This interview is an excerpt from Deborah Hicks Midanek’s book “Speaking Out on Governance – What Stakeholders Say About the Revolution”, which recently won a Gold Award from the Nonfiction Book Awards Program via the NFAA.
Canadian-born Roger Martin is a writer, strategy advisor and one of the most influential business thinkers in the world. For her new book, Deborah Hicks Midanek – a renowned corporate “problem solver” herself – spoke with Roger about creativity and innovation, good and bad reasons to be on the board of directors and how to improve corporate governance.
Deborah Hicks Midanek: What do you think the purpose of the modern public corporation is today, and has it changed?
Roger Martin: I don’t think its purpose should have ever changed. I come from the school of thought that says the government gives this nice protection of limited liability to the corporations in America, and it’s similar in other countries. In exchange, I think the job of the company is to make the world a better place. I honestly believe so, and I learned that from my father. You should both produce a product or a service that makes customers’ lives better and in doing so employ people who you help to put food on their table and money in their retirement accounts and do it in a way that is beneficial for the planet.
If you do all these things, it’s one of the highest callings you can imagine. I know being a teacher is great and serving your country in the armed forces is great, but I think if you take that as the purpose of the corporation, being an executive of a corporation is a great thing, too.
DHM: Well, one of the things that strikes me is that it’s also a profoundly creative position. That’s what I find, having spent my life in the world of corporate turnarounds, that the opportunity to knit things together in a more logical way is really not about mechanics and physics. It’s about biology and art and communication of a picture. Helping the corporation do those things you just mentioned, recover its roots, recover its connection to its purpose and its customers, is very creative. It’s about biology and art. It is not nearly as much about spreadsheets as people tend to think.
RM: I couldn’t agree more. It’s a bit of an obsession of mine, the degree to which what’s being taught in business schools, very influential because so many corporate executives in America now have an undergrad or graduate business degree, or both, is the primacy of analysis. You’re taught in business school that unless you make decisions based on data analysis, facts, you are being a sloppy, slovenly executive. You must have analytical proof in order to do something.
The fundamental problem with that goes back 2,400 years to the guy who invented the methodologies we are taught in our business education. Aristotle in the 4th century BC was the first guy on the planet to describe a method for determining the cause of a given effect. That is the scientific method. It was formalized 2,000 years later by Bacon, Newton, Galileo, and Descartes in the Scientific Revolution, but it was all Aristotelian posterior analytics.
The interesting thing to me is that we accept that as a fantastic methodology created by this fantastic genius guy, but we ignore something incredibly important that he said about his method. He said, literally, in almost so many words, “About this methodology: this methodology is for the part of the world where things cannot be other than they are.”
What he said is, if I let go of this stone, it will drop to the floor. It’ll drop to the floor now, it dropped to the floor 10 years ago, five years ago, two weeks ago, yesterday, five minutes ago. It’ll drop to the floor tomorrow, the next day, whatever. It’ll drop to the floor in Africa, in Europe, in the US. It’ll drop to the floor at the top of a mountain, in the bottom of a canyon. It’s part of the world where things cannot be other than they are. There’s a fundamental law that’s unchanging that causes that to happen, and that is what my scientific method is for. It is for the part of the world where things cannot be other than they are.
Then he pointed out that there are parts of the world where things can be other than they are. Like my relationship with you, Deborah. If you started screaming and yelling at me, we’d have a different relationship than if you talk nicely to me. That’s part of the world where things can be other than they are. Or, it’s the part of the world where consumers can’t be more than an arm’s length away from their smartphone now, when in 1998, they didn’t know what a smartphone was because it didn’t exist.
“If you’re a company and you keep on assuming the future’s going to be the same as the past, somebody will disrupt you and blow you out of business.”
Aristotle was clear. “In that part of the world, do not use my method.” Full stop. Don’t do it. Why would he say that about his beloved thinking method? Because he was smart enough to figure out that if you use the method of analyzing the past as if the future’s going to be exactly like the past, it ain’t going to work particularly well in the part of the world where things can be different. In fact, what will it convince you? It’ll convince you that the future will be identical to the past, and then what’s going to happen to you if you’re a company and you keep on assuming the future’s going to be the same as the past? Somebody will disrupt you and blow you out of business. In that part of the world, what Aristotle said was that rigorous thinking requires imagining possibilities and choosing the one for which the most compelling argument can be made.
