Shareholder Primacy vs. Stakeholderism: 5 Years Later (Pt 1)

Summary

Podcast Summary: "Is Business Broken?"
Episode: Shareholder Primacy vs. Stakeholderism: 5 Years Later (Pt 1)
Release Date: October 17, 2024

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Introduction

In the inaugural episode of the series exploring the evolution of corporate purpose, Is Business Broken? delves into the pivotal shift from shareholder primacy to stakeholderism initiated by the Business Roundtable five years prior. Hosted by Kurt Nickish from the Ravi K. Mehrotra Institute for Business, Markets & Society at Boston University Questrom School of Business, the episode features an insightful panel comprising:

• Lynn Payne – Professor at Harvard Business School
• Om Prakash Bhatt – Former Chair and CEO of the State Bank of India
• Anthony Allitt – Former Chair and CEO of Silgan Holdings
• James Orlikoff – President of Orlikoff and Associates Inc.
• Jamie – Expert on corporate boards and governance

Business Roundtable's 2019 Pledge

Five years ago, the Business Roundtable, a collective of 181 American CEOs, revolutionized corporate America's foundational ethos by signing a pledge to prioritize all stakeholders over merely shareholders. This declaration marked a departure from the long-standing doctrine of maximizing shareholder value, signaling a commitment to fostering value for employees, communities, suppliers, and shareholders alike.

Initial Reactions to the Pledge

Anthony Allitt initiated the conversation by noting that Silgan Holdings wasn’t among the signatories. Om Prakash Bhatt expressed his surprise and disappointment regarding the Business Roundtable's shift. He remarked:

“They talk about the power of free markets... the issue seems to be more about short termism versus long termism.”
[01:29]

Bhatt emphasized that the shareholder capitalist system naturally cycles out executives who focus solely on short-term gains, as success ultimately hinges on addressing the needs of customers and employees.

Boardroom Receptions and Practical Impacts

James Orlikoff raised concerns about the vagueness of the pledge, questioning its practical implications and motivations behind the late declaration. He highlighted several criticisms that had been mounting against the shareholder value model, including:

1. Short-Termism – An overemphasis on quarterly returns at the expense of long-term sustainability.
2. Externalities – Negative impacts on the environment and societal inequality due to profit-focused strategies.
3. Democratic Undermining – Shareholder-driven resistance to beneficial legislation, such as environmental regulations, to protect returns.

Orlikoff summarized:

“...we could have had a conversation about short term, long term, which still covers a lot of what we're talking about.”
[10:25]

Jamie pointed out that regulatory changes and press influences overshadowed the Business Roundtable's statement, reinforcing existing short-term financial pressures within boardrooms.

International Perspectives: The Indian Context

Lynn Payne provided a contrasting viewpoint from India, where stakeholder-oriented practices were deeply ingrained due to cultural and legal frameworks. She cited the Tata Group as a prime example:

“62% of its equity has been put into a trust... the trust funds a lot of education, a lot of medical research.”
[05:47]

Payne attributed this to India's historical and religious emphasis on selflessness and public good, as well as legal requirements mandating corporate social responsibility (CSR) activities.

Corporate Governance and Board Dynamics

Jamie emphasized that the shift towards stakeholderism in the U.S. was often superficial, lacking concrete governance changes. He critiqued the absence of standardized definitions and prioritization strategies for stakeholders, referencing Peter Drucker's notion:

“The only way you can serve multiple customers is if you serve them all equally badly.”
[03:20]

James Orlikoff highlighted structural failures in corporate governance, using Boeing as a case study. He explained how a shift in board composition from engineering to finance expertise led to deteriorating product quality and stakeholder relationships:

“They had a very interesting balance of kind of a preponderance of engineering expertise on the board... which precipitated all of the difficulties that they're experiencing now.”
[17:33]

Challenges of Implementing Stakeholderism

Om Prakash Bhatt argued that stakeholderism introduced unmanageable complexities into business operations:

“...we're going to try to bring in all of the division in our society into the businesses. And so what are we going to get? Businesses that are about as efficient as our governments...”
[20:17]

He expressed concerns that incorporating diverse and sometimes conflicting stakeholder interests could hinder corporate efficiency and effectiveness.

