America has always had an uneasy relationship with brilliance. Cultural tropes, like the mad scientist or the nerdy computer whiz, show both a respect for high accomplishment and an anxiety about how smart people fit into society.
This cultural uneasiness is most apparent in the educational realm. Schools recognized the existence of students with high academic aptitude by providing them with gifted programs and advanced classes. Outside of school hours, many sponsor honor societies or academic competitions. And the old tradition of publicly recognizing a graduating class’s valedictorian remains strong.
However, the educational industry has never let these programs shake the field’s commitment to egalitarianism. The spending on education in the United States is disproportionately directed towards struggling children. Sometimes this policy is explicit, such as earmarking billions of federal dollars annually for special education and little or nothing for advanced academics.
Other policies implicitly support struggling learners more than students who excel, such as the No Child Left Behind Act and its successor, the Every Student Succeeds Act, which encouraged states to reward schools that help struggling students reach basic proficiency levels. These laws, though, did not incentivize or reward schools for helping students reach high levels of academic accomplishment. As a result, the numbers of high achievers stagnated.
Equity over excellence
This truce of carving out a few advanced programs and classes from a system concentrated on educating the lowest performing students worked reasonably well for decades. However, that arrangement was shattered within the past few years in the United States as districts and states embraced “equity” initiatives with the goal of achieving equal outcomes across individuals as well as groups.
The policies inevitably sacrifice bright and high achieving students to the social goals of activists. The push to hobble high performing students in order to achieve equity can take many forms. In Oregon, the state legislature eliminated the requirement that students pass a high school exit exam to demonstrate proficiency in reading, mathematics, and writing for two years until the state can re-evaluate its graduation requirements.
The reason: the testing requirement was “inequitable” because higher percentages of black and Hispanic students were failing the test. The impetus to eliminate tests that show differing levels of academic success is also apparent in admissions tests. At the Thomas Jefferson High School for Science and Technology, a magnet high school in Virginia often touted as the best high school in the country, admission is no longer based on high test performance.
Instead, a new system assigns seats at the prestigious school so that each region in the school district is evenly represented, and then all students that meet basic criteria (a 3.5 middle school grade-point average) are entered into the lottery. The result is a student body that is more racially diverse (from 73 percent Asian to 53 percent Asian, from one percent black to seven percent, and from three percent Hispanic to 25 percent Hispanic), but much less academically elite.
Magnet schools in Philadelphia and Boston also revamped their admissions procedures to de-emphasize tests and to improve the admission chances for Hispanic and black students. Reducing or eliminating the impact of admissions tests is not unique to high schools. Concerns about equity have also caused universities to make college admissions tests optional for applicants.
College admissions tests show well-known differences in average scores, and applying the same admissions standard to all groups will inevitably admit higher scoring groups at higher rates than lower scoring groups. This mathematical reality makes admissions tests a target of equity advocates. The test-optional movement has been underway for many years, mostly at small liberal arts colleges. Making standardized tests optional seems like a good idea to counteract the unequal admissions rates across groups.
However, research shows that it does not improve the socioeconomic or racial diversity of a student body. It does, however, raise a college’s reported test score average (because low performing applicants choose not to report scores), which improves the school’s rankings. Test-optional universities also increased tuition at higher rates than universities that required test scores. None of these developments help disadvantaged students.
The test-optional movement accelerated recently during the COVID-19 pandemic and in response to growing concerns about equity. The movement to drop testing requirements reached its greatest success when the regents of the University of California system voted to make admissions tests optional for applicants—despite their own faculty making a strong recommendation against a test-optional policy.
Even this move towards lowering standards was not enough. Advocacy groups sued the University of California system, which settled the lawsuit by agreeing to ban the consideration of any test scores in the admissions process. This outcome was exactly what university president Janet Napolitano had previously proposed and what many California politicians had wanted for years. What an amazing coincidence!..Continue reading..
Shell is one of the largest energy companies in the world. Although many of us may associate it primarily with oil and gas, it has embarked on an ambitious energy transition agenda in a bid to move away from the use of fossil fuels toward green and sustainable energy.
