implications and those implications may impact significantly on the organisation’s ability to deliver what it is really there to do - i.e. satisfy shareholder objectives.

Thirdly, having or adhering to a quality program is not a guarantee of success. TQM and other quality programs generally concentrate on the processes within a corporation, on the premise that if all the processes are effective, efficient and of quality; then the outcomes that those processes produce will be of quality.

The unfortunate reality is that an organisation may have superlative quality processes, but still produce a poor product that no-one wants. “Quality” is not a substitute for thinking. Many corporations who have been quality accredited are still not performing against other criteria. Often the cause of this incongruence is that too much faith is placed in the “quality process” as a cure-all, while the basics of running a business are down-played or over-looked.

Although it is never the intention to promote mediocrity over excellence, it must be said that many corporations satisfy their shareholders by providing the market with what it wants; and what it wants may be “less” than what can be achieved. 

From a product perspective, enough “quality” should be build into a product or service to create the necessary sales that will create the necessary and desired benefits to satisfy its owners. Note that the concept of maximisation of quality is not present here.

From an organisational perspective, only sufficient investment in “quality” is needed that will create the necessary processes, environment and outcomes to enable the organisation to satisfy its owners in the timeframes that they consider important. Over this level, any investment in the pursuit of quality is at the expense of shareholders.

Much has been written about the loss of trust in management. These discussion almost always deal with the loss of "trust from below" - i.e. trust by employees or subordinates of senior management.

What they don't deal with is the loss of "trust from above" - i.e. the loss of trust by the board and shareholders in management. Causes for this include management:

1. Setting expectations and failing to deliver.
2. Saying things that are later demonstrated to be false.
3. Withholding part of the "truth".
4. Only putting one side of the argument for an initiative proposed by management.
5. Pursing initiatives that only management will personally benefit from (i.e. KPI facilitation when the KPI is the basis of management's remuneration).
6. Pursing personal gain ahead of corporate gain.
7. Saboutaging initiatives that benefit shareholders ahead of management (eg. golden parachutes, etc).
8. Promoting colleagues beyond their competency.
9. Allowing risks and problems to remain unresolved beyond necessity.
10. Hiding issues that later embarass or compromise the board.
11. Hiding issues that later negatively impact company reputation or worth.
12. Hiding issues that later increase risk or cost.

It is often the case that on some issues the "trust from below" is incompatible with "trust from above" and they conflict. Corporate and cultural tension is often caused when these two truths are made public and both board and management are perceived as breaching faith (internal and external).

A difficult position to recover from.

This, like a score of other “motherhood and apple pie” strategies is dangerous if adopted unquestioningly. Strategies such as the following appear in the mission statements of many of the world's major corporations:  "We will become the biggest", or the "best", or have the "largest market share", or "we adopt TQM principles", or “we are here to maximise customer satisfaction”, or “we are here to create sustained competitive advantage”, and so on.

These are all admirable pursuits, but only when they are in context, and then only when they are seen as enablers to achievement rather than the purpose for striving. In other words, they are the tools used to get to where you want to go. No owner who invests in a corporation does so because it has established, for example, sustained competitive advantage per se. Rather, the owner invests because of the benefit that sustained competitive advantage delivers.

It is a truism that not all organisations are alike;  they have different needs and aspirations and similarly, the expectations of their owners are different.  Therefore the adoption of a particular management theme or tool-set, may not be equally appropriate for all organisations.

Sustained competitive advantage in most contexts implies on-going investment in product design and modification, quality orientation, new channel development, research and development, innovation and other strategies and techniques which continuously review and revitalise products and services in order to maintain a competitive advantage.

Most of these techniques have a “longer-term” benefit rather than “shorter-term”. Sustained competitive advantage is often appropriate therefore, when shareholders are content with longer term pay-back of expected benefit. It is often in conflict with shareholders however, when they have a short-term expectation of benefit.

As an example, a manufacturing company may have a flexible ability to tool-up quickly to manufacture a certain type of product. A new product hits the market that is well within the capability of the company to produce. In the short-term, and in the early stages of the product’s life-cycle, demand is well in excess of supply so quality and efficient channels are not critical. The company is not very liquid and therefore has little capital resource to draw on. Historically, the company has provided good short-term dividend return to a loyal group of shareholders.