Conversely, Jamie countered by advocating for diversity in boards, suggesting that:

“...diversity injects tension, if not conflict, into deliberation... and then you can harness that force.”
[22:43]

He posited that with proper governance structures, diverse boards could enhance decision-making rather than causing dysfunction.

The Role and Composition of Boards

Lynn Payne stressed the critical role of boards in navigating corporate purpose amidst societal changes:

“...this was a time call for leadership, call for action.”
[12:43]

She lamented the lack of bold leadership from independent directors, attributing it to broader societal failures in addressing pressing global issues.

James Orlikoff further discussed the inherent obligations of boards beyond shareholder interests, citing environmental and social responsibilities:

“You have to have some sense of obligation.”
[27:25]

He highlighted that while shareholder value is important, it alone cannot resolve all societal challenges, emphasizing the need for a balanced approach.

Future Directions and Concluding Thoughts

The panel acknowledged the complexity of balancing shareholder and stakeholder interests. Om Prakash Bhatt maintained that:

“Shareholders are caring about this... our customers care about it, right? Our shareholders care about it.”
[23:09]

He advocated for leveraging existing shareholder-driven motivations to address social and environmental concerns without overcomplicating corporate structures.

Jamie and Lynn Payne underscored the importance of effective governance, diversity, and leadership in steering corporations towards a more inclusive and sustainable future.

Kurt Nickish concluded the episode by teasing the next installment, which will further assess the five-year impact of the Business Roundtable's declaration and explore future operational strategies for corporate boards.

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Key Takeaways

• Business Roundtable's Shift: A significant, albeit controversial, move from shareholder primacy to stakeholderism within American corporations.
• Cultural Variances: Countries like India had already embedded stakeholder-oriented practices, making the U.S. shift appear delayed and somewhat performative.
• Governance Challenges: The vague nature of stakeholder commitments has led to minimal tangible changes, with many boards remaining entrenched in short-term financial goals.
• Board Composition: Diversity, both in expertise and demographics, is crucial for effective governance but requires robust structures to harness its benefits.
• Future Outlook: The ongoing debate highlights the need for a balanced approach that incorporates stakeholder interests without compromising corporate efficiency and leadership.

Notable Quotes

• Om Prakash Bhatt [01:29]: “They talk about the power of free markets... the issue seems to be more about short termism versus long termism.”
• James Orlikoff [06:24]: “Why are they so late to the party?”
• Lynn Payne [05:47]: “Imagine, 62% of everything from one of the largest conglomerates in the world goes into a trust.”
• Jamie [03:20]: “The only way you can serve multiple customers is if you serve them all equally badly.”
• Lynn Payne [12:43]: “This was a time call for leadership, call for action.”
• James Orlikoff [27:25]: “You have to have some sense of obligation.”

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For those interested in the intricate dynamics of corporate purpose and governance, this episode offers a thought-provoking examination of the evolving landscape five years post the Business Roundtable's landmark pledge.

Transcript

[Kurt Nickish]

You're listening to Is Business Broken, a podcast from the Merotra Institute for Business Markets and Society at Boston University questrom School of Business. I'm Kurt Nickish. Five years ago, the Business Roundtable made a bold move and redefined the purpose of a corporation. 181 CEOs signed a pledge to create value for all stakeholders in a corporation instead of just shareholders. Before that, their stated purpose of a corporation was solely to maximize shareholder value, but no more. The pledge committed to creating value for communities, employees and suppliers along with shareholders. What, if anything, has changed since that declaration five years ago? That's the question we posed at a live event at questrom a few weeks back. I spoke with Lynn Payne, a professor at Harvard Business School Om Prakash Bhatt, the former chair and CEO of the State bank of India Anthony Allitt, who's the former chair and CEO of Silgan holdings and James Orlikoff, who's the president of Orlikoff and Associates Inc. Here's the first half of our conversation.