This includes targets of reaching net-zero carbon emissions by 2050 or sooner, as well as a more immediate goal of reducing scope one and two emissions by 50 percent by the end of this decade.
In order to do this, it is leveraging several new technology trends that are proving themselves to be revolutionary in many industries beyond their own sector. These include artificial intelligence (AI), the internet of things (IoT), and – as we will see in this article – Web3 and blockchain.
Blockchain is best known to most people as the technology that underpins cryptocurrencies like Bitcoin. The simplest way to think of it is that it’s essentially a relatively new form of database format. Blockchains have two key features that make them different from other databases. Firstly, rather than being centrally located on a specific computer or server, they are distributed. This means they are spread across multiple computers, so no one person is in direct, overall control, and all changes have to be validated by consensus.
Secondly, they are encrypted, meaning they are effectively tamper-proof, and only people with permission can add to them or edit the data they contain.
These two features, in combination, make blockchain ideal for applications where data needs to be added, checked, and validated by multiple parties, and security and integrity are of utmost importance. A good demonstration of its robustness can be seen in the fact that the Bitcoin network itself handles 270 million transactions every day, is worth (as of writing) around $400 billion and has remained secure throughout the 13 years of its existence so far.
These features make blockchain an attractive technology for global organizations like Shell, which need hyper-secure, scalable technology solutions to drive a new generation of applications involving collecting and sharing valuable data. Their “trustless” nature improves the current processes used across the industry, helps to reimagine energy value chains via tokenizing energy to create transparency & traceability, and creates new markets and new business models with DEFI / DAO’s / NFT’s etc.
Recently, I was joined by Dan Jeavons, VP of Computational Science and Digital Innovation at Shell, as well as Shell’s blockchain lead, Sabine Brink, to discuss some of these projects on my webinar.
Brink tells me, “The intersect of digital and energy is one of the most exciting spaces. Looking at how do we utilize this technology – web3, blockchain that accelerate the energy transition. This is an extremely motivating journey to be on.”
This enthusiasm has led to her spending the past five years examining every area of the business where blockchain and related Web3 technologies could be implemented in order to drive sustainability and green energy goals. A number of projects have emerged out of this, and the most promising are now moving into pilot and production stages, where it is hoped their ability to drive real global change will be realized.
In particular, I was interested to hear how the energy giant is using blockchain to trace and verify the provenance of energy created from renewable sources. As the world has come to appreciate the urgent need to transition towards sustainable energy sources, huge rewards – both in terms of financial incentives and customer loyalty – have emerged for organizations that work towards affecting change.
The process, however, is often opaque – it’s difficult for customers or partner organizations to really be sure exactly how clean a specific energy source or supplier is. Jeavons and Brink explained to me that Shell has developed a blockchain-based system that can demystify the complex web of sources.
He says, “So if you look at the electricity market today, we have energy attribute certificates (EAC) that represent green energy or grey [non-green] energy generated in a given month or year. For companies that aim to run on 100 percent green energy, their monthly or yearly certificates may match their total energy consumption, but when the sun doesn’t shine, and the wind does not blow, grey energy is actually being consumed. So it’s hard to claim that they are actually consuming green energy on a 24/7 basis.”
Shell’s solution involves creating highly granular certificates in real-time at the source where the energy is created – which could be solar panels in the desert or wind farms in the ocean – to represent the green energy produced at every half hour, in sync with established energy attribute certificates systems. Every point of that electron’s journey to the point that it is consumed is tracked and recorded on a blockchain.
“This is one of those solutions where blockchain creates the transparency and assures us there’s no double-counting of electrons in the system; we believe this could be a game-changer,” Jeavons tells me.
Another project which has just made the leap to pilot phase is an ambitious venture between Shell, Accenture, and Amex aimed at increasing the availability and use of sustainable aviation fuel (SAF).
Brink says, “To me, this is one of the most exciting projects we’ve been working on. I’m very proud of the team. It’s one of the first public blockchain solutions that creates a credible and transparent way to help decarbonize the aviation sector. Thanks to its inherent technical features, blockchain offers verifiability, transparency, and security of environmental attributes of SAF.”
