Preface
Recent financial crisis has given rise to the notion that the relationship between government and the commercial sector is in need of being "reinvented" and that government should be given broader authority in the financial system. In this context, the author intends to reconsider what a "firm" is, what business leadership should be engaged to achieve, and how companies can be improved by tighter external control.
The Current Corporate Governance Debate
In western countries, the practice of government is to react in the aftermath of a crisis by instituting regulations intended to prevent the same thing from happening again. For example, the US Congress passed the Sarbanes-Oxley act in 2002, in the wake of the financial meltdown that occurred as a result of the technology bubble. It was enacted too late to have any ability to mitigate that crisis, and was found to be entirely ineffective at mitigating the housing bubble that occurred less than a decade later.
The proposal of additional legislation frustrates many business executives: it presents a tremendous expense in compliance to regulation that ultimately fails to achieve its intended objectives. Moreover it cedes control over their organizations to regulatory authorities that have little knowledge of business, no familiarity with a specific corporation's idiosyncratic situation and challenges, and no inclination to act in the best interest of shareholders.
Given that the discussion generally occurs after a crisis has arisen, and that the intrusion into corporate affairs in the wake of past crises has done nothing to prevent or mitigate the crises that came afterward, there seems to be little value in regulation.
The author asserts that the reason that such efforts have been impotent is that they tend to consider only the specific qualities of a given crisis in a superficial manner, and fail to get to the root of the problem that, it turns out, is common to all of these crises.
There is in general a very poor understanding of what a "firm" actually is: its operations, its internal control systems, its risk management systems, its financial goals, etc. If we are to understand the cause of pandemics, we must first being with a fundamental understanding of the physiology of the firm itself.
The Firm's Purpose
This book aims to rethink the fundamental purpose of the firm, and explore how a firm can become a respected institution through better leadership and government. As corporations have become vital institutions for society, we cannot afford merely to let them crumble, and the notion that the system of capitalism can be promptly disposed of in favor of something else (which is not clearly defined, either), is not merely unreasonable, but wholly illogical.
Better regulation of firms might help, but the question remains as to what, specifically, the new regulations should encourage firms to do. Legislation cannot compel a firm to achieve a specific outcome: it can only given the means by which a firm operates in hope of achieving that outcome.
Corporate performance is driven by leadership and management displayed by the board of directors and the senior management team, the goals they set, the strategy they adopt to achieve them, and the orders that are executed to implement that strategy. All the activity of a firm derives from these bases, and the results that they achieve are a consequence.
The origins of all of this stems from an understanding of a company's purpose and role in society: this is foundational to the setting of objectives, which in turn drive strategy, actions, and consequences. Specifically, firms exist to provide goods and services that the customers are willing to purchase. Their product is their contribution to society, and their revenue is its sole reward. Where board members and executives lose sight of this fundamental purpose, they do considerable damage to their companies. Where regulators lose sight of the fundamental purpose, they forcibly steer not one firm, but an entire industry or economy, in the direction of disaster.
(EN: Perhaps it's pulling at threads, but "to provide goods and services that the customers are willing to buy" seems a bit too specific, and would benefit from being more broadly phrased as "to provide value to its customers" as the products and services are the embodiment of the value for which customers pay, and are prone to change over time. A firm that senses its purpose is to provide a specific good is setting a course for obsolescence.)
Business Leadership
The governance of a firm is generally taken to mean the regulation of a firm by external (government) authority; but government goes well beyond regulation, to internal governance that is implemented by the firms;' management team over its internal processes and practices. The author likens the board and executives to the lungs of a company: where they are not working at full capacity, the health of the entire firm is compromised.
(EN: That is a very weird analogy, which may be a bit too oblique to the point I think the author is attempting to make: there are many firms that are completely capable of perpetuating their daily functions without the oversight and guidance of the board, but such firms tend to run amok - departments may be working at odds with one another, some headed off in the wrong direction, and generally seem to be getting things done until the lack of coordination and oversight results in either a breakdown or severe dysfunction.)
Good leadership requires professionalism, innovation, initiative, integrity, stewardship, and culture building that are derived from the character of the senior management. This does not, and cannot, come from external regulation.
Firms As Respected Institutions
The notion of a firm being a "respected institution" seems almost quaint and outdated ... but it is not entirely obsolete. Much consternation is directed at corporations, specifically and in general, as the scapegoats of financial crises. But customers each can identify firms for whom they have deep respect and loyalty.
Originally, a firm's reputation was based on its products, and the value they deliver to the customer remains a strong pillar of the reputation of a firm. Today, a firm's reputation also considers its corporate culture, its behavior in its industry, and the way in which it benefits society at large.
(EN: There is something of a dual meaning to reputation - and it begs the question, "reputation to whom?" Specifically, the customers of a firm have a sense of a firm's reputation as a result of its service to them, but there seem to be many third parties who see fir to chime in - people who do not buy from a firm, do not do business with a firm, but yet seek to promulgate their opinions about the firm, and presume that they should have influence as well. Especially given the author's previous statement about the purpose of the firm, it would seem to follow that these third-parties are incidental and inconsequential. Unfortunately, most government regulators fall into this category, and must pander to the desires of voters who do not have a valid claim to a stake.)
Firms As Profit Generators
The author oblique refers to the conflict for a firm that seeks to appease the conflicting demands of customers and shareholders. This has been the issue that has fueled many of the financial crises in recent years.
Where profit maximization becomes the chief concern of the firm, the sense of obligation and fair-play that might otherwise exist in relationships with any other party (customers, employees,, suppliers, competitors, and all of society) decays.
In particular, emphasis is given to short-term performance and immediate results, with little concern for the long-term viability of the firm. The recent crises, and likely many of the crises that proceeded them, demonstrate that such an approach tends to rot a firm slowly from within - a slow cancer that is seldom detected until the firm has become thoroughly diseased and the outlook is terminal.
This is the reason it is more important than ever to rethink what firms are, consider their purposes, and put in place the internal governance that is necessary to preserve their reputation and sustainability.