[Anthony Allitt]

It's a pleasure to be on stage with these folks. Tony, let's start with you there in the middle. When the Business Roundtable made the statement, Silvan holdings was not one of the 181 companies that's part of the Business Roundtable. What was your reaction to it?

[Om Prakash Bhat]

I was shocked and disappointed when Roundtable came out. The surprise really comes from if you look at the words they said at the time, it didn't really fit with the recommendation in that release. They talk about the power of free markets, which I think we hopefully all generally agree on the great wealth creation that comes from free markets. And even what they talk about, the issue seems to be more about short termism versus long termism. If you talk about where people tend to say shareholder capitalism fails, they seem to be more around issues of people making short term decisions, which really is the beauty of the system is those people get churned out over time and only the ones who focus on the needs of customers and employees ultimately succeed in a shareholder capitalist system. So that was my reaction to him.

[Anthony Allitt]

Jamie, you work with boards. What was the reception in the boardroom? Kind of immediately it was less impactful.

[Jamie]

I think most of the motivation is coming from the regulators and the press. I mean, I think legislative changes like Sarah Baines Oxley were far more known and impactful than the Business Roundtable movement. I think there was an awareness of it. But I strongly agree with Tony. I think the short term focus, the quarterly reporting focus tends to dominate intends to kind of Almost be a gravity well which pulls people back to that perspective. So that concept is one. The second one kind of goes back to Peter Drucker's famous quote. The only way you can serve multiple customers is if you serve them all equally badly. You know, the whole notion of, well, that's great, we can try to focus on stakeholders, but how do we prioritize? And I've not yet seen any real attempt to come up with a kind of a standardized sense of what we mean when we say stakeholders and then how we prioritize them. So it's. It's kind of out there in the ever present elsewhere.

[Anthony Allitt]

I mean, this is a US group, right? The Business Roundtable. These were American CEOs. Did you feel the ripple in India? Is this, you know, at the time, Paul Polman changing his company for. And trying to be more responsive to the youth. This was certainly a moment, and I'm just curious, like, whether there was a big reception to this in India and elsewhere.

[Lynn Payne]

So thanks, Kurt, for that question. But I think in India, historically, a lot of this had already been going along. In India, the father of the nation is Mahatma Gandhi, right? It was he who sort of led the independence movement. And he had said, and I quote, that those in power should consider themselves as trustees and use their vast resources, power and influence for the good of the people. This is what he had said. We have the Tata Group in India, which is possibly the largest group of its kind anywhere in the world, right? Even in terms of earnings, profit, it may be in the top five. But interestingly, 62% of its equity has been put into a trust. And that trust funds a lot of education, a lot of medical research, all kinds of things. And again, as a trust, maybe it is one of the largest in the world. Imagine, 62% of everything from one of the largest conglomerates in the world goes into a trust. And the trust does a lot of philanthropy, right? And I think in India, it comes from. You know, India has also been home to three of the largest global religions. Hinduism, Buddhism and Jainism. Right? And all these religions, what they talk about is selflessness, devotion to the public good, and the pursuit of righteousness. So if you look at it culturally and historically, and if you accept the term genetic memory, Indians have been sort of hardwired into a different kind of thinking. And which is why, as we speak today, India is the only country in the world where by law, there is a requirement for corporates to put 2% of their profits into something known as corporate social responsibility activities. It could be education, it could be water, it could be. So therefore in India, there was hardly any reaction in the sense that, you know, okay, these guys are waking up now. We've been doing it for maybe a few million years.

[Anthony Allitt]

They're moving in our direction almost. Yeah, yeah. Lyn, you study corporate governance boards. Your career has spanned the rise of shareholder value maximization and really linking it to executive pay to drive that. And then here comes this moment where Business Roundtable, this group, is stepping away from it. What was your reaction at the time and what did you make of it?