The product is Avelia – one of the first blockchain-powered book-and-claim system which will offer around one million gallons of sustainable aviation fuel (SAF) and associated environmental benefits to corporates looking to reduce emissions from their business travel.
Currently, there is insufficient SAF available at an affordable price. It’s hoped that through aggregating demand for SAF among corporate travelers who form a more concentrated segment than leisure passengers, there will be a reduction in the price – with SAF currently priced significantly higher than equivalent conventional aviation fuels. However, a growth in demand for the fuel will theoretically lead to suppliers increasing investment in production and, therefore, an eventual fall in price.
“It’s really hard to decarbonize the aviation sector,” Brink tells me. “Decarbonizing the aviation sector cannot happen overnight. Today we do not have large-scale airplanes that can be powered by green electricity that are able to travel the world. Sustainable aviation fuel is actually a solution – sustainable aviation fuel that we can utilize today and implement with existing infrastructure.
With Avelia, we hope to demonstrate that the tracking of SAF data at scale can be delivered in a credible manner, thereby proving to decision-makers that a mechanism for corporations and airlines to book and claim SAF is an acceptable form of emission reduction. In turn, this creates increased demand signals to structurally scale the SAF production required to reduce emissions in aviation.”
Other blockchain and digital transformation projects currently undergoing evaluation or pilot status at Shell involve “digital passports” to track the lifecycle of industrial parts, equipment, and machinery at energy plants operated by the company and its partners.
Of course, all of this technology-driven transformation is driven, at its root, by data, and Shell has worked to implement an integrated data platform that aggregates 2.9 trillion rows of information harvested from all areas of its business. This includes IoT sensors installed across its plants and wind and solar farms, ultimately allowing it to create digital twin applications to help it better understand the operation of its assets.
Jeavons says, “This is what my team is so excited about – the potential to do this at scale. We’re rolling out digital twin … we’re rolling out AI … and when you put that together with traceability, we believe we could bring to market a whole raft of decarbonization solutions … where we could partner with our customers to help them accelerate their own decarbonization journeys. We’re just getting started.”
With the Covid-19 vaccine rollout steadily gathering steam, and an overwhelming desire to get back to business, companies face a difficult choice: should they force employees to get vaccinated? And if not, how can they encourage workers to roll up their sleeves? Bloomberg Businessweek spoke to Kevin Troutman, a Houston-based lawyer who co-chairs the national healthcare practice of the law firm Fisher Phillips. This interview has been condensed.
Could an employer face some liability if its workers aren’t vaccinated?
Workers comp laws are the exclusive remedy for illnesses and injuries contracted in the workplace. But employers also have to be concerned about following OSHA guidance, and we expect that OSHA is going to be issuing some COVID-specific standards. They’re going to at least say, I think, make the vaccines available to your employees, and it will be a violation if then you fail to do it. You could be fined and penalized and, you know, OSHA can hand out some substantial fines. So it can be it can be pretty significant.
What should employers do then to encourage employees to take the vaccine?
One thing that is really important is to share reliable objective information with employees, to try to dispel any misunderstandings or misconceptions that are out there. Ideally, the information should come from local healthcare providers — maybe arrange for a doctor in the community to just come out and maybe talk to their employees, answer some questions and help employees to understand the issues better.
If leaders of the organization believe that vaccinations are the right thing to do, and they are out there explaining it, and providing reliable information, and even setting an example and saying, “Hey, I’m getting vaccinated,” I think those things will help get employees more comfortable with taking the vaccine.
What about offering incentives for getting vaccinated?
A lot of employers think, “Well, I’ll just offer some money and, and get people to take the vaccination, and it’s as simple as that.” Unfortunately, it’s not as simple as that. All medical information is supposed to be treated as confidential — you’re not supposed to get that information and then use disability-related information to discriminate against an employee.