As the product becomes accepted in the marketplace and becomes more mature, new suppliers enter the market. In order to stay in the market, all suppliers must start differentiating their product, concentrate on quality and invest in efficient distribution channels. Due to the cost of such investment, one would only contemplate such a strategy if one was prepared to remain in the market long enough to enjoy the benefits from this strategy and its necessary investment.

It is clearly inappropriate for the company in question to even contemplate “sustaining advantage” as it doesn’t have the capital, it isn’t what their shareholders want, and they would lose the flexible opportunistic character of their business that has served them well.

Sustained competitive advantage, like most strategies, needs to be moulded to suit the context and objectives. It should never be regarded as a “given”. Embedding sustained competitive advantage within a corporation’s mission statement is therefore a commitment to certain long term strategies, investments and shareholder outcomes. It is never a panacea for shareholder satisfaction.  

It is quite alarmingly to observe the frequency with which organisations reach for the “structure button” whenever they need to wring some improvement from their organisations.

It is reasonably understandable why this occurs. This is because structure is arguably the most pervasive, visible and responsive element of the organisation. When required to “do something”, a CEO will often change the structure so that he/she is seen as having done something quickly - irrespective of whether the change brought about will create the impact desired.

Certainly structure can aid (or hinder) certain outcomes. In fact, the wrong structure can have disastrous ramifications on people, process and outcomes. However, structure is “no more” than an enabler and should be treated as such. It should never be the first point of call when seeking improvement, as structure is a necessary outcome of “higher level” decisions made for the organisation.

The relationship between these elements of the organisation are as follows:

1. The organisation exists to fulfil owner objectives. The fundamental characteristic here is the recognition that the initial stimulus of all organisations is the satisfaction of owner needs. This is equally true of public and private, large and small organisations.  Corporate objectives therefore must reflect owner objectives. 
2. The organisation chooses to operate within specific economic, social, cultural, regulatory and economic parameters within which it must be active in order to fulfil its owners' objectives and extract the benefits sought by them.
3. Within this market, the organisation must choose what it will offer (i.e. its products and services) so that a benefit can be extracted from the chosen market in order to satisfy owner objectives.
4. Once an organisation's products and services have been identified, it must choose the methods by which the market will become aware of its offerings and how these offerings will reach their market. This is the classical four “Ps” of marketing. The market and product/service decisions will open up a number of distribution, support and delivery options.  How does the organisation get the products and services into the market while still satisfying core objectives? What channels of distribution, service delivery systems and marketing communication strategies are available and which ones deliver the desired benefit? Answers to these questions are impossible without knowing what outcome is desired.
5. Once the market and product mix strategies have been determined, it is then necessary to assess their impact on the organisation's product and service delivery capability, particularly human resources, structure, information technology and financial resources. The higher-level decisions will significantly determine decisions on human resources, structure, information technology and processes required to make it happen. A decision to manufacture versus a decision to retail, for example, will cause significant changes to H.R., I.T., organisational structure and process strategies. The higher-level decisions determine the mechanistic needs of the organisation.
6. Only when these tasks have been effectively completed, can an organisation pull together these divergent (and often conflicting) elements and call it a business, operating, corporate or strategic plan. After the higher level decisions have been made, an organisation can develop a holistic financial picture.  Only then can an organisation determine whether it will satisfy owner objectives.

Many organisations claim that they exist “to satisfy their customers”, or to “maximise customer satisfaction”, or some other variation on this theme. When one examines their operations, one often finds both an ethos and an operational environment that is trying to do just that - maximise customer satisfaction or value.

If we take this concept to its logical conclusion - what would an organisation that is providing “maximum customer satisfaction” actually be doing? Even if it is providing good service at a good price and thereby satisfying customers, it is inevitable that competitor reaction will find a way to provide slightly better service or product at a slightly better price. When we extend this logic to its extreme, then “maximum” customer service must, by definition, be the provision of exceptional service at zero price to the customer - an obvious inanity.