[James Orlikoff]

Well, I have to say my first reaction is, why are they doing this now? I was on vacation, it was August 19th and I was about to go to the beach.

[Anthony Allitt]

They did it in August. Interesting. Okay.

[James Orlikoff]

No, I mean, I had a bunch of different reactions at once. One was, why are they so late to the party? We've been talking about this for the last 30 years. But then the real question for me was, why are they doing it? I wanted to know, well, what does this mean in practice? Because the statement itself was extremely vague.

[Anthony Allitt]

I mean, for a long time, right? It was just dogma. I have no choice. This is what fiduciary duty, this is what I have to do, number one, above all. And this is the way to run companies. So what made them change it? What was this in response to?

[James Orlikoff]

I, of course, I don't know what the immediate trigger was or the tipping point, but if you think back to 2019, there were so many criticisms of the shareholder value model being leveled. I won't go into all of them, but I would just highlight what I see as the top three. One has already been mentioned. Tony and Jamie, this whole question about short termism, this concern that it was fostering a kind of short termism in the sense of just being guided by quarterly returns and being so willing to do whatever it took to meet shareholders quarterly expectations, nevermind the future. So short termism was one of them. A second set of concerns was around externalities, or what economists call externalities, like what effects does this system have on third parties on public goods? How is it affecting the environment? How is it affecting income inequality? And there was a lot of concern that 35 years of focusing on shareholder value was at the expense of investing in workers. And we saw stagnant wages, even though we saw lots of productivity increases and growing shareholder wealth. So that was a second bucket. A third bucket of criticisms was really around. This system seems to be undermining our democratic institutions and shareholders and companies using shareholder value as A rationale for blocking legislation that might help other stakeholders. You know, I have a fiduciary duty to my shareholders and therefore if this legislation goes through, I will have to work harder to produce those returns. So I'm going to block this legislation. And of course the rationale of moving to tax havens, so really undermining government capacity. So there were these, there were other criticisms too, but all of this kind of added up to a kind of erosion of confidence in the system. And you could see from surveys at the time, but also just an outpouring of books from people who were not anti capitalist but people who said this system needs to be fixed. So we saw lots of books. So all of that was going on. What was the immediate trigger? I don't know, but I think it was kind of a response to all this, trying to say we're going to try to make the system better.

[Anthony Allitt]

Yeah. Let me add two more criticisms. One was just value transfer, right? You've got a lot of companies that just get an activist shareholder on, move profits forward, sell the company, get out and so you have value transfer instead of value creation happening. And then executive compensation, I mean we mentioned it just very briefly, but that's just as far as social image of companies. That was a big thing that played into this pressure and that certainly I.

[James Orlikoff]

Think was part of the whole view of income inequality coming from the system shares. What about half the US population has some investment in the stock market, but the top 10% of households controls 80% of the stock market. So when you're maximizing value for shareholders, you're making your shareholders wealthy. That has racial implications, it has social implications. So all of these things plus executive compensation was the face of all of that.

[Om Prakash Bhat]

Can I just jump in one second? Because I agree with those. Why they did it. I would say again, I think it was an opportunity lost because I think we could have had a conversation about short term, long term, which still covers a lot of what we're talking about. And that would have been a really interesting conversation. How should business make themselves more long term focused? What kind of incentive plans should drive that? We lost that opportunity. I also think that because I am such a believer in the power of free markets, they lost the opportunity to stand up against some of those forces and say, well look, there's a lot going. Let's talk what's going on internationally. Part of what's driving the imbalance here. I believe the middle class around the world is rising because of free markets. And of course in the US that's not great for laborers, and it is good for executives of these multinational companies. But that's sort of an unfortunate outcome of an international program too. So it was a chance to talk about some of those points, and instead we kind of defaulted to. There's a new purpose.

[Anthony Allitt]

Let's put out a statement.

[Om Prakash Bhat]

Exactly.

[Anthony Allitt]

I'm curious, like, how PR ish this felt like. Who feels like this was mostly PR or.