The thinking has been that if an incentive is large enough, that might make some employees feel pressured to disclose medical information in order to qualify for the incentive. On January 7, the EEOC issued a proposed rule that you can only offer what they call a “de minimis incentive” — like a water bottle or a gift card of modest value, which we think is around $20 or $25. Those rules were put on hold as part of the transition in administration and then withdrawn, so right now the EEOC stance is in limbo.
Now, a lot of employers are saying, “we’ll pay you for your time to get vaccinated, and maybe allow two hours or something like that.” I think this is a good approach. The employer can say it’s not an incentive. If the EEOC disagreed, the next thing you do is say that’s not enough to be coercive.
What are the risks to requiring your employees to get vaccinated?
Well, if you’re able to work through the people who say they need an accommodation, because of disability or religion, then the risks are you’re going to have 20 to 40 percent of your workforce just very upset, very distracted and not as productive as they would be. Do you want to have to fire them? You probably could legally, but as a practical matter, do you want to fire that many employees?
Is that worse for your company than having 20 or 40 percent of your employees not vaccinated?
I think each company has to decide. It depends a little bit on what you do, and how much interaction do you have with the public. One place it would make a lot of sense to mandate vaccines would be health care, where you’ve got some responsibility for the health and safety not just of yourself and your employees, but of people who are placed in your care. But even in the healthcare industry, I’m not seeing a huge rush to mandate vaccines. They’re making it available. But they’re not mandating it, whereas they have required flu shots.
Have you seen any particular industries that are inclined to mandate vaccinations?
We did a flash survey among clients and people who maintain regular contact with us. We got about 700 responses, and the agricultural and food production industry was at the top of the list among our respondents as to who was expecting to mandate the vaccination. But that was still only about 18 percent of the group.
How might this conversation be different in, say, July or August?
I think the legal issues are going to stay largely the same unless we get more guidance on incentives. From a practical point of view, by mid summer, we should see that a lot more people have been vaccinated. And we’re also going to have more data and more information to tell us more about side effects, and effectiveness of the vaccination. And we may know more about the extent to which being vaccinated prevents a person from transmitting the virus.
All of which will enable us then to improve our messaging to our employees, about why the vaccine makes sense and the risks, or lack of risks, associated with it compared to the benefits. And that’s going to give businesses a better idea of what’s feasible and what they’re going to do.
The contention that the shareholders own companies is based, at best, on lack of understanding of the law, of business, and of history. At worst, it is driven by greed, power, and the desire to protect a business governance that has devastated much of America for some 40 years.
Why, you might ask, is the issue of who owns the corporation so vitally important? Because at the heart of the debate between two versions of capitalism lies controversy. One side feels a deep need to protect the interests of the shareholder first and foremost. The other side feels the pain that comes from de-prioritizing the other stakeholders in a corporation – including its employees, customers, and the community in which it lives.
In truth, the shareholder almost certainly will do as well with either version of capitalism. Change is always hard and threatening to those wanting to protect the status quo even if it won’t cost them a thing. But I contend there is a problem with the status quo, with the current version of capitalism, which serves the shareholders well, but has proven to be catastrophic for the vast majority of the American people and detrimental to American competitiveness on the global stage, particularly in our economic rivalry with China.
Further, it is now proving to be a major threat to our democracy. Thus, a change away from shareholder primacy capitalism must be made decisively and with utmost urgency. The defense of the status quo—shareholder primacy governance—rests increasingly on the rationale that the shareholders are the true owners of the corporation and therefore have the right to demand whatever is in their best interest.
But before we blindly adhere to that idea, it is vital we examine these versions of capitalism, the experience the nation has had with each; and why the issue of corporate ownership becomes an important – if not central — consideration.
Capitalism And Its Multiple Versions Of Governance
The ferocious debate in the U.S. today is really between two forms of capitalism. Not of capitalism itself which continues to be the most powerful economic engine ever created by humankind. Capitalism by itself with access to needed resources, including capital, labor, and a sustainable supply chain and embracing the principles of prudent risk taking, wise apportionment of incentives and rewards, and a commitment to practical long-term investment—acts like a brilliant inanimate engine.
