PAC Model and Corporate Governance

While we were going through the Corp Fin course, we were taught that diversification activities by big companies need not be in the interest of shareholders and instead may be the result of the top management's fancy and that the market recognizes this aspect quickly and share prices of the companies announcing takeovers or mergers go down.

Today in the GSBC class, the topic was Corporate Governance. Once of the issues raised by the Prof. Mudit Kapoor was about Corporate Social Responsibility. His point was that as a company your core competece is to conduct a certain kind of business and not induging in charity with shareholders money. If you want to take up somekind of CSR initiative you must get the consent from the shareholders.

By raising this topic, he definitely had hit lots of us pretty hard on our heads. People came up all sorts of arguments why the CEO should be free to take up CSR initiatives. All the students who raised concerns were relating themselves as the Managers who might have to go to the shareholders for every decision.

Argument from the Prof was simple and clear, all he was saying was, any free cash flow geenrated by the company belongs to the shareholders, either you reinvest in right kinds of projects if available or distribute the money to shareholders. It is upto the shareholders to do any charity if they want to. As a CEO if you want to do some society building, do it with your personal wealth.

At this point I started relating this whole thing to the PAC model. TThe professor was saying that the Shareholders are adults and as a Manager you have to treat them as adults. It is their money and let them take a call. But almost everyone in the class was unable to digest that. Everyone started acting like a parent and wants to treat them as children. Their argument was - Shareholders don't know anything, as a manager we would do correct things, if we have to go back to the shareholders for every small thing how can we run the company.

This thought process clearly indicates the Parent, Adult and Child states in the realtionship of a Firm, the Manager or the CEO and the Shareholders. As mature people we must act like adults but more often than not we tend to either act as a Parent or as a child and all this happens at such a sub-conscious level that we don't even recognize this.

One important thing that we need to learn before we get started in our careers once again is to learn how to act as Adults and when to switch to a Parent/Chuld mode occassionally. This I think would be the biggest challenge for most of us.