The provision of customer service (together with a host of other motherhood and apple pie concepts) must be applied in the context of owner satisfaction. It is only against such a yard-stick that management can determine how much investment into customer satisfaction “is enough” to generate the outcomes desired.

Customer service, as noble and important as it may be, is “no more” than an enabler through which the organisation achieves its ends. No owner has invested in or created a corporation in order to provide customer service, per se.

Customer service is however, seen as the enabler or channel that will deliver the benefit or outcome sought by owners. Doing it well may be important and doing it better than the competitor may also be important, but only when it serves owner objectives and is used as an enabler and not as the reason for existence.

Does satisfying customers more than one’s competitors motivate the customer to buy, buy more, cross-buy, up-buy, provide the company with a strategic advantage? If it doesn’t do any of these things then why is the company spending money making customers happier?

Owners are therefore largely concerned with outcomes, while boards and management are understandably pre-occupied with means. It is not surprising then that management “elevates” the enabler to primary importance because that is the way management sees the world and it is the element that is largely controllable by them.

In the majority of corporations, management defines the outcomes that will be delivered by the corporation,  and management’s definition of these outcomes is, more often than not, a product of what is achievable in the marketplace rather than of what owners want. Since a key determinant of what is achievable in the marketplace is dependent on customer service (among other criteria) it is not at all surprising to observe corporations who pursue it with almost religious zeal and often at the expense of higher-level objectives.

Elevating enablers to primacy is dangerous because most organisations attempt to maximise core objectives. For example, companies try to maximise profit rather than ever say “this is enough profit in the context of all the other things we are trying to achieve”. But since customer service has a cost and is to some extent “limitless” all efforts to enhance customer service will carry significant financial implications for most corporations. Often corporations strive for continual enhancement of it, even when the marginal benefit has long turned negative - a point of which most companies are oblivious.

It is important for corporations to recognise that customer service is “only” an enabler, and to limit endless enhancements to the point of Just Noticeable Difference (JND). That is, the point where additional customer service is exceeded by benefits created by the provision of that additional customer service. “Obsessive or chronic enhancement” of customer service, is a common ailment of corporations who see their reason for existence as the provision of service, rather than the benefit that service provides.

We frequently see companies adopt one or more of a range of strategic “principles” that guide much of what they do. “Principles” such as Focus, Differentiation, Time is of the Essence, Concentration of Forces, Building on Strengths, Matching Aims with Resources, Limiting Risk, Shareholders wanting Earnings, Customer Service, Best Practice, Sustained Competitive Advantage, Total Quality Management, and the list goes on and on. The use of these “principles” are not however, applicable in every instance or in every context despite what many popular authors who promote their own “hobby horse” would like us to believe.

Each of these “principles” are only enablers that assist a corporation to achieve a specific outcome defined by its owners’ objectives. The choice of an enabler should only be assessed against its ability to enhance those objectives, and not because it is used by other companies (competitors or not) or because it is the “flavour of the moment”.

Each of these “principles” have serious implications and impacts on core objectives, and wrongly chosen, will impede an organisation’s ability to satisfy them. The following are examples of legitimate alternatives to some commonly used strategic “principles”. Each is appropriate in its own context and inappropriate out of that context.

Focus versus diversification

Differentiation versus a “me-too” strategy

Time is of the essence versus at the right time

Concentrate your forces versus spread your risk

Build on your strengths versus build the strengths needed to fulfil your aims

Match aims with resources versus create the resources to satisfy aims

Limit risk versus accept higher risk for higher reward

Create “unite’ de doctrine’ versus internal competition and intrapreneurship

Shareholders want earnings versus asset growth and security

Quality organisation versus give the market what it wants

Best Practice versus be as good as you need to be, to satisfy aims

Sustained competitive advantage versus commercial opportunism

Choosing the appropriate strategy is always dependent on the context and what it is that the strategy is required to accomplish. The accomplishment in turn is always dependent on the corporate objectives that are themselves dependent on owner objectives. In assessing strategies therefore, one must necessarily assess the contribution that the strategy makes toward the organisation’s fundamental objectives.

It has been a generality in business that owners and managers look at the corporation “through the same eyes” and that the same “appropriate action” would be chosen by either group.

Unfortunately this is not supported by practice.