DHM: Just as you were speaking about Aristotle, I was thinking, hallelujah, the man allowed for the importance of imagination, and then there you used the word imagine. There are relatively few people who would start the conversation about the purpose of the corporation with the government grant of limited liability in exchange for furthering the purposes of the world; but for the first several hundred years of the existence of corporations, a large part of that charter was granted because the subject corporation was intended to be furthering world knowledge. It was a pretty direct correlation. As the charter became more of a commodity, where you could just go sign up in the Secretary of State’s office, that grant became less valued, perhaps. Anyway, I’m getting off of the subject.
RM: No, no. I think it’s a cool and interesting point. I think Aristotle would be very happy with that because he said, “In the part of the world where things cannot be other than they are, the purpose of human beings is to understand the causes of the current effects.” And he said, “In the part of the world where things can be other than they are, the purpose of human beings is to be the cause of a new effect.” Isn’t that cool? It sounds as though that’s essentially the deal the Dutch government made when it chartered the first limited liability corporation, saying we’ll give you limited liability if you guys go out and cause a new effect: understanding, trading with, exploring East India. It’s about the new, the creation of something that does not now exist, and that requires imagining possibilities.
If you imagine the possibility that there are lands over there, that it’s not the edge of the earth and you’re not going to fall off, but there are actually lands over there – you could sail to them. There may be interesting things that are completely unlike anything we’ve seen before over there. That requires imagining the possibilities. The interesting thing from an MBA standpoint is, you can’t prove any of them in advance.
I like my philosophers. Charles Sanders Peirce, the great American pragmatist philosopher, pointed out that no new idea in the history of the world has been proven in advance analytically. How about that? How many times in your career has your boss said to you, “Well, that sounds like a good idea. Just go prove it and then we’ll do it.” All those clueless bosses who say those kinds of things do not realize that they’re asking you to do something that’s never been done before in the history of humankind. You can’t.
“You’ve got to go try stuff.”
You’ve got to go try stuff, which is why I’m so interested in the importation of some cool principles from the world of design into business. I work closely and am very good friends with David Kelley and Tim Brown and the cool guys at IDEO and other designers, some great designers from other firms, because they brought to the corporation the notion that you’ve just got to prototype stuff.
Make it cheap. Don’t blow the entire corporate budget on trying new stuff. Try it cheap and quick. Figure out what works, what doesn’t. Make it better, make it better, make it better. That’s all consistent with Aristotle. What all the design folks don’t realize is that their practice is consistent with what Aristotle said, while MBA programs are utterly inconsistent with what Aristotle said.
DHM: If the corporation’s purpose is to improve the condition of the world in some way and continue to sustain itself and its employees and its investors and its management and its board along the way, who is responsible for making that happen? Who owns the public corporation and what rights and responsibilities does ownership entail?
RM: The idea is, abstractly, that the owners of the company are the shareholders and the shareholders have that overall responsibility for serving the world as a limited liability corporation should. What they’ve done, essentially, in the modern world is outsource that to something called a board of directors that is responsible for the welfare of the corporation. But the relationship between the owners, as in the shareholders of the company, and the board has become so intermediated that the idea that the owners of the widely held publicly traded company can express anything useful has become difficult.
In the widely held publicly traded company, the owners of the company aren’t even the owners. There’s some notional idea that in representing the true owners, the guy or gal with a mutual fund at Vanguard or Fidelity or somebody with a pension coming their way in some number of years from CalPERS, that their wishes and desires are going to be expressed by these fiduciary intermediaries. Vanguard and BlackRock and Fidelity and State Street and CalPERS and CalSTRS and et cetera are going to give sage and wise advice and pressure and encouragement to a board of directors who will then, because of all that wonderful input, actually manage the company in the interests of the greater good. That’s a set of logical leaps that I think are straight up unrealistic.
“The relationship between the owners and the company has evolved to being not a committed, loving, long-term relationship, but anonymous sex.”
I guess the way I think about it is that there’s this implicit assumption that the relationship between the owners and the company is like a committed marital relationship. It’s long lasting. There’s sort of mutuality of interest. There’s talking things out and making the right decisions. But in fact, it’s evolved to being not a committed, loving, long-term relationship, but anonymous sex.
