Since the first limited liability corporation – the Dutch East India Company – was formed in 1602, supervision by a board of directors has been required. And for four centuries, the role of the board has been poorly understood, repeatedly castigated as ineffective.
Why is it important now to recognize and rectify governance myths? The stakes are huge, as 500 companies are responsible for 70% of global production, and fewer than 100 investors control the majority of corporate shares. Dwarfing many countries in size, these players control global wealth and, arguably, the world.
Though the corporate form has been hugely successful, repeated failures and continuing scandals show that board members of many public corporations are poorly armed for the fight. By understanding and taking ownership of the job before them, however, boards of directors have the potential to lead businesses, and perhaps the world, toward a sustainable future.
But before the board, the CEO and the shareholders can move forward together effectively, the following myths must be debunked.
Myth #1: Public corporations are owned by their shareholders.
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.
Myth #2: The board owes its loyalty to the shareholders.
Each director singly – and the board collectively – owes its loyalty to the corporation, not to its shareholders’ short-term wishes.
Myth #3: The goal of the board is to maximize shareholder value.
The board’s purpose is to protect and enhance the health and enterprise value of the corporation, as the guardians of its perpetual life.
Today’s dominant focus on maximizing short-term shareholder value can be seen as a dereliction of the director’s fiduciary duty, by sacrificing the creation of long-term value.
Myth #4: Independent directors are not necessary.
Management cannot supervise itself. Disinterested directors who bring a detached perspective have become an imperative and are now required to be a majority of the board in many parts of the world.
Myth #5: The CEO reports to the shareholders.
The CEO is accountable to the board, which evaluates performance and determines compensation, on a basis which has typically been publicly disclosed.
Myth #6: Shareholders give direction to the board.
Board powers and shareholders rights are defined in the company’s formation documents. Shareholders have little control beyond their ability to vote periodically on the corporation’s proposed slate of directors.
Myth #7: Directors should not communicate with investors.
Shareholders are not the enemy, and directors generally have the savvy not to divulge insider information. It is important that directors know what is on the minds of shareholders, while simultaneously maintaining focus on the prospects for the whole, not just the parts.