Management may elect, say, a Total Quality Management (TQM) strategy because based on their knowledge of their market, quality is the differentiator between the customer opting or not opting to purchase the company’s product.

From a corporate perspective this seems like a reasonable decision path. However, TQM is expensive to implement, takes time for its benefits to come to fruition and often carries with it considerable risk. An investment in TQM is necessarily borne by shareholders, at least until its benefits “kick-in”.

If all shareholders of that company have longer-term objectives, then a TQM strategy may enhance those objectives. But what if those shareholders have a short term cash dividend objective? Clearly, a TQM strategy would be directly to the disadvantage of their objectives, irrespective of what management determines is “good for the company”.

If management is faced with a desire to embark on a TQM strategy when shareholder objectives are long term, then an investment in such a program seems relatively straight forward – go and spend the money needed.

But when management faces a desire to embark on TQM but shareholder objectives are short term (eg dividend growth), then the challenge facing management is different. The challenge is for management to enhance quality AND continue to pay dividend. This paradox therefore requires innovative solutions in the same way that Honda resolved the paradox between quality and cost.

Just spending the money as a strategy in the long-term scenario detracts from shareholder satisfaction in the short-term scenario. Similarly, short-term dividend-focussed strategies may be redundant, expensive or higher risk in the long-term context.

Different perspectives of owners and management as to what is an appropriate strategy or policy (let alone outcome) causes tension between the two groups. This tension is also fuelled by differing motivations of the two which when applied to the formulation of corporate destiny, has the potential to create great disharmony or dissatisfaction.

The principal reason that owners invest in a corporation is to fulfil their own specific objectives that most generally relate to wealth creation and its maintenance. The principal reason that managers are involved in a corporation (where they have little or no equity) is because management is the manager’s profession.  The issues and outcomes that enhance or detract to or from a manager’s professional standing are not the same issues or outcomes that create or maintain wealth.

As an example, the way that managers are perceived as effective or “good” is generally in comparison with their peers. Therefore, managers will understandably strive to perform well on measures that help that assessment, such as industry or sector ratios. A manager may be considered as the most effective in the industry or sector if, say, his ROI is the highest in the sector. But what if in the search for “excellence”, the high ROI is achieved through high gearing and high risk? And what if shareholders are risk averse and demand low gearing?

There is considerable evidence to support the contention that managers and owners do not share common objectives and perspectives. That their objectives and perspectives differ, is normal and to be expected. However, not understanding that they differ is both naive and potentially dangerous for shareholders and their expectation for certain outcomes.

A recipe for potential disaster is created when management is biased toward or from certain tools, techniques and strategies needed to operate the corporation optimally.

The solution to this dilemma is to define shareholder objectives in quantifiable terms; use these metrics as the core element of the corporation’s mission statement; and then ensure that all tools and techniques chosen by management are assessed against the mission-metrics to ensure that they contribute to or enhance shareholder objectives.

Intuitively one would expect that small organisations with few shareholders are more “in-touch” with their owners’ objectives than larger organisations. One would further expect that the larger the organisation and the greater the number of shareholders, then the less able the organisation is to keep “in-touch” with all shareholder objectives.

Unfortunately, experience and reality show that companies, irrespective of size, are not immune from the lack of congruence between owner objectives and corporate actions.

The majority of companies are small businesses who have one or a small number of people carrying out the roles of managers, directors and owners simultaneously. One would expect that since one person carries out all three roles then “knowledge” would be “perfect” and congruence would be maximised.

Most small businesses actually have difficulty in ensuring congruence because they are too involved in operational management. It is easier to change the objective than to change the operational, marketing or business realities that threaten incongruence.

Generally boards and management of large corporations maintain that since they have many shareholders with varying objectives and they can’t effectively ask shareholders what they want; the board has the responsibility to define the core deliverables of the organisation. These deliverables are intended to keep shareholders satisfied. For reasons identified earlier, such presumptions by boards are often misplaced because they are subjectively derived. The demonstrable fact is that many (most?) corporations do not know what their owners want in any realistic, practical and measurable way.