I mean it is anonymous sex in the sense that Fidelity may show up on your share register this quarter as having 6.2% control. We don’t actually know who Fidelity is. It’s thousands and thousands of individual mutual fund investors, so it’s anonymous in that respect. In the next quarter, they could show up with 3.2% or zero, and they didn’t actually have to have a discussion about it. They got what they wanted, anonymous sex, and exited. The presumption is the parties behave like a committed, married, long-term relationship, and it’s actually anonymous sex. What we get is the schism that comes from that. Disappointment, sadness, and STDs, lots and lots of that.
DHM: Following along, what is the role of the board of directors, and to whom does that board owe its fiduciary duty?
RM: If you could get people on boards to be this way, it would be to have a commitment to doing the best for society that you can do. That means doing the best for consumers, customers, whatever they are, doing the best for your employees, doing the best for the environment. That means being able to say after you hang up your spurs as a director, say after 10 years, that in some small tiny little way, the world is a little bit better place than it was 10 years ago when I went on the board, because of what this corporation did.
That’s what we should do at corporations. You could ask what about the poor shareholders? Well, I’m a subscriber to the Robert Wood Johnson credo, which he had engraved in granite in 1948 and still sits at the J&J headquarters. The credo says, paraphrasing, customers come first, employees come second, the communities in which we work come third, and last come the shareholders. However, if we do a good job with the first three, the shareholders will earn a fair return.
“Shareholders don’t get screwed if you take care of customers, take care of employees, and make the world a better place.”
J&J went public for some tiny trivial amount in 1948 and the last time I checked was worth some $350 billion, so that credo may have worked. Shareholders don’t get screwed if you take care of customers, take care of employees, and make the world a better place. Shareholders do just fine. Aristotle famously said, “If a man seeks to be happy, he’s unlikely to end up happy. If a man seeks to lead a good life,” by which he meant a life of virtuous contribution to his society, “he will end up happy.” It’s the same for shareholders. I wish that boards could take that credo as a responsibility and, as much as humanly possible, ignore chatter from the shareholders.
DHM: What do we think defines the success of the board and how can we evaluate it? This leads to the next question, about your position that a public company board is a tax on investors. If we can’t define their success, then it’s absolutely a tax. Can we define their success?
RM: Here’s the tricky part. I’ll do a little bit of a digression before answering that question. In thinking about the world of business, I ask how two systems work. One system is the system that operates once a person is in a given chair. If there’s a person in the chair, how do they do their job? What incentives do they have, what capabilities do they have, what governance mechanism runs them when they’re in their job?
But there’s another system that I think gets short shrift, which is the system that gets the person in that job. We can be very clear in specifying how we want that first system to work once the person’s in the job, but we have a challenge in that we don’t tie that assessment to how that person gets in that chair in the first place.
I’ll give as an example how just cataclysmically horrendous the bond raters were shown to be in the global financial crisis. How many AAA rated tranches of subprime debt, which are never, ever supposed to default, defaulted completely and were utterly worthless? How could that possibly have been, people ask? Well, you have to ask the question: What do we want somebody in the chair at Moody’s, Fitch, S&P to be capable of doing? We’d like them to be capable of analyzing the corporation, analyzing its capital structure both in detail and with inspired thinking to be able to come to a conclusion as to its credit quality, whether the instrument deserves a BBB- or junk or AA or AAA rating. We’d like them to be able to analyze companies, their risk profiles, the terms of bond issues, where they sit in the stack, how much of it there is. All of that.
Then you have to ask: How does a person with that set of skills get into that chair? There’s a market for people with that set of skills who are really, really good at that, good enough to save us from the global financial crisis. What you find if you think about that, is that those people are also great at bond trading and they can make at least 10 times, probably 100 or even 1000 times what they can make sitting at a desk at Fitch or Moody’s, by running the bond trading desk at Goldman or running their own bond fund, working at Apollo, whatever.
We assume that somebody sitting at a bond rating desk at Moody’s, Fitch, S&P is really good at rating bonds, when in my view, the only thing we can know for sure about somebody who’s at a bond rating desk at Moody’s, Fitch, or S&P is that they’re not very good at rating bonds. Otherwise, they’d be at Goldman, their own bond fund, or Apollo. It’s the impossibility theorem, that if they have the skills we want them to have for that job, they will be in another job – and we’ve dotted the landscape with those folks. Again, after the global financial crisis, we said, “Oh, assets were exaggerated in value on balance sheets, so we will now have the auditors as part of their audit declare whether an asset is impaired or not.”
