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New ways to govern public and private enterprises: with stakeholder networks

By Shann Turnbull - posted Monday, 11 August 2003


A new approach to governing public or private-sector organisations is becoming urgent as society becomes more complex and dynamic. The command and control hierarchies governing both sectors are rapidly reaching their use-by date.

During the past few decades, efforts have been made to overcome the inefficiencies and unresponsiveness of public-sector bureaucracies. Corporatisation, privatisation and public-private partnerships are now producing mixed results and some failures. Both the public and private sectors are increasingly frustrating citizens with unresponsive telephone call centres. Serious problems have emerged in the private sector from the unexpected failure of major publicly traded corporations. These and other failures raise the fundamental question of whether private ownership and/or market forces can reliably sustain a business, let alone increase its efficiency and effectiveness.

The problem has been exacerbated by society getting too complex for a single CEO to manage large and/or complex organisation. In such situations it has also become impractical for company directors to monitor and direct activities with due diligence and vigilance as required by the law. Likewise, Ministers of State can no longer adequately monitor and be held accountable for the actions of government officials. This is exacerbating the alienation of citizens by big business and big government.

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A new way to govern is required to enrich democracy while improving efficiency and effectiveness. These objectives can be achieved by following the techniques found in nature to reliably govern and sustain the complexity of living things with unreliable components.

Such "ecological" organisations would be responsive by being kept to human scale. This would also avoid information overload and the loss of feedback as to when mistakes are made or have unintended consequences. Networks of human-scale organisations would then be required to achieve economies of scale and scope. However, to minimise information overload by managers of the networks, each operating unit in the network would need to be as self-governing as possible. This would enrich democracy.

For organisations to become self-governing they require a division of power along the lines found in the US constitution. As a result each operating unit would itself become a network organisation. Besides providing checks and balances this also has the advantage of disaggregating decision-making labour and providing distributed intelligence. Just as importantly, multiple control centres would increase the variety of information channels to cross check accuracy while increasing the variety of control agents to better manage complexity. To be efficient, effective and responsive, no activity that is better managed at a lower level would be carried out at a higher level.

Network organisations introduce internal interdependence to provide a rational basis for developing trust, cooperation and greater operating efficiency. They also introduce internal competition for job satisfaction and other self-interests. Unlike command and control hierarchies, network organisations allow individuals to utilise their contrary nature to be competitive/cooperative, suspicious/trusting, self-interested/altruistic and so on. These are nature's ways of introducing the checks and balances required for efficiently sustaining the self-regulation of social creatures.

Network governance can allow the self-interest of executives to be harnessed to further the public good by introducing contestability for senior positions. Internal competition for control provides a much better informed, sensitive and efficient mechanism to improve the operations of a business than competition for control through the stock market. Network governance provides a compelling basis for replacing corporatisation, privatisation or public-private partnerships as a means for increasing economy, efficiency, and effectiveness of social enterprises.

An outstanding example of network firms organised into networks of groups, are the stakeholder-controlled enterprises located around the town of Mondragon in Northern Spain. A World Bank study found that these firms were more efficient than investor-owned firms. Like mutual enterprises the stakeholder firms do not require equity investors to bring them into existence or to make them efficient. Over 80 per cent of investor-owned firms typically fail in their first five years compared with less than 1 per cent of the Mondragon firms.

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Network governance is found in the most complex and dynamic industries like fashion textiles, movie making, electronics and biotechnology. In such industries it is common for firms to both cooperate and compete with each other because of their respective specialisation of talent, knowledge or production techniques.

Network governance is also found in all sustainable non-trivial employee-owned firms. The John Lewis Partnership that operates chain stores in the UK illustrates both network governance and its competitive advantages. The partnership, like Mondragon, is a major business with more than 50,000 employees. It demonstrates how contestability for corporate control through the stock market is not required to produce efficiency and competitive advantages. Another example is VISA International Inc, which has a network of more than 1000 boards of directors within the one legal entity. Each board has absolute autonomy over a particular function or geographical area.

The absence of a public market for shares in these firms eliminates the ability for senior management to ramp up the share price by one means or another, cash-up their stock options and then depart. By not having shares publicly traded network firms grow organically rather than through acquisitions. Many acquisitions are driven by the ambition of a CEO for greater power, influence and remuneration that commonly results in the loss of shareholder value.

All viable firms by definition become independent of investors but no firm can exist without employees, customers and suppliers who are therefore strategic stakeholders. Only a relevantly small tax incentive is required to make it more attractive for shareholders to agree to transfer their ownership over 20 years to stakeholders. In this way any overpayment of investors after 20 years could be eliminated to democratise the wealth of nations.

Firms transferring ownership would sponsor new ownership, transfer "offspring" firms to raise the funds required to expand the size and scope of their operations through establishing network relationship with their offspring. This process would convert multi-national corporations into nested networks of firms owned and controlled by stake-holding citizens. Democracy would be regained with citizens countering the governance of firms by anonymous alien institutional investors while also participating in the governance of public-sector agencies.

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About the Author

Dr Shann Turnbull BSc (Melb); MBA (Harvard) is the Principal of the International Institute for Self-governance based in Sydney and a co-founding member of the Sustainable Money Working Group established in the UK. He is a founding life Fellow of the Australian Institute of Company Directors, Senior Fellow of the Financial Services Institute of Australasia, Fellow of the Governance Institute of Australia and Fellow of the Australian Institute of Management. He co-authored in 1975 the first course in the world to provide company directors an educational qualification and wrote Democratising the Wealth of Nations. His bibliography reveals he is a prolific author on reforming the theories and practices of capitalism.

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Related Links
Feature: How to engage citizens
Institute for International Corporate Governance and Accountability
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