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Issue No. 146 | 26 July 2002 |
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Crean-ite Is Not A Dirty Word
Interview: Trans Tasman Cole-Watch: The Full Story Unions: The Right To A Life Bad Boss: Phoenix Rising Politics: The Virtuous State International: The Champions History: Mandatory Mums Corporate: Network Governance Review: Navigating The Doublespeak Satire: Hector The Galah Found Hiding Poetry: Eight Days a Week
The Soapbox The Locker Room Postcard Week in Review Bosswatch
 No Need To Import IT WorkersKangaroo Court Horrifies ReaderSite Reunites Redundant WorkersCarr Off CourseThe Banners of GreedJoin The PartyShocks and Stares
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Corporate Network Governance
***************** The command and control hierarchies governing both sectors are rapidly reaching their "use by date". During the last 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 if 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. A new way to govern is required to enrich democracy while improving efficiency and effectiveness. These objectives can 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 information 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 becoming a network organisation. Besides providing checks and balances this also has the advantage of decomposing decision making labour and providing distributed intelligence. Just as importantly, multiple control centres would increases 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 way of introducing the checks and balance 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% of investor owned firms typically fail in their first five years compared with less than 1% of the Mondragon firms. 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 over 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. that has a network of over 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 stocks 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 twenty years to stakeholders. In this way any overpayment of investors after twenty 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 control 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. *Dr. Shann Turnbull is the author of A New Way to Govern: Organisations and Society after Enron, published in London, July 2002 by the New Economics Foundation. Hard copy available by sending a $15 cheque to the author with a $1 stamped self addressed business size envelope to PO Box 266 Woollahra, Sydney, 1350
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