It has no ethical or moral components. And that’s why the governance, the rules of engagement, become so very critical. Vitally, governance identifies the beneficiary of this amazing capitalist engine. In China, the capitalism engine is working brilliantly given what China intended. And there, the major beneficiary of much of the value creation goes to the Communist government. In some Nordic European nations, capitalism rewards both shareholders and, through taxes, government projects which provide citizens with some combination of free education and/or free healthcare. Much of Europe, through taxes, has a very elaborate societal safety net. But the engine is still primarily free enterprise capitalism.
Shareholder Primacy Capitalism
In the United States, the governance for the last 40 years has been clearly committed to give the shareholder priority over any other company stakeholders. This is the concept of shareholder primacy every CEO and board director knows: The purpose of business is to maximize short-term shareholder value. Recently, it has been contended that this is fair and just because the shareholders own the company.
The other stakeholders, for the last four decades, became secondary: the customers, the workers, the corporation itself, the vendors, community, the planet. Even in this system, the capitalist engine worked magnificently. As intended, it drove short-term shareholder value to unimaginable wealth and prosperity. The other stakeholders became deprived and exploited. And the guardians of this governance became the financial community which enforced the system with aggressive brutality.
The CEOs and others in the C-suite of top corporations became corrupted by equally unimaginable compensation, as long as they delivered on this shareholder demand. And if they couldn’t or didn’t do it, they were summarily dismissed. If and when the CEOs and boards of directors tried to deviate from this strict behavior, the company was punished by the financial community which has the power to drive down the company’s price in the stock market.
Before the pandemic, Bank of America downgraded Chipotle’s stock because an analyst decided the company was paying its workers too much. As a result, the company’s price declined by 3%. When American Airlines announced pay raises for its pilots and flight attendants, Wall Street punished the company by dropping its stock price 5%. The message sent to the market was clear — workers were to be squeezed and the benefits belong to shareholders. So, for 40 years workers’ wages have been relatively flat sitting at, or often below, inflation.
Lastly, in the past decade, shareholder primacy expanded the intensity of activists who acted like terrorists, blackmailing and terrorizing CEOs and corporate boards alike. Historically, activists have served the business community well. Often, they worked with management to help increase value creation. Occasionally, they did take over the company with intention to hold the stock and capitalize on the inherent, but previously underperforming, value creation.
But this new group of activists employ a different strategy. They take over the company, take out the cash, cut R&D, fire as many people as possible and in the shortest possible time, flipping the company after taking it public or selling the corpse to a strategic buyer. All in the name of maximizing short-term value. Of late, they don’t even have to take over the company. They buy in to the target company and threaten to run their standard play if the company will not “voluntarily” provide that extra short-term value at the expense of all the other stakeholders.
Another brutal tactic to drive shareholder value is the tax efficient practice of stock buybacks. Trillions of dollars have been created to benefit current shareholders in the stock market by reducing the number of available shares. This artificially increased the value of the remaining shares, without creating organic value to the enterprise. This is financial engineering at its best. (Prior to 1982, stock buybacks were illegal and were considered stock manipulation.)
In the first four months of 2021, the stock buybacks practice continued and recorded the highest levels in 20 years. And what a negative impact this extraordinary use of operating profits turns out to be. Workers are grossly underpaid. And corporations that used to lead the way by investments in R&D and basic research were starved by this choice. America used to be the leader in technology, transportation, semiconductors, computers, medical science and more.
For example, America invented synthetic biology but now we trail Chinese scientists. And where are we on 5G technology? In a recent interview, Intel CEO Pat Gelsinger cried out, “Our competition is out to eat our lunch. And if we don’t fight for it, every single frickin’ day, we are at risk of losing it.” Government investment support continues to be anemic as well. Simply put, business must step up. Because right now we’re setting stock buyback records. We are world champions at this, indeed.
But the most cruelly treated victims of shareholder primacy were the workers. Their unfair, unjust, and unreasonable wages created a catastrophic microeconomic disaster. It affected families; it created an unequal quality of education which placed American kids at the bottom half of the developed world. It also catapulted America as the most unequal nation with the most immobile society among peer nations. Just one more fact.
