Governance
are the only species on the planet The Future of Management: that attempts to survive and thrive in dynamic complex environments1 in way not found in nature. Our brains Network Governance beautifully illustrate how distributed decision-making allows us to survive BY SHANN TURNBULL AND MICHAEL PIRSON and thrive in complex environments. Distributed decision-making is a strategy used in nature and super computers - but not by those who manage them.
Self-governance promotes survival Managers are currently trapped in distributes decision-making to compre- Our brains have no Chief Executive meeting the complex competing hensibly and reliably simplify complexity Neuron. Different parts of our brains interests of their multiple stake- from the bottom up, outside-in as well make different types of decisions. A holders. Network governance as top-down. This cannot be achieved strategy also found in network-governed introduces a political process to with the centralised command and firms and self-governing automobiles. manage stakeholder conflicts to control hierarchies used in political Different areas of our brain continu- provide benefits for all stakeholders dictatorships and corporations. ously compete with all the other areas as required by Blackrock. This also In market economies it is an empowers managers to promote the astounding irony that public corpora- objectives of the United Nations tions, graduate schools of management, Network governance Sustainable Development Goals. business or government are committed to the failing command-and control distributes decision- e argue that network govern- system of management and govern- making to comprehensibly ance is the only way directors, ance. We argue that this model is toxic and reliably simplify Wexecutives and their busi- because hierarchies provide absolute nesses can reliably survive in a complex powers to their controllers which most complexity from the environment. Network governance often results in corruption. is understood as the distribution of It is amazing that so many clever bottom up, outside-in as power and labor. Network governance people have not noticed that humans well as top-down.
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TABLE Hierarchies simplify complexity incompletely with errors Decision-makers losedata, information, knowledge and wisdom of their stakeholders Hierarchy Data upwards Employees Sectors Volume loss Correct: 85% Missing Say span of eight Private or public 50% per of lower level or wrong Per Accumulated Citizens/legislature level meaning level total Shareholder/Minister Negligible Unrealiable Unknown Board of directors 3.1% 1.4% 98.6% Chief Executive Officer 6.3% 3.3% 96.7% 1 1 Senior management 12.5% 7.7% 92.3% 8 9 Middle management 25.0% 18.1% 81.9% 64 73 Team leaders 50.0% 42.5% 57.5% 512 585 Workers 100.0% 100% 0.0% 4,096 4,681
for control according to our internal needs and/ 50% of the data of subordinates is transmitted or external existential opportunities and risks. upward with only 15% is subject to bias and errors. Self-driving cars are designed the same way. Network governance with diverse cross- Like all systems in the universe, humans checking sources of data that can include depend upon the integrity of stability that is opposing interest introduces checks and challenged by environments creating tension balances to data omissions, biases and errors. for change. Buckminster Fuller described this We have applied this in our Western democratic relationship as “tensegrity” from combining systems, which are currently under threat. In the word “tension” and “integrity”2. It reflects both cases, tensegrity creates resiliency because the ancient idea of Yin and Yang providing decision-making is being continuously chal- a healthy life. This idea describes how seem- lenged because power is not central but shared. ingly opposite or contrary forces may actually These principles are at work in agile organisa- be complementary, interconnected, and tions and self-governing cars. interdependent. Our DNA hard-wires in us Finely tuned and contested decision-making the potential to be balanced by being both is not typically found in hierarchies. Instead, Public sector competitive~cooperative, selfish~generous, competition for control is left to the less hierarchies, not suspicious~trusting and so on3. well-informed, insensitive brut force of market subject to systemic Hierarchies suppress tensegrity as they rely competition exercised through public stock challenge, become on subservience and obedience to a central exchanges. Public sector hierarchies, not subject stagnant change authority that may make decisions in a cocoon to systemic challenge, become stagnant change resistant of ignorance. Ignorance is endemic in hierarchies resistant bureaucracies. bureaucracies because they are created to filter information. In addition, they introduce compelling incentives Tragedies from markets and bureaucracy avoided for subordinates to bias or omit information that with network governance could reflect poorly on their performance. As an extraordinary example of network An indication of the systemic filtering, biases governance, the VISA credit card business was and errors inherent in hierarchies is indicated in not publicly traded until 38 years after its forma- the Table. It makes the generous assumptions that tion in 1970. The founding CEO of VISA, Dee