In the case of medium size companies where management may be divorced from directorship and/or ownership, it is common to find organisations intent on striving to maximise generic outcomes rather than satisfy specific owner objectives. Certainly, a large part of this lack of congruence is caused by management failing to ask owners what they want; but equally at fault, are owners who have not made the effort of telling management in realistic and measurable terms what it is that they desire from their involvement in the company.

Very few companies, irrespective of size, really know what their owners want. In the case of small business, the owner/manager has rarely defined what it is that is wanted so that it becomes the principal driver of business performance.

The solutions are clear and easy: if you are an owner, even of the largest corporation, make sure that the board and/or management knows what you want in terms of value, benefit, growth and risk. Also identify your objectives in terms of environment, ethical activities and governance issues such as related-parties transactions.

If you are a director or senior manager, ask your owners what they want as an outcome.

If you are an owner/director/manager, then be honest with yourself and what you are doing operationally. Is the company that you run giving or likely to give you the outcome you seek? If not, then its time to assess the options.

If we accept that a carbon tax will be introduced regardless of whether we agree with it or not (and regardless of whether we agree with the science that justifies it); isn't the issue (and greater value for directors) for/from this forum:

Firstly, how corporations (and therefore directors and managers) can protect their corporation from any negative impacts of the tax and climate change? At this stage and based on the consensus on the issue demonstrated in this discussion and in the broader community, directors MUST accept the issue as one requiring a risk management strategy.

Secondly, how corporations (and therefore directors and managers) can take advantage of the opportunities that such a tax and envirnmental change will create?

Huffing and puffing about whether the policy and/or science is right or wrong is irrelevant unless you are able to affect public policy and change it - and I don't know whether that has been explicitly proposed in this discussion. If you can't change it, apply a probability to the liklihood of it happening and prepare your company for its realisation.

If as a director, you ignore the possibility of this issue affecting your corporation, its value and its impact on shareholders; then be prepared for the inevitable shareholder legal action against you for neligence. Do you really want to have that fight?

My research has confirmed that not only do different shareholders have different objectives, but the same shareholder’s objectives vary among different investment targets.

It is possible, but not particularly useful, to talk of a set of generic objectives shared by the community of shareholders. Such objectives will necessarily be in general and generic terms such as maximisation of 'wealth' or 'benefit'.

The difficulty comes from an attempt to define such concepts as 'wealth' and 'benefit'. It means different things to different investors. Some may interpret wealth enhancement as asset growth, while others may interpret it as dividend maximisation. 'Benefit' may mean dividend to one investor while it may mean share price growth to another.

The error of many boards and management is that they argue from the general to the particular. If they believe that all shareholders want, say, dividend maximisation, then they argue that their shareholders want dividend maximisation. The issue is that corporate strategies to minimise risk or grow assets are different and have fundamental impacts on what a corporation does and how it does it.

Compounded upon this error is the assumption that each shareholder will have consistent objectives across all investments. Institutional investors weight certain attributes such as growth, industry sector, risk, etc. and choose their investment targets on the basis of those weightings (among other criteria).

They may invest in a certain industry sector in order to minimise risk or to secure the benefits from fast growth. Their expectations (and therefore objectives) from such investment decisions will vary according to the character and attributes of each target and what that target represents for the investor in the investor’s context. A typical large investor will (and mom-and-dad investors may) therefore have a range of objectives within his (their) investment portfolio/s.

How then, can a corporation claim to be pursuing shareholder wealth or benefit if it does not know in real and quantifiable terms what it is that its shareholders regard as 'wealth' and 'benefit' as it relates to the shareholder’s objectives in that particular corporation?

This is a fundamental issue with modern corporate management and the cause of much owner pain and management dysfunction. Boards and management make fundamental strategic, operational and investment decisions based on incorrect assumptions about shareholder 'well-being' or on ill-founded subjective assessments. 

Without clear and quantified owner objectives, management will continue to fire its strategies at shadows rather than at substance and continue to wonder why owners are unhappy. Corporate investments and resources will continue to be applied in directions that are presumed to be appropriate without ratification in measured terms of the correctness of those actions.  And those actions will continue to detract from the maximisation of owner satisfaction as long as 'owner satisfaction' remains undefined and unquantified.