Prior to the pandemic, some 60% of American homes had to borrow money most months to put food on the table, or to pay to keep from losing the roof over their heads. So, this is the fallout from the shareholder primacy system. A perverse version of capitalism that the shareholder community today is fighting to protect. And it’s finding some allies in Congress as well, who are the recipients of huge contributions to their reelection campaigns.
Another serious impact of four decades of shareholder primacy is our democratic way of life. The affected Americans are losing hope in our government’s ability to be fair and just. Populist forces have exploited this group and authoritarian forms of government sprang forth in various parts of the world in the last 40 years (Turkey, Hungary, Poland). The same movement has been active and threatening our democratic institutions here in the United States.
This unjust version of capitalism is the driving force that created our vast socio-economic inequality here at home. It must be noted that the most egregiously affected and deprived groups in our society have been the black and brown communities as the Covid-19 pandemic so tragically demonstrated.
But if the shareholders do not own a public corporation, how can one continue to defend such a flawed and damaging form of capitalism? And this is why the question of who owns the corporation becomes an important part of why a better, more just, more balanced form of capitalism is absolutely America’s best choice moving forward.
So, Who Really Owns The Corporation?
Simply and clearly, the corporation owns its own assets. In the simplest terms, a private company became a public company when the original owners gave up ownership. In turn, they received a stock certificate outlining certain rights to profits and other privileges. What they got, again, was a stock certificate not a certificate of ownership. The word “ownership” does not appear in that document.
Additionally, while the shareholders are entitled to a portion of profits, as shareholders, they are no longer exposed to liabilities of the companies in which they hold shares. They are granted, in essence, total immunity! Furthermore, the shareholders can come into a stock whenever they want, and leave when they want (with very, very few exceptions). In today’s world, the stock owner may be a machine and shares may be held in a timeframe of milliseconds.
To me, these facts are ample and logical evidence that preclude a shareholder from being a true owner. Do you know any business “owner” large or small who assumes no risk or liability? I highly doubt it. Legally, there is no evidence that stakeholders are owners. No law – absolutely none— can be found which states that shareholders own the corporation.
In her 2012 book The Shareholder Value Myth, Lynn Stout, who taught at Cornell University Law School, successfully argued that shareholders don’t own the company – this was the foundational insight of that book. The lie being purveyed was that the law required companies to serve shareholders with as much profit as quickly as possible. She was quick to dispel the notion, citing three core reasons:
Directors of public companies aren’t required by law to maximize shareholder value. Companies are formed to conduct legal activities, that’s all, and profit is not a mandatory requirement, though profitability is always an advantage.
Directors of a company have full control of it. Shareholders have no legal right to govern the activity of a company for their own benefit. Directors can decide to reduce, not increase share price, if they believe it’s in the best interest of the company itself.
Shareholder primacy, where short-term profits are the primary goal, often leads to tragic consequences for the common good.
How prescient Stout’s comments turned out to be.
For those desiring a more in-depth explanation, one can find it in the words of Marty Lipton, arguably one of the most respected iconic stewards of American corporate law. When participating in a roundtable discussion hosted by the American Enterprise Institute, Lipton concludes that the shareholder fundamentally does not own the corporation. In his own words, “I don’t view the shareholders as outright owners of the corporation in a way one would own a house or a car.
They’re investors in the corporation and own the equity, and they are thus important constituents, but they are not the owners of the corporation as a whole. And for that reason the company should not be run solely in the interest of the shareholders.” He adds, “corporations can only exist within the overall umbrella of government and society.” His dispassionate rigor and logic are most convincing.
The full roundtable transcript for those interested is here. Then there’s an “agency” ownership argument. Joseph Bower and Lynn Paine laid that argument to rest in a seminal piece in the Harvard Business Review in 2017. Conclusively, the shareholders are owners of stock in the corporation. They are not the owners of a corporation’s assets. There can be no further, reasonable argument.