Who’s really good at that? Who’s good at figuring whether an asset is impaired or not, when all you have to do is essentially look at that asset and be able to calculate with reasonable precision its expected cash flows up to infinity, then discount it back in precisely the right way to determine whether that’s more or less than what’s on the books. I know one guy who may be really good at that. His name’s Warren Buffett, and he’s not an audit partner at PricewaterhouseCoopers. He’s worth $50 billion because he’s really good at that. There are other people who are really good at that too, and they don’t sit in Deloitte, PwC, KPMG. In asking them to determine which assets are impaired, we are giving them a job that they are, by prima facie evidence, by virtue of being in that chair, not good at doing.
“We don’t teleport people into board seats.”
This is a bit of a digression, but it gets back to boards. We don’t teleport people into board seats. We don’t have press gangs going around the streets forcing people to become directors. It’s a voluntary act, and there’s a selection process. What I argue is, we do not ask this question: What is it about that person that would cause them to say, “I will use my time and energy to do this thing”? Because of the logic laid out above, how can we believe that the person who is motivated to be in that seat will do that job well?
DHM: The truth is, the way our system works is that it is often the easy choice that is made. To be as compassionate as possible to those people who are choosing directors, it is understandable that they will appoint people whose attributes they can understand. To me, the fact that it’s taken a long time to add diverse points of view, diverse backgrounds to boards, makes great sense, because the people making the choices about who’s on the board are most comfortable evaluating people who look like themselves.
RM: There’s that, but you’re talking about one direction. I’m talking about the other direction as well. What would cause a director, potential director, to say, “Yes, I want to spend however many person hours a year it is doing that thing versus the alternative thing.”
I tend to agree with you that boards are typically made up of people who are like the people already on the board. I buy that argument, but if we want good governance, we have to have that person who is invited. Let’s just say, for the sake of argument, that the nominating committees are doing a great job and they’re inviting, let’s just say, people who would do a good job. What causes that person to say yes?
I would argue that there are a whole bunch of bad reasons to be on boards, and I’ve heard all of them. There’s only one good reason, but that’s not a reason that I’ve heard very often, if at all. You could say yes because you think it’s really good money. That would be one legitimate reason. Oh wow, the package is about $800,000 or $900,000 a year; that’s better than the alternative use of my time and talent. If I spent those hours on an alternative use, I could make at most half that much, so it’s really attractive. What’s your motivation going to be, then, once you’re on the board?
DHM: Not to lose your seat. To fit in, to have people think that you’re good at it.
“The only legitimate reason to be on a board that’s actually good for the board is if you think that this is an act of public service.”
RM: Exactly. A second reason is prestige. Serving on this board will raise my prestige. I can say, I’m on the board of General Electric Company. What’ll you do? You’ll make sure that you don’t lose it, because then you’ll lose the prestige you just got. If you run through the reasons why somebody would say yes, they’re actually bad for everything that you, Deborah, would want that board to do. The only legitimate reason to be on a board that’s actually good for the board is if you think that this is an act of public service, that the world is a better place to the extent that corporations are governed better so that they do good things for society. What percentage of board members you’ve met would say that’s their motivation for serving on a board?
The answer is none, it’s not viewed that way, and that if we’re going to have widely-held publicly-traded companies, we have to honor and revere board members the way we honor and revere judges. Being a judge is a huge negative NPV [net present value] activity, right? If you were a super lawyer, super at what you’re doing, you would make tons more working at Wachtell Lipton than you would being a judge. But in that profession, there is a view that among the highest public service things you could possibly do with your life is to sit on the bench and help us uphold and build the law over time. That’s what we have to have for corporate directors.
I don’t think we’re going to get there for boards as a whole, but we could get there for chairs of boards. If you’ve got a good chair, they can slap around the directors enough to get them to be better directors. If you’ve got a crummy chair, you’ve got no chance.
“We need to make the subversive minority the majority if we’re going to have good governance, in my view.”
DHM: Where I have been able to be helpful is when boards are facing disaster and they don’t know what to do, because the people who sit in those chairs are often uncomfortable having to step up and deal with it. That’s where I have elected to participate, so I’ve served on lots of boards of troubled companies, and there I can have impact and I can help. I can help. I can help with the jobs, I can help with the customers, I can help with the environment, I can help with a lot of things because in the middle of that insanity, the situation is plastic. It’s movable. You can reshape it, but you can’t when it’s going along in a very healthy, allegedly healthy, mode.