46 The European Financial Review April - May 2019 Hock, explained that the organisation “had multiple promoting the common good for all, capitalism has boards of directors within a single legal entity, none created incentives for investors to exploit not just all of which can be considered superior or inferior, as their other stakeholders but global resources. each has irrevocable authority and autonomy over The idea that companies should adopt “A new geographic or functional area"4. Hock observed: model of corporate governance” to promote the “No part knew the whole, the whole does not know common good was put forward by the New York all the parts, and none had any need to. The entirety, publicly traded company Blackrock. Blackrock is like millions of other chaordic organisations, the largest investor in the world managing $US6.3 including those we call body, brain, forest, ocean trillion. In 2018 Larry Fink the chair of Blackrock and biosphere, was largely self-regulating.” stated that corporations: “must benefit all of their Hock had coined the word “Chaord” to describe stakeholders, including shareholders, employees, the nature of the VISA organisation by combining the customers, and the communities in which they words “Chaos” and “Order”. These words may appear operate”6. Fink went on to state: “Without a sense inappropriate for managers. But they reflect the ideas of purpose… corporations will ultimately lose of “change” and “stability” inherent in tensegrity. the license to operate from key stakeholders”. As As Hock described in his 1999 book, Birth of governments are stakeholders this raises the ques- the Chaordic Age, the senior executives from the US tion if they should only licence corporations to exist banks who agreed to form this type of coopera- if they promote the common good? tively owned organisation between competitors Network governance creates both “a new model had no experience or understanding how it could of corporate governance” suggested by Fink and work5. Each Bank formed its own VISA board to promotes his objective of providing “benefits for control its geographical area. Each bank also sent all of their stakeholders”. But as shown by Ostrom representatives to compound boards involving it is not a “new” model but a very ancient model their competitors for controlling various common universally found in natural systems. For this functions shared by all. reason, we described this special type of network If each bank is considered to be a self-governing governance as “ecological”. It is how thousands of “republic” then the organisational architecture of small-minded ants or bees collectively decide on a VISA could be described as representing: “polycen- bottom up basis when, where and how to design tric compound republics”. Elinor Ostrom who build, operate and maintain their custom designed shared the 2009 Nobel Prize in economics used dwellings. Another reason to badge corporations this term. It is how she described pre-modern as “ecological’” is to attract widespread polit- societies controlled competing interests from over ical support to protect global environments that exploiting scarce sources of food to extinction. sustain the wellbeing of humanity.
Avoiding global tragedy of the commons No need for new laws to save the planet with Over exploitation of common resources to deny ecological governance them for everyone is described as “the tragedy of There is no reason why large brained highly intel- the commons”. Today the tragedy of the commons ligent executives, or “masters of the universe”, has spread to global proportions. The common should not learn individually and as a specie, how goods such as clean air, healthy and richly diverse to survive and thrive in our fast changing complex environments with stable reliable nurturing climate world to preserve both ourselves, and the environ- appears now to be all at risk for everyone. Instead of ment. There is no legal reason in major jurisdictions
Finely tuned and contested decision-making is not typically found in hierarchies. Instead, competition for control is left to the less well-informed, insensitive brute force of market competition exercised through public stock exchanges.
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why corporations could not simply have meeting a cooperative group like VISA. Unlike VISA of their shareholders to adopt ecological forms the network of groups together establish a of governance shown in the Figure. This fact is second level of compound boards to govern evident from the creation of VISA in the US, the the whole MCC7. employee controlled John Lewis Partnership in Beside the vertically aligned republics of the UK and the nested networks of stakeholder individual firms the MCC established lateral controlled network governed firms located support organisations. These are also network around the town of Mondragon in Spain. governed firms with compound boards to The Mondragón Corporacion Cooperativa provide their stakeholders with services such (MCC) as the network of around 200 firms is as: firm creation, product research and devel- known, illustrates many features of ecological opment, banking, schooling, work experience, governance. Each of the 200 firms represents trade and professional education, farming, a self-governing “republic”. When firms grow fishing, shopping, insurance and social beyond human scale they split into two like security. Consistent with the host Basque an amoeba. One firm becomes the supplier or community seeking political independence customer of the other. In this way a network the MCC creates a self-reliant life supporting of firms is formed with its own network of internationally competitive richly participative compound decision-making centers to form democratic community.
