THE ERROR AT THE HEART OF CORPORATE LEADERSHIPsimultaneously over time. As a historical matter, the original pur-
pose of the corporation— refl ected in debates about limited liabil-
ity and general incorporation statutes— was to facilitate economic
growth by enabling projects that required large- scale, long- term
investment.
- Corporations have diff ering objectives and diff ering strategies
for achieving them.
The purpose of the (generic) corporation from a societal perspective
is not the same as the purpose of a (particular) corporation as seen
by its founders, managers, or governing authorities. Just as the pur-
poses and strategies of individual companies vary widely, so must
their performance measures. Moreover, companies’ strategies are
almost always in transition as markets change. An overemphasis on
TSR for assessing and comparing corporate performance can distort
the allocation of resources and undermine a company’s ability to
deliver on its chosen strategy. - Corporations must create value for multiple constituencies.
In a free market system, companies succeed only if customers want
their products, employees want to work for them, suppliers want
them as partners, shareholders want to buy their stock, and com-
munities want their presence. Figuring out how to maintain these
relationships and deciding when trade- off s are necessary among
the interests of these various groups are central challenges of corpo-
rate leadership. Agency theory’s implied decision rule— that manag-
ers should always maximize value for shareholders— oversimplifi es
this challenge and leads eventually to systematic underinvestment
in other important relationships. - Corporations must have ethical standards to guide interac-
tions with all their constituencies, including shareholders and
society at large.
Adherence to these standards, which go beyond forbearance from
fraud and collusion, is essential for earning the trust companies
need to function eff ectively over time. Agency theory’s ambivalence