[James Orlikoff]

I know there's a lot of cynicism around it, and I don't question the sincerity really of the people who made this statement. It was. I do believe that they believe that they do pay attention to their stakeholders, and there is a sense in which they do, but it's a very vague sense. It's not a sense of we owe our stakeholders the following and we're going to be accountable for it. There was not that kind of accountability written in. So I think there was just a lot of confusion and not really clear thinking, at least not clear thinking of the type that I like to see when someone makes an announcement like that.

[Anthony Allitt]

Yeah, Tony, did it change how you run your company or you ran the company at the time, really?

[Om Prakash Bhat]

No. I kind of have the fortune that our company, our mission right from the outset was building sustainable competitive advantage. So the long term was part of our language from the beginning and engendering pride in our employees and the way we go about that. Institutions are out there and they're doing this and they're never losing sight of the importance of constituencies. Without our employees, we're nothing. And so we know that without the word stakeholder be used, so we change very little. We do not use the word stakeholder in our company. Words matter. And that word was chosen very specifically to get parity to shareholder. That's the intention. And then we get into this issue of what does that mean if you get parity to shareholder? And that's why we've resisted. Not because we don't think all those constituencies are extremely important, because they are, but rather that it, for me, sets a confusion that I don't really know how to manage a company from anymore.

[Anthony Allitt]

Did you see that in other companies, that you were like your competitors, other ones that you're watching?

[Om Prakash Bhat]

So, no, I would say most companies, you see the language a lot more. I think you see expectations from constituency groups that are growing. But really, most businesses, I would say, did not change a lot legally, I didn't see. I don't think bylaw work has been done that says most bylaws did not get changed. So which really sets the true purpose of a corporation.

[Anthony Allitt]

A lot of boards didn't issue this statement either. Right. It wasn't like the CEOs did it without the boards signing off on it, essentially.

[Om Prakash Bhat]

Correct. I know of no evidence that says the boards of the roundtable were consulted on this, actually, to speak of.

[James Orlikoff]

Well, there's actually research saying that they weren't.

[Jamie]

And that's interesting.

[Anthony Allitt]

Yeah, yeah, gotcha.

[Lynn Payne]

I just want to say that, you know, so there are certain technical legal aspects that we are talking about. Why boards did what they did, why corporates did what they did, what the law says about it, what the accountancy profession says about it. But I think, you know, this was a time of extreme change. Lots of things were happening in society. The middle class was getting hollowed out. There was huge amount of inequality prevailing. There's huge amount of social unrest. All kinds of things were there. And I think this is a time for some kind of leadership thinking on the part of the board. This is not the time where you sort of got onto what the law says, the do's and the don't. And this is what I learned in this course. This is what this professor says. This is a time to do some creative thinking, get out of the box. Right. So I think at some level, being an independent director myself, I think that this was a time call for leadership, call for action. And I think largely it is the independent directors who have failed the system, if I can use this word, it is the independent directors who were not bold enough or if they did take the initiative, sort of buckle down to the other corporate pressure from the same board, maybe promoters, maybe investors, maybe the CEO, maybe something like that. And I think it speaks to the kind of people we are. Right? So I have chaired a large bank. I've been on some of the marquee boards across the world. And I have failed this world in helping the boats to take the right leadership so that they could have taken the right decision at that point of time, so that today we would not be in the kind of state we are. You know, today the planet is almost on the verge of collapse for a variety of reasons. And maybe that's a different topic. But I really feel that in the world, of all the types of organizations that human beings have made to benefit ourselves collectively, like clubs and trusts and associations and cooperatives and political parties, the most powerful, the most effective is the corporate business. You know, these guys can do anything. You know, there are corporations here in America whose revenues, even profits, are larger than the GDP of many countries across the World. These guys can move mountains. These guys can move, you know, capital or technology or people across countries, across boundaries. They can do anything. They can make policy, they can shape policy, they can influence policy. Right? There is nothing with a good set of dedicated board members cannot make happen anywhere in the world. And that is why I'm saying that these are the people who failed humanity. Because again, whether it's a value system game or whether it is you're wearing blinkers, you're focused on something here when you should have been focused on something here. It was all about profit maximization. It was all about, if I'm the CEO and I can make a few million bucks if I do this, that, and the other, but not this, that and the other. But if that, this, that, and the other is more important for humanity, you somehow have blinkers. You don't look at it, you don't notice it, you are not moved by it. Right? So wherever in India I speak on some of these topics, I say it's not about us. Think about our grandchildren. I strongly believe that at some level, as individuals, as leaders, as human beings, we have both, individually and collectively, fail to understand and therefore fail to act or perform to take the right decision to provide the right leadership for this.