FIGURE Generic Illustration of ecological governance with stakeholders as co-regulators Seperation of governance powers from management allows independent bottom-up outside-in stakeholder intelligence to integrate governance into Corporate Social Responsibilities to monitor and control misconduct. Systemic constestability of decisions protest nutures with less costs the interest of stakeholders, the firm and society
Elects & pays Elects Nominates Inform (Informal reporting not shown)
Employee Board of Auditor,
Assembly governors nominationadvise &on pay director to Valuers, ect. protect minorities One vote per share to
protect minorities
Suggest Key Performace Indicator (KPIs) for hiring & Regulator Supply paying directors Accountable to Forums Stakeholders Stakeholder Compound Nominates chair of Firm accountable shareholder meetings to regulator Congress Customer Informs with no votes Shareholder Annual Determines KPIs Councils for paying executives General Meeting Chaired by nominee of Stakeholder Congress
further their own & mutual interest with entity interest & mutual their own further Management
Board One cumulative Community (may include vote per share (Elects & Approves pay per director for directors & governors) Committees non-executive directors) Stakeholders become “supplementary” co-regulators to protect and protect to “supplementary” co-regulators become Stakeholders
For publicly traded, private firms, non profits and government corporations
48 The European Financial Review April - May 2019 The ability for firms to meaningfully engage with stakeholders is dependent upon separating the power of directors to manage from their power to govern. This also removes the toxic systemic conflicts of managing their own conflicts of interest such as controlling their Auditor.
Governments could provide role models stakeholders obtained benefits as desired by and incentives Blackrock. Hierarchical institutions in the public, private, non-profit and government sectors under- Stakeholder co-regulators enriches democracy mine the legitimacy of political democracies. with less government Their unelected and poorly accountable elites The ability for firms to meaningfully engage with spread political discontent. Ecological govern- stakeholders is dependent upon separating the ance introduces direct democratic processes power of directors to manage from their power to institutions with systemic contestability to govern. This also removes the toxic systemic and accountability from their diverse stake- conflicts of identifying and managing their own holder constituencies. conflicts of interest such as controlling their Each common interest stakeholder constit- Auditor; Annual General Meetings holding uency of significant institutions would them to account, or their board nomination, automatically become voting members of their remuneration and performance appraisals. This respective firm specific stakeholder association8. separation of powers is typically included in the The resulting polycentric networks of stake- shareholder agreements of Venture Capitalists holder associations with a compound board are and by some lenders. shown in the accompanying generic Figure for The need for a requisite variety of co-regu- institutions in different sectors. lators to reliably communicate and/or regulate Any professionally qualified stakeholder complexity is a fundamental requirement of the could self-nominate each year to become laws of cybernetics9. It is another reason why their advocate. Institutions would be required hierarchies lack effectiveness and are susceptible to offer competitive pay to create competi- to failure. tive elections each year to also create market • As noted by Hock: forces for stakeholder nominees to compete Industrial Age, hierarchical command and in challenging management. Besides creating a control pyramids of power, whether political, systemic process to contest management advo- social, educational or commercial, were aber- cates could also act as mentors to managers rations of the Industrial Age, antithetical to to provide a systemic process for continuous the human spirit, destructive of the biosphere improvements. Stakeholders can add value to and structurally contrary to the whole history make organisations more efficient. and methods of biological evolution. They Stakeholder involvement introduces “A new were not only archaic and increasingly irrele- model of corporate governance” to contest vant; there were a public menace10. management “group think” that concerned • Nine years before the global financial Larry Fink. The stakeholder Congress would crisis in 2008 Hock also noted that: establish Key Performance Indicators inde- We are experiencing a global epidemic of insti- pendently of management for directors to tutional failure that knows no bounds. We must evaluate managers. How well managers and seriously question the concepts underlying the directors met their KPI’s would be published current structures of organisation and whether with the annual accounts to allow shareholders they are suitable to the management of accel- to hold directors accountable. Shareholders erating societal and environmental problems could then vote for the directors appointment – and, even beyond that, we must seriously and remuneration according to how well all consider whether they are the primary source of
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BY FIRMS AND ORGANISATIONS SERVING ALL THEIR STAKEHOLDERS, MANAGERS CAN LEAD THE WORLD TO ACHIEVE THE UNITED NATIONS SUSTAINABLE DEVELOPMENT GOALS. those problems11. There are manifold compelling reasons for regulators to mandate the adoption of ecological governance as condition for firms to obtain what Fink refers to as their “license to operate. There are numerous specific bene- fits for shareholders, directors, managers, employees, stakeholders, auditors and regula- tors12. However, there are global implications. By firms and organisations serving all their stakeholders, managers can lead the world to achieve the United Nations Sustainable Development Goals.
4:112–127, 144, 148 3. Kelso, J.A.S. and D.A. Engstrøm 2006, The Complementary Nature, Cambridge, MA: MIT Press. Dr Shann Turnbull has been a 4. Hock, D. 1999, Birth of the Chaordic Age, p. 191, San Francisco: serial entrepreneur founding enter- Berrett-Koehler Publishers, Inc. 5. Ibid, p. 162. prises and re-organising listed firms. 6. Fink, L. 2018, ‘A sense of purpose’, Blackrock, Annual In 1975 he co-authored the first Letter to CEO’s, New York,
50 The European Financial Review April - May 2019