Democracies Don’t Suffer Famines: Implications for Corporate Governance
August 24, 2009 5 Comments
In his keynote at the Spigit Customer Summit, Gary Hamel said that something that caught my attention: democracies don’t suffer famines. Hearing this, I was intrigued and did some research.
Amartya Sen, winner of the 1998 Nobel Prize in Economics, made this empirical observation:
One of the remarkable facts in the terrible history of famine is that no substantial famine has ever occurred in a country with a democratic form of government and a relatively free press.
Why? In a paper from the John F. Kennedy School of Government at Harvard University, Sean M. Lynn-Jones puts forth two reasons:
First, in democracies governments are accountable to their populations and their leaders have electoral incentives to prevent mass starvation. The need to be reelected impels politicians to ensure that their people do not starve.
Second, the existence of a free press and the free flow of information in democracies prevents famine by serving as an early warning system on the effects of natural catastrophes such as floods and droughts that may cause food scarcities.
Isn’t that powerful? Simplifying things, I distill those two reasons into these: (i) organizational responsiveness, and (ii) distributed trend detection.
Both of which describe the realm of what Enterprise 2.0 is about, albeit without the life-and-death issue of starvation. That in itself is interesting enough. But when you try to apply those findings to companies, you realize they don’t quite mesh with today’s corporate governance models.
Corporations Aren’t Democracies
You, the reader, probably say “duh” to the observation that corporations aren’t democracies. But to consider the benefits of organizational responsiveness and distributed trend detection, it’s important to understand a crucial difference between democracies and corporations. The diagram below shows the corporate governance model:
In the context of making organizations more responsive, and distributing trend detection, where does that happen? It’s the employees. They’re the ones on the front line. They’re getting creative to solve issues everyday. They hear things from the market before most do. They want to make a difference and see their companies progress.
This is the equivalent of the voters in a democracy. The ones who are experiencing issues firsthand. But employees aren’t empowered to change their organizations. That’s the C-Level suite: CEO, COO, CFO, etc.
The C-Level suite lives a life of leading employees, and listening to the Board of Directors. Well listening, and leading, the Board. And the Board serves at the pleasure of shareholders.
In this model, shareholders look at company results and estimate future overall growth in revenue and profits. Fail to hit the numbers, and they put pressure on the Board. Board feels the pressure, and begin to question the C-Level suite. C-Level suite makes changes, and/or is replaced.
Notice that train of actions – it’s not the feedback from employees that drives changes. It’s a look-back at the results by shareholders. This isn’t to say that C-Level executives do not listen to employees. But the structural governance model sets the pecking order for who and what gets attention.
Bringing the Voice of the ‘Governed’ into the Enterprise Conversation
As someone who went to business school, I’m a firm believer in the accountability to shareholders governance model. Capital is scarce, and its efficient allocation across the economy is valuable for ensuring generally sufficient supplies of products and services needed by the population.
But that doesn’t mean the C-Level executives can’t change the way they manage to improve the prospects of their companies and returns for their shareholders. As has been pointed out before, companies are experiencing unprecedented levels of volatility in markets today. Sources of industry change come from multiple directions, and their speed of invasion is much faster.
Maintaining a model of listening only to their senior executives, their Board and their shareholders is becoming a risky strategy for CEOs. It means listening to people whose interests are certainly in seeing a strong, healthy company, but whose capacity to provide early trend detection and problem-solving creativity is limited. Shareholders aren’t in the trenches of your company’s operations. The Board of Directors is made up of C-Level executives from other companies, who need to worry about their own operations.
Gary Hamel discussed W.L Gore as a model of a company where employees are much more a part of the corporate governance model. From Fast Company in February this year, here’s a quick update on W.L. Gore:
Gore has spun a fortune from constantly reinventing the polymer polytetrafluoroethylene. In its 50th-anniversary year, the $2 billion-plus private company is on pace for record revenues and profits, thanks to a number of clever new products with a lot of potential.
An article in Sales and Marketing Management noted that employee teams help to hire new staff members, assist in determining each other’s pay, and pick their own leaders. Crazy eh? But note the same article says this:
An almost eerie optimism radiates through the hallways at Gore, which is best known for its Gore-Tex lining for weatherproof jackets, and which remains a private company despite its size, in order to protect its culture from outside interests.
Ouch! Here’s a company that exemplifies a governance model of innovation, encourages employee innovation and distributed market intelligence. And it has to stay private to protect this culture?
My sense is that the Enterprise 2.0 movement in general is a vanguard toward improving the way companies are managed. Being a public company, used to a top-down order of things and paying a lot of money to outside consultants to understand the market, is hard to change overnight. But companies can begin to improve the way they engage their employees and leverage their vast, distributed know-how and creativity. There is a wide spectrum of how far companies can take this. The key is to begin understanding how new approaches can work in your organization.
Enterprise 2.0 as a movement, not a technology, is quite promising for enabling companies to improve their overall strategies and operations.
Alternatively, we can continue to do things the way we always have, with a limited set of decision-makers and market intelligence gatherers. As seen with the increased rate of companies gaining and losing positions in industries, this model is becoming less reliable.
Remember, there’s a reason democracies don’t suffer famines.