Hack:
Fixing the Fundamental Agency Problem

By Dale Bruns - Cost Analyst at Con-way

March 13, 2012 at 11:06pm

Board of Directors

strategy

Governance

stakeholders

social

Moonshots

Reinvent the means of control

Make direction setting bottom-up and outside-in

Summary

Every public company is controlled by a Board of Directors representing shareholders only; not employees, the community, the environment, or any other stakeholders. Until this fact is altered, it is not only likely that Boards will keep their companies focused on profits above all else, it's actually their legal and moral obligation to their constituents.

Problem

The fundamental problem with public companies is that they are governed by Boards of Directors who are elected by shareholders. Other stakeholders in the organization have no place at the table and thus the company is obligated to put profits above other goals. As it stands today, Directors who make decisions to forgo profits for the sake of other social or environmental goals could face lawsuits and jailtime for breaching the fiduciary duty they have to their shareholders.

This is a tremendous barrier that stands in the way of many brilliant and well-meaning ideas of the type found on this very site. In order to suceed in implementing widespread change, in order to change the paradigm of management, this problem must be addressed.

Solution

Restructure public corporations so that the shareholders aren't the only party the Board is accountable to. By allowing other stakeholders to vote for Board members, the Board will have the permission to prioritize their needs above the needs of shareholders. This is only likely to work for newly public companies, however their success under this structure should create a competitive imperative for other companies to follow suit.

Some key points:

1) The voting rights should be partitioned in whatever manner best supports the mission of the company. There is no set ratio that is best, it's a matter of what the company cares about most. Some companies may exist completely for their employees' welfare, others completely for the welfare of poor families in Africa, etc. Their stakeholder voting allocation should emphasize this mission.

2) Employees are almost always a relevant stakeholder, regardless of mission. This is because they must be engaged for the company to succeed in the mission. As such, it would be wise if employees had some voting rights.

Practical Impact

There are already companies who have Board of Directors chosen from amongst their stakeholders. Many non-profits currently employ such a structure. This is proven and effective in maintaining the integrity of a mission over the long term. It places meaning above profits, and many people choose to work for non-profits despite lower earnings potential. However, non-profits have their own set of constraints, mainly their reliance on fundraising to raise capital.

This change in governance allows a company to partake in the benefits of a non-profit, which is largely a focused and principled corporate mission, while also taking advantage of the benefits of public companies, notably their resources and ability to fund operations through profitable business activities.

First Steps

The first place to start with this idea is for companies considering IPO's, especially those still controlled by a founder, to safeguard the mission of their company by structuring their Board in such a manner as to allow all stakeholders a vote. This would naturally include employees, the local community, customers, and perhaps other special groups that are impacted by the company's core mission.

Voting rights must be apportioned in such a manner as to limit the influence of passive stakeholders known as stockholders in favor of more active stakeholders. This will entail some risk in that shareholders could reject the stock offering, but a successful track record prior to the IPO would surely convince a large number of investors to dive in.

It is my hope that once these companies begin to show the fruits of their beneficial structure, and begin to outcompete rivals with older, poorly focused strategies, their rivals will begin to feel the pressure to follow suit, if not for moral reasons than merely for financial survival! In this sense, the paradigm can change and the vast store of competitive advantage that comes from a principled and inspiring mission can finally be realized.

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