[Anthony Allitt]

That's fascinating. I think boards internationally are really interesting too. Right? You have countries like Germany where it's mandated that an employer is on the board. So the constituency stakeholder, these words that we've heard. There are different ways of putting boards together to consider all of those. But, Jamie, you were nodding while OM was speaking.

[Jamie]

I very much appreciated his comments because I think a lot of the failures were failures of governance.

[Anthony Allitt]

Corporate governance.

[Jamie]

Yeah, of corporate governance. Take a look at what Boeing is struggling with right now. And no one would argue that they have a good relationship with their stakeholders and they don't have a good relationship with their shareholders at this point either. They're not returning much value. And you can track that to this kind of confluence between the lack of leadership and then a very subtle but very significant change in the competencies that were manifested on the board. So when Boeing was an exemplar company and had good relationships in the communities that they worked and with their employees, they had a very interesting balance of kind of a preponderance of engineering expertise on the board secondary to finance. And then as it began to change, engineering, and hence the quality focus was replaced exclusively by finance focus. So the Boeing board in the last couple of years, which precipitated all of the difficulties that they're Experiencing were focused on short termism and were focused on finance. And the board didn't manifest leadership in the way you're describing it. They manifested financial leadership in terms of maximization of short term value, squeezing the supply chains and outsourcing and single sourcing and things like that, which directly resulted in what they're struggling with now. So I see that as a failure of leadership. I also see it as a structural kind of facilitation of that failure of leadership by the composition mechanism of the board. You also see that at the founding of attempts to be made. One other example is OpenAI where everyone was terrified about artificial intelligence and they said we're gonna create a company that's gonna really go after this. So let's not let the profit motivation perhaps destroy humanity. Let's create a not for profit parent and have the for profit be a subsidiary of the not for profit parent. So there is a charitable purpose to this. And the board did manifesting leadership what it was supposed to do. You know, when the executives got too far ahead and said, oh, you're placing profits over the potential to destroy the world, so we're going to fire you, there was a huge outcry. And what happened? The short term finance won. So even with a structure of we want to have a stakeholder focus, the pull and the swimming against the tide is so great. It's very difficult to manifest that type of leadership even when you have the structures that were set up to facilitate it.

[Anthony Allitt]

So we're gonna get into stakeholder capitalism, what that means, how it could perhaps be structured, what some of the problems are for moving in that direction. But I gotta go back to Tony to ask. I mean it sounds like you feel like we don't even, like everything's not being facetious here, but it's almost like you're like everything's fine, the system is working, it's, this is the way it works best. Let's not mess with this system. We're all long term thinkers here.

[Om Prakash Bhat]

No, that's why I said the opportunity was missed. I think there is more short termism. I think there is private equity, for example, while I think it's more nuanced than that because selling something that doesn't have a future doesn't work either. So that's the opportunity lost. I think we could have been talking about short termism and not about stakeholderism because I think when we get into it we're going to realize, at least in my mind, that it's sort of an unmanageable concept. So no. Do I think everything hunky dory? No. No system is perfect. But do I believe that a free market system where businesses are sort of self interest, motivated to meet the needs of customers and be focused on that? I think it's the simplicity of it drives a very complex and successful system. I think that system is a sharp edge tool. Now we have to figure out how to use that tool as a society. And what I worry about with stakeholders and where we're going is that we're going to try to bring in all the division in our society into the businesses. And so what are we going to get? Businesses that are about as efficient as our governments because we're going to be torn apart by all of these different groups. Today I keep my CEOs focused outside. Look to the outside, meet the needs of your customers. This becomes a very internal focus for these businesses. Now when you go down this path, I don't see how that's a recipe for more efficiency.

