Written by Lawrence Zammit, 25 November 2013
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Many would say that the primary function of a board of directors would be to increase shareholder value. After all board members are appointed by the shareholders who in turn expect the directors to take those decisions that would eventually deliver improved results – be they in form of increased profits, be they in the form of increased equity value. Directors are expected to adopt as dogma the principle that the purpose of business is business.
Therefore is one being out of touch with reality when one expects directors to adhere to values and ethics and to make decisions with the knowledge that the outcome must be good for society, as well as their business? Maybe this is what distinguishes competent directors from wise directors.
With all the competence in the world the business sector could not avoid the numerous scandals that came to light in the last five years. Neither did it manage to recover from the economic recession quickly, in spite of the various economic stimuli adopted by governments.
On the other hand, wisdom at board level helps directors to judge goodness. They would be able to discern what is morally acceptable and what is morally unacceptable and to do the right thing. This does not mean that promoting shareholder value does not lead to goodness. It does. What it means is that decisions taken to enhance shareholder value are based on ethics and values.
Without a foundation of values directors may end up taking decisions that do deliver higher shareholder value but which are morally wrong. Competence on its own does nor guarantee this as it needs to be supported by wisdom.
A taste of this wisdom is provided when directors quickly sense what is behind a situation, anticipate the consequences of a particular action, understand the nature of events, and grasp the essence of things.
They can achieve this if there is ample debate on the company’s strategy and values; if they set the tome from the top rather than rubber stamp what is given to them; if they seek effective feedback from stakeholders. Above all directors need to set for themselves objectives and measure their performance against these objectives.
A former President of Toyota, the Japanese carmaker, was once quoted saying to his colleagues: “To do what you believe is right. To do what you believe is good. Doing the right things, when required, is a calling from on high”. I believe that wisdom is required at Board level to ensure that directors do the right thing.