THE ERROR AT THE HEART OF CORPORATE LEADERSHIPdistinctive and socially valuable features of the corporation, and the
associated challenges of managing for the long term, on the grounds
that corporations are “legal fi ctions.” In their seminal 1976 article,
Jensen and Meckling warn against “falling into the trap” of asking
what a company’s objective should be or whether the company has
a social responsibility. Such questions, they argue, mistakenly imply
that a corporation is an “individual” rather than merely a convenient
legal construct. In a similar vein, Friedman asserts that it cannot
have responsibilities because it is an “artifi cial person.”
In fact, of course, corporations are legal constructs, but that in no
way makes them artifi cial. They are economic and social organisms
whose creation is authorized by governments to accomplish objec-
tives that cannot be achieved by more- limited organizational forms
such as partnerships and proprietorships. Their nearly 400-year
history of development speaks to the important role they play in
society. Originally a corporation’s objectives were set in its charter—
build and operate a canal, for example— but eventually the form
became generic so that corporations could be used to accomplish a
wide variety of objectives chosen by their management and govern-
ing bodies. As their scale and scope grew, so did their power. The
choices made by corporate decision makers today can transform
societies and touch the lives of millions, if not billions, of people
across the globe.
The model we envision would acknowledge the realities of man-
aging 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. Here we off er eight propositions that together pro-
vide a radically diff erent and, we believe, more realistic foundation
for corporate governance and shareholder engagement.
- Corporations are complex organizations whose eff ective
functioning depends on talented leaders and managers.
The success of a leader has more to do with intrinsic motivation,
skills, capabilities, and character than with whether his or her pay is
tied to shareholder returns. If leaders are poorly equipped for the job,
giving them more “skin in the game” will not improve the situation