What I look for in corporate performance.

• Author: Miller, William H.
• Position: Reprint from Directors & Boards, Spring 1991 - Putting In Place the Right Board for the 21st Century

Investment managers are typically so engaged in running their portfolios that very little intellectually substantive commentary on governance has ever appeared in our pages from this sector. A grand exception was Bill Miller's effective effort, at our instigation, to compose an answer to our query, "What exactly do you look for when evaluating corporate management?" -- giving our audience an unusually thoughtful set of insights from the investment world on shareholder-oriented governance. Millet' was then and still is president of Legg Mason Fund Adviser, He assumed leadership of the Legg Mason equity fund management group in 1990.

I BELIEVE that most managements are reasonably diligent and honest and genuinely work to further what they believe are the best interests of the corporation and its various constituencies. Managements seem to assume, though, that if they sincerely serve the corporation's best interests, they are also serving shareholders well. For this to be so, owners and management would have to have identical interests. They do not.

Managements's principal interest is in the health, continuity, and growth of the enterprise. The shareholder's main concern is an adequate return on his or her investment relative to risk assumed and to other investment alternatives. Management's future is much more closely tied to a single enterprise than that of stockholders. The shareholder's capital is mobile, and the rational shareholder will not invest or keep capital invested suboptimally. This is the source of the frequently heard, though often misplaced, complaint about the short-term orientation of institutional investors. They are free to pursue investment alternatives in ways that the typical management is not.

A long-term orientation requires a long-term perspective on allocation of capital, the single most important task managements have and the single most important determinant of shareholder value. The ability of capital to move freely to seek the highest returns is the reason why a capitalist economic system works. When capital is allocated for non-economic reasons, such as in the old command economies of Eastern Europe, the result is inefficiency, waste, and lower-than-necessary standards of living.

If managements want shareholders to think long term, be loyal, and support the company's strategies and activities, they need to adopt policies that encourage such behavior. They need to declare that building shareholder value is the...