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Title: Governance is Governance
Date: 14-Apr-2010
Category: Opinion Essays
Source/Author: Stephen B. Young, Global Executive Director, Caux Round Table
Description: Business ethics and corporate governance would seem to be two peas in the same pod of a moral capitalism. But one falls to the teachings of moral philosophers and the other to the recommendations of lawyers. The two, therefore, rarely intentionally intersect within our corporations - ethics on one side and compliance on another.

Business ethics and corporate governance would seem to be two peas in the same pod of a moral capitalism. But one falls to the teachings of moral philosophers and the other to the recommendations of lawyers. The two, therefore, rarely intentionally intersect within our corporations - ethics on one side and compliance on another.

Some worry about the roles and responsibilities of boards vis-à-vis CEOs, shareholders, and stakeholders; others write about how to decide on the “right” thing to do and the values that should guide business decisions. And still others monitor compliance with rules and regulations.

Recently I heard a remarkable presentation here in Minnesota by William Bojan and his colleagues at Integrated Governance Solutions. They have come up with a roadmap towards what they call "Next Generation Governance" to restore trust in American business leadership.

Their website with more information on their approach is: http://integratedgovernance.com/default.aspx  

Bojan looks at governance of corporations more as a political scientist than as a lawyer or an ethicist. His “Next Generation Governance” is a systems theory of functions, not a set of laws or vague standards of fiduciary conduct or an exhortation from the Kantian moral philosophy of deontology or a school of virtue ethics.

Bojan has concluded that failures and excesses in modern American capitalism arise from a lack of appropriate checks and balances. Management under a dominant CEO is largely unaccountable, overbearing and self-serving; boards of directors are largely uninformed and weak; and monitoring channels are silenced and marginalized.

With stronger checks and balances inside the corporation, boards could focus on delivering strong oversight, and would be more independent, competent, and informed; CEOs could focus on execution and results, while being more accountable and loyal to the best interests of the organization; and a chief monitoring officer would assess and report a more integrated, independent view of enterprise health to the board, fully protected in the role of speaking truth to power.

In listening to Bojan I quickly thought of Montesquieu, the French Baron who, in 1746, wrote the Spirit of Laws which then shaped the constitution of the United States through the advocacy of James Madison and Alexander Hamilton in the Constitutional Convention in Philadelphia.

Montesquieu’s main point here was that a tri-part allocation of authority to a legislature (board of directors), an executive (CEO) and a judiciary (a chief monitoring officer) was the best guarantee of liberty in a republic.

Like Bojan, Montesquieu took a systems approach to functions in order to arrive at his goal of justice in the state. The legislature set the goals and raised capital; the executive got things done; and the judiciary saw to it that all did their respective duties and did not break the laws.

I think the analogy of a corporation to a state is fairly compelling. After all, the earliest corporations were public bodies like cities and universities. The first American colonial governments were those of private corporations chartered by the British Crown having a general court or legislature, a governor or executive and judges. Principles of corporate law like fiduciary duties were first developed for public government in the 17th century and only later moved over to private business entities in the 18th and early 19th centuries.

But if public governments are charged with securing justice, what is the analogous goal of the entity which is the private corporation?

I would suggest that the private corporation is obliged to seek a similar common good for its core constituents – its owners and employees. Both owners and employees are voluntary members of a corporate community. Each seeks economic benefit from the relationship; profits for the owners and profitable wages for the employees.

Now neither the owners nor the employees can benefit as they expect unless other stakeholders have their needs met as well: customers must be attracted and sales made; credit must be secured; and suppliers found.

The goal of the corporate business (actually for a business in any form) is a fair (or just) distribution of benefits so that willing cooperation is secured from owners, employees, customers, creditors, suppliers, and other providers of necessary inputs.

The company is also subject to the laws and regulations of the state and so must also act as a responsible citizen within the wider community.

Thus, the challenge of governance in the private corporation is to achieve justice among stakeholders and responsibility towards the community.

Following Montesquieu’s insights, checks and balances among a legislature, an executive and a judiciary would further the ends of justice and responsibility in the private corporation as well as in any state authority, be it national, regional or local.

Montesquieu asserted that the justice of political liberty is “to be met with only in moderate governments. It is there only where there is no abuse of power; but constant experience shows us that every man invested with power is apt to abuse it; he pushes on till he comes to the utmost limit. … To prevent the abuse of power, ‘tis necessary that by the very disposition of things power should be a check to power.”(Spirit of Laws, Bk XI, Chpt 4)

Working from such common sense he argued that “When the legislative [board of directors] and the executive [CEO] powers are united in the same person, … then there can be no liberty.” Or, in terms of a private business corporation, when the CEO and the Board act like one, there is risk that justice will not be achieved, that only narrow, personal agendas will be vindicated in the process of corporate decision-making.

And, so too, says Montesquieu, “… there is no liberty, if the power of judging be not separated from the legislative and executive powers.” (Sprit of Laws, Bk XI, Chpt 6)

This argument of Montesquieu goes to the heart of William Bojan’s recommendation that corporations need a chief monitoring officer who reports to the board if corporate governance is to become vital and trust in business leadership is to be restored.

Now it would be almost an inexcusable oversight not to reference the thoughts of Madison on the role of separation of power into the legislative, executive and judicial as a means of achieving balanced outcomes and sustainable prosperity.

Madison noted in Federalist Paper 41 that “in every political institution, a power to advance the public happiness involves a discretion which may be misapplied and abused.” That is no less true of powers assigned to private business corporations: there is discretion and potential for misapplication and abuse.

Therefore, guards must be placed to protect against a perversion of the power to the public detriment.

Madison then noted in Federalist Paper 46 that the powers of government under his proposed constitution for the United States of America made the responsible officers agents and trustees of the people. Corporate boards are, of course, agents and trustees of the owners and corporate employees are agents of the corporation.

In Federalist Paper 47 Madison, expressly following Montesquieu, affirmed the maxim that “the legislative, executive and judicial departments ought to be separate and distinct.” “The accumulation of all powers, legislative, executive and judiciary, in the same hands, whether of one, a few, or many, … may justly be pronounced the very definition of tyranny.”

“It will not be denied that power is of an encroaching nature, and that it ought to be effectually restrained from passing the limits assigned to it.” Madison wrote in Federalist Paper 48. He also wrote that “if men were angels, there would be no need for government.” Federalist Paper 51. Therefore, each department needs some practical security against invasion by the other departments.

In a private corporation then, the CEO needs protection from micro-management by the board of directors, the board needs protection from manipulation by the CEO, and the fidelity of monitoring results needs protection from both the CEO and the board.

This balance of power is most likely to occur where the responsible activities of the CEO are the focus of the monitoring system and the board receives the assessments of the monitors, which relationship between board and monitors assists the board in executing its fiduciary duty to provide informed oversight of the corporation for the best long term interests of its owners

Rules and regulations are not sufficient for protecting a proper balance of power wrote Madison: “a mere demarcation on parchment of the constitutional limits of the several departments is not a sufficient guard against those encroachments."

Additional steps are necessary: “the great security against a gradual concentration of the several powers in the same department consists in giving to those who administer each department the necessary constitutional means and personal motives to resist encroachment of the others.” Federalist Paper 51.

Application of this insight in private business corporations would have boards far more independent than that are today in the United States and with their own chairs looking to the board, not to the CEO, for support and remuneration. And, those charged with monitoring and reporting would need direct and unfiltered access to the board as well as to the CEO and other senior officers.

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