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Writer's pictureTony Fish

Do shareholders have to live in a Peak Paradox?

For the past 50 years, most business leaders in free market-based economies have been taught or trained in a core ideology; "that the purpose of business is to serve only the shareholder". The source was #MiltonFriedman. Whilst shareholder primacy is simple and allows businesses to optimise for one thing, which has an advantage in terms of decision making, it has also created significant damage. It does not stand up to modern critique and challenges such as ESG. Importantly there is an assumption that a shareholder group was a united and unified collective.

There is an assumption: shareholders are united and unified

The reality is that in a public or investor-led company, the shareholders are as diverse in terms of vision, rationale, purpose and expectation as any standard group of associated parties. Shareholders as a group rarely have an entirely homogeneous objective. Given the dominance of shareholder primacy, how do we know this concept of non-homogeneous actors is genuine. Because there are conflicts among shareholders, which is so large, it constitutes a topic of high practical relevance for academic interest. Two areas dominate research in this area, board performance and board dynamics. Particular attention has been given to conflict that arises when ownership is shared between a dominant, controlling shareholder and minority shareholders.

The majority and dominant shareholders have incentives to pursue personal goals through the business as they disproportionately gain the benefits but do not fully bear the economic risks and can misuse their power to exploit minority shareholders. That is, the majority shareholder may push management and the board to pursue objectives that align with their own priorities but that are detrimental for the minority shareholder. Studies have shown that such conflicts negatively affect a firm's performance, valuation, and innovation. In listed companies, market regulators, using minority protection clauses, try to avoid this abuse of power, but in private equity markets, there is no regulator to prevent this conflict.

Surprisingly, however, far less research has examined whether and how different types of shareholders (even stakeholders) can complement each other so that mutual benefits arise.

In a recent study examining shareholder relationships in privately held firms, the outcomes of private equity investments in privately held family businesses were compared. This research hypothesis was to test if the objectives of professional investors and family owners differ. PE investors focus on maximising financial returns through a medium-term exit and generally have lower levels of risk aversion. Family shareholders, in contrast, generally have most of their wealth concentrated in a single firm, hold longer time horizons, and are often particularly concerned about non-economic benefits the firm brings to the family (e.g., reputation in the community). What is clear is that the reason to trade and have a purpose is critical for any alignment to emerge.

We know that boards and management need to be informed and review shareholders' objectives. Shareholders need to be informed and review the extent to which they are still aligned in terms of time horizons, risk preferences, need for cash, prioritising financial goals, and whether control or dominance of an agenda is constructive or destructive. Which is the segway to the Peak Paradox mapping above.


The fundamental issue is that we cannot make decisions at Peak Paradox and have to move towards a Peak to determine what we are optimising for. For shareholders who optimise for Peak Individual Purpose will want to use a dominant position or minority protection to force an agenda to their own goals. A high performing board, perceived, will optimise towards Peak Work Purpose. This included commercial and noncommercial, where commercial boards will optimise for a single objective such as shareholder primacy. What becomes evident at this point is the question about diversity. Dominant shareholders can create environments where the lack of diversity or thinking, experience, motivation, purpose and incentives serves them and their objectives. This will also be seen as a board that does not ask questions, cannot deal with conflict and avoids tension. Finally, if we move towards optimising for a better society (Peak Social Purpose), we find that we move towards serving stakeholders.

Will society be better off because this business exists?

The critical point here is that stakeholders cannot live with Peak Paradox's decision-making and have to find something to optimise for and align to. This will not be a three or five-year plan but a reason for the business to exist. At Peak Paradox, the most important questions get asked, such as "Will society be better off because this business exists?" Because the same data should present a yes and no answer, and the board needs to justify why it believes it should.


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