Corporate Board and Officers:  How their actions affect investors.

If the purchase of Twitter is completed, market mechanisms will have disposed of their top managers and members of the corporate board. Otherwise, they would still be directing the firm.  Without getting into the debate of whether these executives were steering the company to the right direction, it is important to realize how many of these public company managers lead their business with little or no accountability.

You may ask, if shareholders can benefit from delegating the management and operating tasks to officers and corporate boards, what is the problem with that? Perhaps there may be a group for bad managers but overall, they are adequate, right?   Well, there is concern with how little restriction the managers have in public companies to abuse their discretion and benefit themselves personally.  There are legal and contractual mechanisms but are limited and not all are able to control and constraint abuses of judgment and improper behavior.  The fertile ground is there for those who have power and ambition.

The Risk of Having Others Manage Your Business

There is an inherent dilemma with having people managing the business of others.   Managers and corporate board members vow their loyalty to shareholders but despite their pledge, they have ample leeway to operate and not necessary with interests aligned with shareholders.   Making managers accountable is difficult because they can act opportunistically as they take advantage of facts and operational details of the company that shareholders simply do not have.  This in turn makes it difficult to evaluate and supervise.  In large corporation such as Twitter it is difficult to fire those people whose assignments were to protect shareholder investments and did not do their job. This is partly because shareholders lack the resources or worse because, they  may not even be aware of the problem until it’s too late.

Corporate law and charters may allow shareholders to act, but too many owners cannot manage a business by themselves.  It would be chaotic. There are far too many of them to drive consensus and those who are interested in management, do not have the time, capability, power, or resources to run the business.  For example, of the ten largest Twitter shareholders only 6 had less than 3% stake and 8 had less that 5%.  Imagine the minimal fraction of percentage of control that thousands of other independent investors hold.  Even those large investors have their hands tied because they are generally investment funds that hold many other investments to watch for.

Agency Problem Among the Company Constituents

This reliance on agents to do the job raises a serious issue known as the corporate agency problem. Shareholders trust their welfare based on actions taken by other people called agents which may act, not motivated by the shareholders’ interests but on behalf of their own.

There are several ways to make managers accountable.  Take for example a corporate board of directors. It is created and structured to select and supervise the company’s officers.  Board structure exist by law and by internal corporate agreements. Officers are supervised by the board and shareholders supervise the board.  The urgency to manage the agency problem cascades all the way to the owners of the company.

Owners of a company select corporate boards members to act as a group and not always work together or are effective in supervising their officers.  For example, in some companies, the chief officer of the company is member of the board and even the chairman.  This means having the officer being supervised by itself.  Not very effective, especially if board members are not deeply involved in the operation and the shareholders are unable to hold board directors accountable.

Some CEO’s have such egos that if unchecked they will turn a company upside down no matter the laws.  Board members may attract a comfy prestigious pathway to retirement not accounting for their fiduciary duties. Others think that their job is to cheer and support managers failing to monitor them.  Think of Elizabeth Holmes and the fated Theranos or Enron and Worldcom.

Even if the corporate board member is working to the best if its ability, there is still an information gap between day to day business conducted by  managers and limited  boards  meetings where members probably ignore key operational facts that would allow  proper vigilance.

The possible departure of the officers and corporate board of Twitter is the result of shareholders acting.  This time using a market mechanism.  Shareholder that cannot properly supervise or redirect a company’s agent always have the option to sell their shares as a last resort and invest elsewhere. Those who insist and stay can, if they have the capability, to move other companies to take over. This mechanism of control exposes companies to being taken over by other companies who can acquire a controlling interest in the company’s shares.

Managers who are the subject of takeovers often lose their jobs which is what is about to happen in Twitter. Here a shareholder apparently disagreed with the direction of the company   but by himself did not have the capacity to change the direction, so he gathered another corporation or group of corporations to do so.    This is one very complicated way unsatisfied shareholders make these agents accountable.

If you are an investor of a particularly public company, have you examined how are shareholders addressing the agency problem which by the way also exist between interests of majority and minority stakeholders?   How much these officers have leeway before being held accountable?  Are these large investors pushing their influence to steer the company to a particular direction?  Having managers with the necessary freedom and authority to make decisions is crucial to build a strong business and maximize shareholder value. The task is to balance the risks and the rewards.