Critical Issue: Defending a Good Company from Bad Investors


In 2018 I plan to write a “Critical Issues” series for CEOs, boards, and senior teams. Drawing from current news events and the real, every-day challenges I work on with CEOs, I hope to spark discussion, debate, and action. In addition to my own writing, I’ll share and provide context around important articles from others. 

Today I want to highlight a Harvard Business Review article on activist investors -- whether by hedge funds, corporate raiders, or family/private investors. The piece uses data and examples to illustrate the flaws in the model most investors have used for decades to measure shareholder value, and offers a new purpose oriented model. David Pyott, our own CEO from Orange County, who led Allergan through their takeover bid, is interviewed following the article.

I’d like to thank the team at the Center for Higher Ambition Leadership for connecting me with this article. The authors were a resource to our group at our most recent CEO Summit in Boston.  

I recommend this article be required reading for your board and senior team.  An ounce of prevention is worth a pound of cure.  

Executive Summary:  

Article: The Error at the Heart of Corporate LeadershipHarvard Businesss Review, May 2017

Authors: Joseph L. Bower and Lynn S. Paine, Harvard Business School, and authors of Capitalism at Risk: Rethinking the Role of Business

Read Time: 15 minutes

Key Companies Included: Allergan, DuPont

Quote: "Shareholders are not accountable as owners for the company’s activities, nor do they have the responsibilities that officers and directors do to protect the company’s interests."

If You Can Only Read One Thing: Review the bulleted list of implications for boards toward the end of the article.


Quick Summary:  

The agency theory of governance holds that the purpose of the corporation is to maximize shareholder value and that a board is responsible to shareholders as “agents” who are required to adhere to the wishes of the shareholders. The theory is false.

Joe Bower and Lynn Paine, in their Harvard Business Review 2017 article, argue convincingly that a board’s responsibility is not to be the “agents” of shareholders but to be the fiduciaries of both shareholders and all others who have an interest in the long-term success of the corporation they are governing.

Agency theory teaches that the sole responsibility is to shareholders; therefore, activist shareholders can demand ways for a company to drive up earnings, often artificially, and if the company does not comply, the investors can cry foul, asserting that the board is not working on behalf of the shareholders.

Bower and Pain, in contrast, argue that agency theory is flawed legally, morally, and strategically. They argue effectively that the company’s long-term health is the fiduciary responsibility of the board – not “maximizing shareholder value” at any given time – especially for a subset of shareholders who have no long-term commitment to the health of the enterprise.

As companies and boards are becoming more enlightened about the purpose of the corporation and their responsibility to govern as fiduciaries, The Error at the Heart of Corporate Leadership is a must read. It is time to build the counter to agency theory that has dominated corporate boardrooms and policy makers for too long. This is an important step for purposeful leaders who are not only building higher performing organizations but also a better world for all.

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Click here to read the article in Harvard Business Review, May June 2017.