RM: You are part of the subversive minority, Deborah, and we need to make the subversive minority the majority if we’re going to have good governance, in my view. You can see by your own experience that that’s really hard. It’s hard work. I’m totally, totally into hard work. In fact, I aim myself at the hardest possible work, but I can’t make myself accept public board seats anymore, because it is such hard work to be that subversive a force; essentially, trying to subvert the norms of behavior on the board. That’s really, really hard work.
DHM: It is really hard work. Really hard work. My very first board, the board of the bankrupt Drexel Burnham, I learned that the men around me did not have the ability to hear my voice. It wasn’t that they weren’t willing to listen. It’s just I realized that my voice is in a different register. The frequency of my voice is different. So I learned to project my voice by sort of throwing it at the ceiling so that the voice would come back down on top of them. I also led by asking questions rather than by asserting positions, because asserting positions would not have gotten me anywhere.
RM: And I would argue, sadly, Deborah, that if you were on the board of Drexel Burnham five or seven years before when it was the highest flying thing and you’d have been saying, “Guys, we’re about to hit a wall. A bunch of you are going to be arrested,” and so on, they would have said, “Give me a break. We’re awesome. We are awesome and you’re an idiot.”
DHM: Of course, of course. The diseases of affluence. But let’s go back to the thread of this conversation. You are talking about seeing a world in which we find a way to position the chairs of boards of directors in such a way that they are seen as doing an important public service. Are you suggesting that we create a cadre of specifically credentialed chairs who have a certain kind of training, or a certain kind of imprimatur, or a certain kind of experience, or all of the above, and that it’s from that pool that chairs are picked? What kind of mechanism are you imagining in this design thinking brain of yours?
RM: Well, it is a tricky question. I’m always into things that happen more organically than not. My own take on all the boards I’ve seen and board members I’ve seen is that there is no correlation between effectiveness and their previous roles. Oh, were they a CEO already or how much experience do they have in this industry? It is completely a psychographic thing. The question is: What is their way of being in the world as a human being?
Any kind of categorization scheme that makes it seem like we’re going to have to pick specific features is going to be hard. I guess I would just hope that there could be a movement that says, “We need these people and we need them to be this way,” and people start emerging organically as great directors.
Of course, we do know that there are people out there who I think are great directors, and I think they need to be celebrated more. We may have a 25-year migration path toward having essentially that cadre. I would love to see that group of directors, of chairs, become a bit of a club; one that admits people that they watch on boards behaving the way they think they need behave. So if you’re a member of that club, even though that label has some bad connotation, but just go with me, people will seek you out to be a chair because you have that kind of stamp from peers who are doing it the way you’re doing it.
There’s lots of thinking that would have to happen on this front to say how we could accelerate that and I think you’d need some leadership from the big owners of equity capital and the big investment managers, maybe even the pension funds, in order to push for that kind of person being the chair of the board.
DHM: Well, you know, Roger, it seems to me that you just retired from being a professor. You have greater clarity of thinking than many people around this issue. I nominate you to be the person who figures out how to create that club. Seriously, you have the power of the pen and you have the power of the brain, and you have a history of talking about integrative thinking, design thinking, and solutions-based processes. What can we do to make this happen? The existing infrastructure around boards of directors is not going to do the job.
RM: Right, right. It’s the wrong kind of club now. Agreeableness is the number one criterion of membership in the club now.
DHM: I think you may be right that it has to start with investors, but I’m not sure that they actually really understand the job of the board.
RM: You’re right, you’re right. I think it’s got to start with people committed to and practiced at being a great director. I think you should do it.
DHM: But I’m outside the system.
RM: I think about too many things, but it would be a 10–20-year project. I think it’s the only thing that will save the widely-held publicly-traded company from going into the ash bin of history as something that we tried but didn’t work and we’ll go back to what we had in the 20s and 30s where there will be semipublic companies, with people saying as John D. Rockefeller did, “You can buy some shares, but I’m in charge, I own this.”
DHM: That’s happening. Look at Carlisle and KKR and so on. That’s the world that they live in.
RM: Or Facebook or Google.
DHM: Absolutely, those guys too. I don’t know whether you want to call them benevolent, but these same dictator structures are in a position where in many ways they have way more influence in the world than governments do.
RM: Oh, absolutely.
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