The Best Path Forward For Business: Stakeholder Capitalism
Multi-Stakeholder Capitalismwas the capitalist governance that started the modern capitalism era in America in 1945. It lasted for some 40 years. During this period, America became the most dominant economic and military nation in the world. In addition, America’s middle class grew to remarkable size and wealth. This group became the world’s largest economic market.
Remarkably, in this 40-year period, the middle class’s value grew more than twice the rate of America’s top one percent (by income). It was a period when most all segments in America saw significant economic progress (a tragic exception was most of the African American community). Business clearly understood the power and meaning of this multi-stakeholder capitalism.
The Johnson & Johnson Credo brilliantly encapsulated this business responsibility in a truly authentic document of historic importance. Thus, multi-stakeholder capitalism is not an experiment. It is a remarkable 40-year demonstration period in our business history. Moving from history to present day relevance, JUST Capital has become the leading not-for-profit organization promoting the adoption of stakeholder capitalism.
(As a disclosure, I serve as a director of JUST Capital.) It ranks the largest 1,000 corporations in America on a “justness” criterion — as defined by the American people via polling —a surrogate for the principles of stakeholder capitalism. The findings are dramatic. Many of the most “just” companies also deliver the greatest return to the shareholders. As I noted earlier, stakeholder capitalism works superbly well in producing long-term shareholder value. Think about it. Workers now receive a proper living wage.
They produce incremental value for the corporation, motivated by sharing in the incremental value they create. The key is that incremental value is now produced. Next, corporations invest more in R&D and Basic Research to compete with China and other nations. The planet will become more livable by their ESG commitments. All these activities in a synergistic and symbiotic way produce that greater long-term value for shareholders. This is what Milton Friedman truly advocated.
It turns out that shareholder primacy and its devastating consequences promptly belong in the dustbin of history. Freed of the false myth of corporate ownership and it’s dangerous governance, stakeholder capitalism opens the door to the entrepreneurial power of a truly free version of capitalism that can lift all boats and create inclusive prosperity for all Americans.
In the end, stakeholder capitalism is one of the essential pillars of a sustainable democracy and the journey to create an equal opportunity for all future generations. That vision is worth the battles we must fight today. So, onwards.
Peter Georgescu is the Chairman Emeritus of Young & Rubicam Inc., a network of preeminent commercial communications companies dedicated to helping clients build their businesses through the power of brands. I served as the company’s Chairman and CEO from 1994 until January 2000. For my contributions to the marketing industry I have been inducted into the Advertising Hall of Fame. I immigrated to the United States from Romania in 1954. I graduated from Exeter Academy, received my B.A. with cum laude honors from Princeton and earned an MBA from the Stanford Business School. In 2006, I published my first book The Source of Success, asserting that personal values and creativity are the leading drivers of business success in the 21st Century. My second book, The Constant Choice, was published in January 2013. My latest book is Capitalists Arise! which deals with the consequences of income inequality and how business must begin to help solve the problem
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The role of the Board in relation to cyber security is a topic we have visited several times since 2015, first in the wake of the TalkTalk data breach in the UK, then in 2019 following the WannaCry and NotPeyta outbreaks and data breaches at BA, Marriott and Equifax amongst others. This is also a topic we have been researching with techUK, and that collaboration resulted in the start of their Cyber People series and the production of the “CISO at the C-Suite” report at the end of 2020.
Overall, although the topic of cyber security is now definitely on the board’s agenda in most organisations, it is rarely a fixed item. More often than not, it makes appearances at the request of the Audit & Risk Committee or after a question from a non-executive director, or – worse – in response to a security incident or a near-miss.
All this hides a pattern of recurrent cultural and governance attitudes which could be hindering cyber security more than enabling it. There are 3 big mistakes the Board needs to avoid to promote cyber security and prevent breaches.
1- Downgrading it
“We have bigger fishes to fry…”
Of course, each organisation is different and the COVID crisis is affecting each differently – from those nearing collapse, to those which are booming. But pretending that the protection of the business from cyber threats is not a relevant board topic now borders on negligence and is certainly a matter of poor governance which non-executive directors have a duty to pick up.
