The fundamental reason we’re experiencing a financial meltdown, he says, is we abandoned this notion:
Enterprises earn profits through the goods and services it generates, not the imagined value of its shares.
It is the primary responsibility of corporate governance (ie. boards of directors) to ensure a business is actually delivering on its promised goods or services.
Seems a no-brainer, right? So why did we abandon this?
Professor Gilles points out three contributing factors:
- Focus on share value. For the past quarter century boards have focused on share value, rather than the nuts-and-bolts of operations, and share value can be manipulated by all manner of financial instruments which have nothing to do with the actual value of the goods/services. As long as the numbers looked good, it was assumed the fundamentals of the company must be doing well.
- Lack of Dissent. Boards of Directors by definition are comprised of like-minded individuals – typically, reasonably wealthy; graduates from similar schools; and with shared values. This minimizes the likelihood of any board member vigorously taking a contrarian position on anything, when dissenters were needed.
- Passive oversight of managers. Or: nobody is really paying attention to the actual business. The assumption was that “somebody” was providing valuable services or goods.
I’ve certainly seen this in action. No names mentioned of course, but during a career spanning small business, corporations and civil service, it’s been clear to me on more than one occasion that when a business owner isn’t directly involved, it’s all too easy for decisions to be made that provide superficial, bonus-oriented results at the expense of the long-term health of the corporation. Seeing the recent implosions resulting from this practice, much like the unwinding of characters in Magnolia, is at once a horror show and perhaps contains faint rays of hope that we’ll learn our lesson and start doing it better.
Readers: have you witnessed this in action? Where boards paid attention to charts and graphs, while managers made decisions winning for the short-term but jeopardizing the long-term health of the org?
photo credit: ManilaRyce