[Jamie]

You don't want to bring in the divisiveness and the dysfunction of government. But there's very good research that shows. Let's talk about diversity. Diversity on the board. That diverse boards make better decisions are more likely to manifest the type of leadership that OM was talking about. Why? And the answer is it's not the diversity in and of itself, but it's because the diversity injects tension, if not conflict, into deliberation. And so the key then is it can go in the direction that you're describing, which is it can be dysfunctional. But if you create good governance processes and you have containment vessels so that the expectation is of dynamic tension, almost an organizational Hegelian dialectic, then you can harness that force, you know, and then you can get different perspectives and different, you know, and that's exactly why diversity makes, you know, decision making better. So I think there's gotta be some way to avoid your concern, you know, so that we don't simply devolve into the divisiveness that we see in broader society and the dysfunction that we see in federal government. But we recognize that one of the reasons stakeholderism is rising is because we see worldwide growth of the middle class and therefore very, very diverse perspectives being injected into something that used to be incredibly homogenous.

[Om Prakash Bhat]

I agree with all that. I would just say that I think the shareholder system has an answer to that because shareholders are caring about this. I'm answering this question all the time about diversity. The world's evolving, the customers want more from us. You think about sustainability. Most companies were doing a lot about sustainability before the Business Roundtable ever said this. Because our customers care about it, right? Our shareholders care about it. I'm answering, Cheryl, the questions on diversity and social issues all the time, and that's totally legitimate.

[Anthony Allitt]

And is that new?

[Om Prakash Bhat]

It certainly has grown because these are legitimate concerns. By the way, Olman and I totally agree. I think that we all want a world that deals with these questions. My only question is, how best do you deal with them? And shareholders want the same thing, so they're asking for this.

[Anthony Allitt]

We're kind of at one extreme where you have take care of profits first, everything else will take care of itself. That kind of mentality on one end and then you've got the fear at the other end is that we're going to have an electoral college of boards that's trying to decide how to move companies forward. And that's. We want to be somewhere in between, probably.

[Lynn Payne]

But this electoral college is very important. See? Why is there a board when somebody starts a business?

[Anthony Allitt]

Why is there a board when somebody starts a business?

[Lynn Payne]

Tom, Dick and Harry, you know, he's the CEO of that business. He's also the janitor of that business. He's the salesperson. He's. He's the accountant, he's the lawyer. He's everything. And he gives 24 hours per day to that business. Wife and family be damned. Right? The first priority is business. But as the business grows, he has one employee, two employee, 10 employees, 15 employees. Then suddenly the role starts getting segregated, right? Then comes in a bank loan and then comes in a private equity and all those kinds of things. So suddenly, from one owner, now there are a thousand owners or there are a million owners, right? Now, these owners of this business, they can't do anything to that business. They don't know the business. They have no control loan, zero, nothing. Right? Now, who's the guy who's going to be proxy to the owners, look after the interest? It's the board, which is why this creature named as the board came up, right? And which is why the board's responsibility is to the shareholders. And in India, by law, it is said the maximum responsibility is to the majority of the minority. So there might be institutional shareholders, there might be promoter shareholders, there might be some bulk shareholders. But if there are individual shareholders like us sitting here in this panel, then any resolution, or many resolutions, they are differentiated, cannot be passed. If the majority of the minority, which may be of the aggregate only 10% or 12%, if they refuse, you can't pass anything like that, right? So just to say, why is there a board? The board looks after the interests of the shareholders because the shareholders cannot look after their interests in the company.

[Jamie]

Because.