Cyber attacks are in the news every week and have been the direct cause of millions in direct losses and hundreds of millions in lost revenues in many large organisations across almost all industry sectors.
Data privacy regulators have suffered setbacks in 2020: They have been forced to adjust down some of their fines (BA, Marriott), and we have also seen a first successful challenge in Austria leading to a multi-million fine being overturned (EUR 18M for Austrian Post). Nevertheless, fines are now reaching the millions or tens of millions regularly; still very far from the 4% of global turnover allowed under the GDPR, but the upwards trend is clear as DLA Piper highlighted in their 2021 GDPR survey, and those number should register on the radar of most boards.
Finally, the COVID crisis has made most businesses heavily dependent on digital services, the stability of which is built on sound cyber security practices, in-house and across the supply chain.
Cyber security has become as pillar of the “new normal” and even more than before, should be a regular board agenda, clearly visible in the portfolio of one member who should have part of their remuneration linked to it (should remuneration practices allow). As stated above, this is fast becoming a plain matter of good governance.
2- Seeing it as an IT problem
“IT is dealing with this…”
This is a dangerous stance at a number of levels.
First, cyber security has never been a purely technological matter. The protection of the business from cyber threats has always required concerted action at people, process and technology level across the organisation.
Reducing it to a tech matter downgrades the subject, and as a result the calibre of talent it attracts. In large organisations – which are intrinsically territorial and political – it has led for decades to an endemic failure to address cross-silo issues, for example around identity or vendor risk management – in spite of the millions spent on those matters with tech vendors and consultants.
So it should not be left to the CIO to deal with, unless their profile is sufficiently elevated within the organisation.
In the past, we have advocated alternative organisational models to address the challenges of the digital transformation and the necessary reinforcement of practices around data privacy in the wake of the GDPR. They remain current, and of course are not meant to replace “three-lines-of-defence” type of models.
But here again, caution should prevail. It is easy – in particular in large firms – to over-engineer the three lines of defence and to build monstrous and inefficient control models. The three lines of defence can only work on trust, and must bring visible value to each part of the control organisation to avoid creating a culture of suspicion and regulatory window-dressing.
3- Throwing money at it
“How much do we need to spend to get this fixed?”
The protection of the business from cyber threats is something you need to grow, not something you can buy – in spite of what countless tech vendors and consultants would like you to believe.
As a matter of fact, most of the breached organisations of the past few years (BA, Marriott, Equifax, Travelex etc… the list is long…) would have spent collectively tens or hundreds of millions on cyber security products over the last decades…
Where cyber security maturity is low and profound transformation is required, simply throwing money at the problem is rarely the answer.
Of course, investments will be required, but the real silver bullets are to be found in corporate culture and governance, and in the true embedding of business protection values in the corporate purpose: Something which needs to start at the top of the organisation through visible and credible board ownership of those issues, and cascade down through middle management, relayed by incentives and remuneration schemes.
This is more challenging than doing ad-hoc pen tests but it is the only way to lasting long-term success.
Data breaches can be quite costly to organizations with direct costs (remediation, investigation, etc) and indirect costs (reputational damages, providing cyber security to victims of compromised data, etc.)
According to the nonprofitconsumer organization Privacy Rights Clearinghouse, a total of 227,052,199 individual records containing sensitive personal information were involved in security breaches in the United States between January 2005 and May 2008, excluding incidents where sensitive data was apparently not actually exposed.
A data breach may include incidents such as theft or loss of digital media such as computer tapes, hard drives, or laptop computers containing such media upon which such information is stored unencrypted, posting such information on the world wide web or on a computer otherwise accessible from the Internet without proper information security precautions, transfer of such information to a system which is not completely open but is not appropriately or formally accredited for security at the approved level, such as unencrypted e-mail, or transfer of such information to the information systems of a possibly hostile agency, such as a competing corporation or a foreign nation, where it may be exposed to more intensive decryption techniques.
ISO/IEC 27040 defines a data breach as: compromise of security that leads to the accidental or unlawful destruction, loss, alteration, unauthorized disclosure of, or access to protected data transmitted, stored or otherwise processed.