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To Kill a Zombie: Ending Shareholder Primacy

Posted on September 23, 2014 by David

The theme of the Drucker Forum to be held in Vienna November 13-14 this year is “The Great Transformation: Managing Our Way to Prosperity”. In the run-up to it Simon Caulkin wrote a mainly excellent article in the Financial Times entitled “Era of management-led growth held hostage by old ideas that refuse to die”. In it he outlined the challenge of changing the assumption that the purpose of the corporation is to maximize returns to shareholders. He cited Lynn Stout’s work, among others, to assert that “shareholders own shares, not companies, which are separate legal persons, and directors’ only fiduciary responsibility is to the company. Shareholders are not principals and managers are not their agents.” Caulkin described the whole shareholder-primacy theory as a zombie idea.

Then he went off the rails a little by mixing his monster metaphors: “So, yes, an era if management-led growth is both feasible and urgently needed. But the renaissance will not flourish unless a stake is driven through the heart of the shareholder-primacy zombie first.”

This won’t work with zombies!

Every monster hunter knows that you can kill only vampires by driving stakes through their hearts; to kill a zombie you have to disintegrate their brains. The shareholder-value model may suck out the lifeblood of corporations but it doesn’t have a heart. Its brain is in thrall to neoclassical economics with its belief in the sanctity of free markets and its scientistic assumption that if humans aren’t completely rational then they ought to be. Unfortunately the shareholder-value model is held in place by a powerful systems dynamic that works like an addiction. The short-term rewards for those who benefit – corporate executives, hedge funds, and buyout artists – are significant, while the long-term damage is only now becoming visible. Even then, the complexity of cause-and-effect in complex systems allows many to deny that any such relationship exists. As Upton Sinclair’s quip reminds us: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

So how to disintegrate this zombie idea’s brain? I have suggested a change in metaphor might help, from that of monsters to systemic addiction. Most addictions end only when the addict “hits the wall” and makes a radical attempt to change his or her lifestyle and avoid the contexts that trigger the habit. Often this takes a shattering event – either a personal crisis or an encounter with a charismatic individual, or perhaps both. I suspect that it will require similar events in the case of shareholder-primacy model – a crisis plus the emergence of charismatic enterprises that show a consistent ability to outperform their conventional counterparts in sustainability and service to their communities, while operating at a scale comparable to their conventional counterparts. Oh, and it couldn’t hurt to attack the idea intellectually, as Lynn Stout has done, and try to disintegrate its brain…