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Who does a director serve?
By Norman Wolfe, CEO Quantum Leaders
We all know a director’s number one responsibility is to maximize shareholder value. We are guided to remember we have a fiduciary responsibility to the shareholders of the corporation. But who is the shareholder(s) that I as a director have a fiduciary responsibility to? And when it comes to maximizing value for the shareholder(s), whose value am I to consider?
If I was a money manager making investment decisions, maximizing value would be simple. I would simply ask the investor(s) what is important to them and what do they value, and make decisions accordingly. While the role of the director is similar, who is the “investor” and what do they value?
Maximizing shareholder value and our fiduciary responsibility are always a given in every presentation about directors’ responsibilities. Yet, rarely do I hear anyone answer the question, who is the “shareholder” to whom I, as a director, owe my allegiance?
While most people answer, “it is all the shareholders that I have a fiduciary responsibility to”, I believe this avoids the real question. How do I as a director make investment decisions that maximize shareholder value when there is no homogenous shareholder? I’ll highlight the issue by sharing actual examples regarding key decisions directors are often called to make.
Two long-term shareholder groups, who combined own greater than 50% of the stock, would like to realize a return on their investment. They have independently concluded that the market conditions were perfect for the sale of the company. They believed the sale of the company now would yield a maximum return of their investment and maximize shareholder value. They used this assertion to pressure the board to put the company up for sale.
A second example. A mature company with modest growth was defining a new strategy that would put the company on a more accelerated growth path. The company over the last few years had performed fairly well and had retained a fair amount of cash on its balance sheet. This company had a long-term history where previous attempts to grow the company had only produced spurts of increased growth but nothing substantial or sustained. A number of investors, who combined held about 48% of the outstanding shares, felt the best use of the cash was to pay the shareholders a dividend. By all rights, the shareholders had an excellent point in light of the current performance and previous growth history
Here are two examples where a group of shareholders, who represented either a clear majority or a substantial voting block, wanted the board to vote in their favor. It would be easy to say that as directors, our fiduciary responsibility is to vote the way these shareholders want. After all if such a decision would come before a shareholder vote, they would clearly have sway. Yet our legal council would jump up and remind us that our fiduciary responsibility is to ALL the shareholders, and directors must think about the wants of each shareholder including those who hold only a few shares of the firm.
So here we have the dilemma of who do we serve and more importantly on what do we base our decisions? As I have shown, it is not easy because there is no one shareholder. So, who do directors serve? What framework or context can they use to make decisions that would fulfill their fiduciary responsibility to all shareholders?
We can turn to the Business Judgment rule for guidance on this. The Delaware Supreme Court has said, a court "will not substitute its own notions of what is or is not sound business judgment" (Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)) if "the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." (Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971))
As long as the director is, in good faith, making a decision they believe to be in “the best interest of the company” they are fulfilling their role as a director. This leads to the question, “who is The Company and what is in the company’s best interest?”
From my own experience leading many organizations of varying sizes, as well as from that of the many organizational leaders I have had the good fortune of working with over the years; one thing has become very clear to me. While a corporation is clearly a defined legal entity, with all the rights of any “person”, the metaphor is broader than just the legal arena. A corporation is in fact just like a person. It is a living entity with its own purposes, its own soul. It is the soul of the corporation that directors serve when they decide in the best interest of the company.
For more on the soul of the corporation and how the director can use this to guide their decision download the full white paper on
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