By Bothwell Nyajeka
CORPORATE finance literature states that the primary objective of management is to maximise shareholder value.
This value is typically reflected through company share price appreciation and dividends, and at its core lies one fundamental measure ― return on equity (ROE). Return on equity measures how effectively a company generates profits from the capital invested by its shareholders.
Investors, in turn, set what is known as a hurdle rate, the minimum return they expect from an investment. This benchmark determines whether a company should pursue a project, continue investing in a business, or exit altogether. If returns fall below this threshold, capital will inevitably flow elsewhere.
Boards of directors are therefore expected to make decisions that enhance shareholder value over time, ensuring that investments generate returns that meet the hurdle rate in the long term.
However, in practice, boardroom decisions are not always as rational as theory would suggest. There have been moments in boardrooms where I have posed and asked myself a difficult question: Are we making decisions based on return on equity or return on ego?
Ego, defined as one’s sense of self-importance or self-image, plays a subtle but powerful role in decision-making. It is not inherently negative. In fact, ego is often what drives entrepreneurs to take risks, pursue opportunities and build businesses from nothing.
Many successful enterprises are born out of ego, a belief that “I can do this better”, or a determination to escape rejection from job hunting and create something meaningful.
In that sense, ego is a positive force. It fuels ambition, resilience and innovation. But left unchecked, ego can quickly become destructive.
In the boardroom, ego-driven decisions often reveal themselves when an individual shows overconfidence in their judgment, despite contrary evidence and also resistance to feedback or alternative viewpoints. Other behaviours include a preference for personal recognition over collective success, the pursuit of short-term wins at the expense of long-term value and decisions driven more by emotion than data.
Ego driven decisions can lead to investments that do not meet the required return thresholds, misallocation of capital, and ultimately erosion of shareholder value.
At its worst, ego creates an environment where decisions are made to protect reputations rather than to create value. This is where the board plays a critical role.
One of the board’s most important responsibilities is to ensure that management decisions are grounded in return on equity, not return on ego.
Return on ego worsens the principal-agent problem, a classic conflict where the interests of managers (agents) diverge from those of shareholders (principals). When managers champion empire-building acquisitions or vanity projects, not because these actions clear the hurdle rate but because they enhance personal status, power, or job security, they are effectively prioritising their own utility over shareholder wealth.
The board’s role, therefore, extends beyond simply vetoing bad ideas; it must actively realign incentives by tying executive compensation to long-term return on equity targets, scrutinising proposals for signs of self-serving bias, and fostering a culture where agents are rewarded for saying “no” to their own ego. Without such safeguards, the agency gap widens, and the firm’s capital becomes a tool for personal ambition rather than value creation.
But the responsibility does not end with management. The board chairperson and directors must also guard against ego influencing their own judgment. This is because ego often grows with power, experience and success. Strong boards recognise this risk and put in place mechanisms to ensure disciplined decision-making. From my experience, several practical governance practices help anchor decisions in value creation.
As a start, the board must require management to establish a minimum acceptable return on equity. This is the hurdle that becomes the benchmark for all investment decisions. If a project’s expected returns exceed the hurdle rate, then the project will get the greenlight. If the project does not meet the hurdle rate, then the project is rejected. This simple discipline prevents emotional or ego-driven investments.
Boards should also set clear strategic objectives and Key Performance Indicators (KPIs) that reflect both short-term performance and long-term value creation. This ensures that decision-making remains focused and measurable.
The board chair should encourage diverse perspectives and open debate during meetings. This reduces the risk of groupthink and ensures that decisions are tested rigorously before approval.
All major projects or investment proposals submitted to the board should be supported by robust financial analysis, projections and risk assessments.
Lastly, the board must enforce conflict of interest policies. Directors must formally declare conflicts of interest and recuse themselves from decisions where personal interests are involved. This protects the integrity of the board’s decision-making process.
Beyond formal structures, effective governance ultimately requires personal discipline.
Every director must cultivate the habit of self-reflection by asking the following questions: Am I advocating this position because it creates value? Or because it protects my position, reputation or prior decision?
One of the most important lessons in leadership is that it is not about being the smartest person in the room, but about creating an environment where the best idea wins, regardless of where it comes from.
Ego, particularly with experience, has a way of whispering: “You know it all.”
The most effective leaders learn to challenge that voice. One way of overcoming this “I know it all” attitude is by having a mindset that is open to continuous learning and admitting that I don’t know everything, and having the strength to say “I do not know” in front of fellow board members.
Ultimately, the difference between high-performing companies and struggling ones often comes down to the quality of decisions made in the boardroom.
Boards that consistently focus on return on equity and allocate capital efficiently, build sustainable businesses and create lasting shareholder value. Boards that drift towards return on ego risk misallocating resources, eroding value and undermining trust, because in the end, markets reward performance, not pride.
Nyajeka is a Chartered Accountant and business leader. He has vast experience as a corporate executive and has sat on various boards in Zimbabwe, Botswana, South Africa and Uganda. He is currently chairman of ACR Solutions and is also a seasoned trainer and facilitator for the Institute of Directors Zimbabwe (IoDZ). For board advisory, executive coaching, leadership development and business turnaround consulting. Email him on: bnyajeka@acr4solutions.com