The Big Lie (And It’s Legacy)

 

Roger Martin, Dean of the Rotman School of Business has been a mentor and friend to me for some time now, and I am big fan of his writings, ideas and teachings.

In November, he co-wrote ( with Jennifer Riel) a short article worth reading and I wanted to share it (see link below).

I especially appreciated the cautionary tone of the article to ensure that we as society do not polarize the 1% and the 99% (Occupy parlance) as this is not a productive approach and one that we cannot afford given the urgency of the issues that need ALL of our attention if they are going to be addressed well.

Moreover, the authors point out that “Our current capital markets are structured around a dangerous lie — that the sole function of the corporation is to return value to shareholders. Under this construct, every action undertaken by Wall Street traders, mortgage brokers and the rest make perfect sense and are morally unambiguous. It was their job to sell as much as they could, to grab as much value as possible, in order to return that value to shareholders. So long as shareholder-value-maximization remains our governing principle, no change in regulations will change the fundamental behavior.”

Having owned and operated my own social enterprise, I know personally,  all to well how dangerous this “lie” can be.  In my experience, it has been used to over and over to justify the dismantling of many a good thing.

And while the article focuses on the role of incentives in perpetuating behavior guided by this lie, we also have to look at the disincentives for challenging the lie as well.

By ensconcing profit maximization into corporate law and by-laws, we make it difficult to empower their governing bodies (Corporate Boards and their Directors) to act with all stakeholders in mind. The argument that profit maximization should be the sole objective has in fact been used as a basis for successfully suing well meaning corporate directors (in the U.S) for breach of fiduciary duty. U.S.  Corporate law dictates clearly that all Directors must act in the interests of all shareholders-only (profit maximization). Thus, a director may be held liable by others if he or she acts in such a manner as to be detrimental to these  interests.  Thus, if a Board makes a decision that reduces profit maximization but prevents a project that would result in environmental degradation or expensive clean up costs which reduce gains, they could be taken to task by shareholders and sued for resulting damages (lost profits).   In Canada, our corporate laws are deemed to be not as clear on this and leave room for interpretation,  however the prevailing ethic in making decisions is the same.

In the end, Directors who do try to take a balanced approach in the midst of a profit maximizing business culture, is often characterized as the “looney” on the team.  And after good few chuckles about mis-directed empathy or ethics, are usually voted out anyway.

Yes, changing the incentive structure is part of the solution towards more balanced risk/reward assessments, but so is a good look at how our laws dis-incentivize taking a more balanced stakeholder position at the governance level.

And there is one more arena to address: Culture. To see change in how business evaluates opportunities, we need to look at fundamentally re-wiring what we have been taught as a society about the role of business over the past 60 years.

And changing what business means to society and the role it plays this is the crux of the matter and where the 99% and the 1% need to come together.

To read the full article, click here: http://management.fortune.cnn.com/2011/11/09/what-occupy-wall-street-got-right/?section=magazines_fortune

Let us know what you think.