The Revolution

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It is of the essence of revolutions of the more silent sort that they are unrecognized until they are far advanced. This was the case with the so-called industrial revolution and is the case with the corporate revolution through which we are at present passing. The translation of perhaps two-thirds of the industrial wealth of the country from individual ownership to ownership by the large, publicly financed corporations vitally changes the lives of property owners, the lives of workers, and the methods of property tenure. The divorce of ownership from control consequent on that process almost necessarily involves a new form of economic organization of society. Manifestly the problem calls for a series of appraisals.

- Berle & Means
The Modern Corporation & Private Property, 1932

In 1932, Adolf A. Berle and Gardiner C. Means named a revolution that has transferred much control of wealth to the organization.  Today the control of the organization is under fire and the responsibility of the board of directors is poorly understood by many, including directors themselves.

The director’s job is not to maximize shareholder value but to protect and enhance the health and value of the corporation. Focus on maximizing shareholder value in the short run, which has become a dominant focus, can be seen as a dereliction of fiduciary duty.

Shareholders of public companies do not own them, but instead own interests in residual income with specific and narrow rights attached, including the right collectively to elect the directors. Just because they assert rights does not mean they have those rights, unless the board falls for their bluster and gives them rights.

Each director singly and the board of directors collectively owes its loyalty to the corporation, not to shareholder’s short term wishes. Much of the volume of funding hedge funds and private equity firms enjoy derives from hard working pension fund managers struggling to garner enough money to pay escalating, unfunded pension obligations. Addressing the pension crisis would change the investment landscape and somewhat reduce the chronic pressure for short term profits.

If directors take ownership of these concepts, they can drive the companies in their charge toward long term sustainable value creation over short term sophistry. They can if they choose just say no to activists with whom they disagree and can boldly lead their companies to better futures if they will do the job before them. If they do not assert their control, the relentless pressure to secure short term gains may seriously erode their companies’ positions and our country’s ability to compete on the world stage.