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What’s the Core Priority of Corporate Managers?

A recent article argues for changes to the shareholder-centered governance model


In a recent Harvard Business Review article, Harvard Business School professors Joseph Bower and Lynn Paine raised a number of important questions that go to the heart of what a corporation is all about, and to the very nature of modern capitalism. Among them: What’s the core priority of corporate’s management, the near-term gains of shareholders or the long-term health of the company?

The idea that maximizing shareholder value should be the primary goal of corporate managers is relatively recent, first put forth by academic economists in the 1970s, most notably by University of Chicago economist and Nobel Prize recipient Milton Friedman. In a 1970 New York Times Magazinearticle, Friedman wrote that a corporate executive is “an employee of the owners of the business,” and that those owners typically will want to make as much money as possible while conforming to basic rules of the society. Mr. Friedman believed that business concerns beyond making a profit, such as “promoting desirable social ends,” or “providing employment, eliminating discrimination, avoiding pollution and whatever else,” amounted to “preaching pure and unadulterated socialism.”

His ideas were further developed in a 1976 paper by Michael Jensen and William Meckling into what became known as agency theory. As summarized by Bower and Paine, the basic premises of agency theory include:

  • “Shareholders own the corporation and are principals with original authority to manage the corporation’s business and affairs.”
  • “Managers are delegated decision-making authority by the corporation’s shareholders and are thus agents of the shareholders.”
  • “As agents of the shareholders, managers are obliged to conduct the corporation’s business in accordance with shareholders’ desires.”
  • “Shareholders want business to be conducted in a way that maximizes their own economic returns.”

This governance and management model is still pervasive in the financial community and in much of the business world. Thinking of shareholders as owners and of management as agents may sound natural enough, but Bower and Paine believe that “it is legally confused,” and “involves a challenging problem of accountability.”

As an alternative to the shareholder-centered governance model, Bower and Paine propose a company-centered model. “Such a model would start by recognizing that corporations are independent entities endowed by law with the potential for indefinite life. With the right leadership, they can be managed to serve markets and society over long periods of time. The model we envision would acknowledge the realities of managing these organizations over time and would be responsive to the needs of all shareholders - not just those who are most vocal at a given moment.”

Their paper offers eight propositions that, together, provide a more realistic foundation for corporate governance and shareholder engagement:

Corporations are complex organizations whose effective functioning depends on talented leaders and managers. “The challenges of corporate leadership - crafting strategy, building a strong organization, developing and motivating talented executives, and allocating resources among the corporation’s various businesses for present and future returns - are significant. In focusing on incentives as the key to ensuring effective leadership, agency theory diminishes these challenges and the importance of developing individuals who can meet them.”

Corporations can prosper over the long term only if they’re able to learn, adapt, and regularly transform themselves. Given the fast pace of technology and market changes, companies may need to reinvent themselves every five years or so. This would be very difficult to achieve if management is primarily viewed as agents of the shareholders, with little independent decision making capabilities.

Corporations perform many functions in society. These include providing investment opportunities and generating wealth, but they also include producing goods and services, developing technologies, providing employment, paying taxes and making contributions to the communities in which they operate. It makes no sense to single one of these out as the purpose of the corporation.

Corporations have differing objectives and differing strategies for achieving them. “Just as the purposes and strategies of individual companies vary widely, so must their performance measures. Moreover, companies’ strategies are almost always in transition as markets change.” An overemphasis on shareholder returns will undermine a company’s ability to deliver on its chosen strategy, especially in times of rapid change.

Corporations must create value for multiple constituencies. “In a free market system, companies succeed only if customers want their products, employees want to work for them, suppliers want them as partners, shareholders want to buy their stock, and communities want their presence. Figuring out how to maintain these relationships and deciding when trade-offs are necessary among the interests of these various groups are central challenges of corporate leadership.”

Corporations must have ethical standards to guide interactions with all their constituencies, including shareholders and society at large. Ethical standards are absolutely essential for earning the trust necessary to function effectively over time and around the world.

Corporations are embedded in a political and socio-economic system whose health is vital to their sustainability.  Societal and system-wide problems can be a source of both risk and opportunity for companies. Companies can suffer great damage if they’re indifferent to the negative impacts of their activities.  On the other hand, being viewed as a socially responsible company is part of what a business may need to do to stay ahead of society’s fast-changing exceptions. Over time, enlightened self-interest can help sustain profits for shareholders.

The interests of the corporation are distinct from the interests of any particular shareholder or constituency group.  Shareholders have different investment objectives and time horizons. Some may seek more current income while others seek long-term growth.  Younger investors may accept considerably more risk than older ones. Some powerful shareholders may seek to divert the interest of the corporation for their own, narrow purposes.

“The time has come to challenge the agency-­based model of corporate governance,” the authors write in conclusion. “Its mantra of maximizing shareholder value is distracting companies and their leaders from the innovation, strategic renewal, and investment in the future that require their attention.”



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