[Lynn Payne]

Because they have no local standing there. Right? So which is why, you know, the board is not going to go away. Which is why it is important to understand about the composition of the board and how we compose a better board. Right? So some of the things are, you know, those practices which are used by headhunters, you know, when they look for a CEO or you know, compatibility, collaboration and all those experience this, that and the other. So the boards unfortunately get selected on, you know, Peter knows Paul and Paul knows Bob. And so, you know, so that is one of the major, you know, they look at consistency, they look at convenience, they look at fellow feeling that whether I'll get along with him or not. So what Jamie said was if there is diversity in the board, it brings about a kind of tension. I would like to call it creative tension. Right? But all diverse people will not bring creative tension. Some of them will bring destructive tension. So the selection of the board, the art and science of selection of the board becomes very, very important. Right? And diversity. Mostly when people speak about diversity in the board, they speak about gender diversity, but it is cognitive diversity, it is experiential diversity. Where the hell do you come from? Right? So what is it that you're carrying in your head all the time, which means so much more for you if you're not mean to somebody else? But maybe it is a critical point for decision making for something important. So board composition, board diversity. And unfortunately today there is no focus on getting the character of the board. Right. The focus is on getting the right directors on the board, but not collectively, you know, what the board should be. Not only is there no focus on it, but because there is no focus, there are no tools and practices on how to make it happen. Right. I feel that A, because the board is not going to go away and B, because at some level it is the most important decision maker. I mean, you know, it may not be able to make things happen, but it can stop anything from happening. If you say no, no, no, that's it. No, you can't do this. Right? They never say no.

[James Orlikoff]

I want to bring in a perspective that I don't think we should forget. And it comes from, you know, when I teach corporate governance to bring directors into our executive programs, I often ask this question, why do we have a board? And we have lots of answers why we have a board. And finally Someone will say, well, I think you're legally required to have a board, which is true. But this is a reminder that the corporation itself and the board are creatures of law. They are not creatures of. As a private investor, you cannot create a corporation without registering with the state. This is an incredible innovation in our society that you can have a corporation and you are required to have a board. And the board by law is the governing body of this entity. You've got to think there's a potential kind of huge moral hazard issue here. Somebody needs to be in charge. So decided that we're going to have a board. So that's another reason that you're there. And I think it's very important if you serve on a board that you recognize that there is that public dimension of your service as well as your obligations to your shareholders. I believe that you do have obligations to these other parties, regardless of whether it enhances shareholder value. Value. You are obliged, for example, not to injure people, not to dump your waste into the community water supply. It might maximize shareholder value. In fact, some economists, Luigi Zingales and his colleague have done some research showing that it was actually did maximize shareholder value over a 30 year period for DuPont to dump its waste into the community water supply in a lot of communities. So I don't think the shareholder value, even long term is going to solve all the problems. You have to have some sense of obligation. But the question is, how far does it go? How far does it go? And that's where there's no clarity around that.

[Lynn Payne]

I would say, yes, 10 seconds. What Lyn said just now, it reminded me of another quote of Mahatma Gandhi. He said that whenever you are in a decision making stage and it's very difficult to take a decision, you think of or look at the poorest man that you know and think how this decision will impact him. He's the stakeholder. Right. And then you take a decision, I mean, somewhat akin to what she's saying.

[Anthony Allitt]

Yeah. I mean, I love being at universities. I think we have Hegel and Gandhi in the same country.

[Om Prakash Bhat]

That's goal, right?

[Anthony Allitt]

It really is. It's great. We're looking for a third now.

[Kurt Nickish]

That's Lynn Payne, Om Prakash Bhat, Anthony Allitt and James Orlikov. Next week we continue where we left off, assessing the five years since the Business Roundtable's declaration and looking into the future. How should boards operate now? What should they be taking into account? Account differently in the coming years. That's next week to get that episode and more. Please follow the show on Apple podcasts, Spotify or wherever you listen. Thanks for listening to Is Business Broken? I'm Kurt Nickish.