First Loyalties: Getting Priorities Straight: In the Second of a Series of Articles on Corporate Governance, Massey University's James Lockhart Argues That the Question of Just Whom Directors Serve Strikes at the Heart of the Good Governance Debate. Get This One Right, He Argues, and Other Elements Will Fall into Place

Article excerpt

In the flurry of debate surrounding the nature of good governance, a notable element has been cast aside. Whatever happened to the notion of trust? To date, the idea that trust may be a common element in governance relations has largely been left to chance.

Yet it is difficult to identify any business transaction or exchange between parties where some degree of trust is not required by either one party or the other, or both. Any purchase or exchange of goods and services is predicated on trust.

The very reason that we have organisations rather than individual contractors is because transaction costs are often significantly lower than the cost of contracts. The role of trust is, therefore, explicit in the creation of organisations.

In the few instances when either party is subsequently revealed to be untrustworthy all hell breaks loose. Both the media and increasingly the internet have important roles in quickly disseminating news of the behaviour of untrustworthy parties.

Sadly the 'good governance' debate has largely focused on eliminating these exceptions rather than attending to the often poor performance of organisations. However, the potential role of trust in the 'good governance' debate is only relevant if roles and responsibilities are well understood.

Through the course of working with directors in research, consulting, education and training we invariably ask who they serve. But a broad array of answers is provided to what ought to be a trivial, almost banal question. We invariably can classify each of these responses into one of three groups.

The first large group of respondents considers that directors are there to serve, or to act in the best interests of, the shareholder. These respondents are typically emphatic in their response and often greet the question with the contempt it deserves.

There is no doubt in their minds that their role and responsibility is to act in the best interest of the providers of equity capital. Whether that provider is the state or a private investor does not appear to moderate this view.

A second, and equally large, group of respondents, considers that the role of the director is to serve a broader group of beneficiaries including shareholders, employees, management, buyers and suppliers, society, and sometimes the physical environment.

Despite the proximity of share holders--recipients of business outcomes (capital)--with other stakeholders--more typically the recipients and beneficiaries of business processes--we classify these latter views into that of serving stakeholders.

By comparison to the first set of respondents, this group often waivers in providing its response, treating the question with circumspection.

We wonder if being asked by academics--albeit ones with strong practitioner interest in business--may engender suspicion.

So often is the answer provided with doubt that we could be forgiven for thinking this audience considers the question a Marxist promotional stunt. …