Archive | November, 2009

How Technology Impacts the Boardroom

As an exercise to contemplate before the session, SVNACD asked prospective attendees to “consider the following question: what would a skeptical activist shareholder think if they knew exactly how many emails you sent and how many minutes you spent reading on your blackberry during your last board committee meeting?”LonAllen

Lionel M. (Lon) Allan (right), Board Chair of the Silicon Valley Chapter of the National Association of Corporate Directors, introduced the panelists, F. Daniel Siciliano and Eric Finseth. Although he retreated to the back of the room, Lon peppered the panelists with informative chatter, adding a bit of informality and humor to what some directors may have viewed a scary topic. Electronic breadcrumbs could document more than you ever dreamed. Better start thinking a little more like a plaintiff’s attorney.

DanSicilianoGetting right to the homework assignment, Dan informed us that litigation might well ensue around the issue of how much attention you paid when the big decision the board got wrong was made. Yes, you were pretending to pay attention, but you were using your smart phone during the meeting and the ability to multi-task is a myth. A recent Stanford study by Eyal Ophir, Clifford Nass and Anthony Wagner provides what Dan believes might be admissible scientific evidence. People who are regularly bombarded with several streams of information do not pay attention, control their memory or switch from one job to another as well as those who complete one task at a time. Dan suggests, “if you aren’t 100% engaged, then leave the room.”

Recent developments in Delaware law (perhaps brought about in part through papers such as Elizabeth Nowicki’s) now provide that directors acting in bad faith don’t have the protections of business judgment law. Inattention = bad faith. That could throw you to the mercies of your D&O insurance, which might be already be tapped out. Simple negligence isn’t a problem. However, recklessness is an aggravated form of negligence and amounts to acting in bad faith. Red flags put you on a higher duty of inquiry. Failure to follow-up might be considered “conscious disregard of a known and unjustifiable risk.”

Deliberately not wanting to know. That’s when you shift out of the innocent category to reckless disregard. SVNACDaudienceTechnology now makes it easier to document. So much more is now discoverable. It becomes very easy to assemble the evidence through a trail of electronic breadcrumbs because we know when the Fedex was delivered, when you opened an e-mail and and when or if you opened attachments. Secured systems may offer some protection against hackers, but because every step of the way is documented through logs, really good security might yield less privacy in discovery.

Maybe it is better to have video conferences, rather than phone conferences, because those on the call might be less likely to multitask when people see them. There was some discussion around the widely known cases of Enron and Worlcom where directors had to pay out of their own pockets. The real case to look to might be Just for Feet, where the out of pocket expense to directors was $41.5 million. D&O insurance was exhausted by shareholder class action litigation filed two years before the bankruptcy trustee’s lawsuit commenced. Directors with particularized skill sets are more vulnerable to a higher expectation regarding diligence in their specialized field.

What constitutes a red flag? Not so much a pure business decision but clear violations of law (such as option back dating, false claims, payments to doctors for referrals). Where the board learns of such violations but fails to shut it down is the main problem…. not making reasonable efforts to avail yourself of information flow. Did they ChrinstineRussellput a system in place to inform themselves? To actually get stung, it appears that not only do you have to nap at the board meeting, you have to know you were napping and that the meeting was important. However, those electronic records, even the meta data that’s left after you thought you erased it, can provide evidence of virtual napping through inattention.

Discussion shifted to the fact that with majority voting at many companies, directors might engage in more discussions with institutional investors to ensure reelection. You obviously have an incentive to keep those folks happy. Watch out for the record re Reg FD (not publicly available information), inconsistency between what you say and what the company’s SEC filings say. Inadvertent disclosure, can be cured by filing a form 8-K. Immediate disclosure must be made public within 24 hours. Map out your communications in advance. It is often better to listen to shareowner concerns and ask questions about there questions, rather than answering and running perhaps running afoul. (CorpGov.net: reference The SEC’s Reg FD: some lessons for public company executives after nine years of practice, The Deal, 10/18/09)panel

The panelists discussed deliberate violations to conceal violations but shifted to failure to discharge duties… like a member of the audit committee who didn’t know they were on the audit committee… another example of acting in bad faith, I think. They can go after you on basic pieces of knowledge that everyone on a given committee should know. Did you ask anyone how it works? Did you ask the expert to explain it to you? Not being allowed to accidentally do stupid things might be the next bar. Not bad faith now but might be in the future.

Permanence is an assumed part of electronic information. The 20th century’s gift to law enforcement is e-mail. Pick up the phone and talk, rather than e-mail. Instant messaging isn’t secure. Some systems keep lots of records, including what you didn’t send, by keeping a record of everything you type, even if you erase it. Voice mail. If you delete it, the system may keep it for 90 days in some corporate backup. Some videoconferencing systems capture meta data. On some, theEricFinseth host can tell if you’re not on their screen during the meeting. On the other hand, you might accidentally have records destruction cycles that are inappropriate. Ask and find out what your system features. Set some policies and pay attention on a recurring basis.

At some point in the conversation, Eric dropped the real e-discovery nightmare… SOX, section 802, codified as 18 USC 1519. Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.

F. Daniel Siciliano is the Faculty Director of the Arthur and Toni Rembe Rock Center for Corporate Governance, Associate Dean for executive education and special programs at Stanford Law School, and co-director of Stanford’s Directors’ College. He is also the co-originator of the OSCGRS (Open Source Corporate Governance Reporting System) Project and the senior research fellow with the Immigration Policy Center. His work has included expert testimony in front of both the U.S. Senate and House of Representatives. Dan has launched and led several successful businesses, including the software automation and design company LawLogix Group—named three times to the Inc. 500/5000 list. Dan was recently named to the Directorship 100, a list of the most influential people in corporate governance. He holds a BA from University of Arizona and a JD from Stanford Law School.

Eric Finseth is a corporate and securities partner with Mayer Brown LLP. In addition to a broad spectrum of transactional types, his practice includes particular emphasis on technical securities law compliance matters and disclosure obligations applicable to publicly traded companies, their insiders, and other participants in the public markets such as banks and hedge funds. Eric is a Lecturer in Corporate Governance at the law school at UC Berkeley, covering Sarbanes-Oxley, the stock exchange corporate governance listing standards, shareholder activism, the duties of directors, officers and so-called “gatekeepers,” as well as DOJ criminal and SEC civil enforcement actions. Prior to joining Mayer Brown, Eric was an Attorney Fellow with the Securities and Exchange Commission in Washington, D.C., in the Division of Corporation Finance, Office of Chief Counsel. In that capacity, he oversaw and administered the agency’s shareholder proposal review program for the 2006 proxy season, the central corporate governance battleground between institutional shareholders and incumbent boards of directors.

CorpGov.net’s supplemental reading list in no particular order or citation style:

 

Behind the scenes Thomas Wohlmut Thomas Wohlmutvideotapes Lon Allen questioning Dan Siciliano for a brief overview of the meeting.DanielSiciliano

 

LonAllenBehindScenes

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Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration

According to Investors Against Genocide, proxies issued directly by American Funds met the SEC standard (Rule 14a-4(a)(3) of the Securities Exchange Act of 1934) by clearly indicating the vote was about not investing in companies that substantially contribute to genocide. However, according to American Funds, 50 – 60% of its shareholders hold their shares in "street name" and receive proxy materials through Broadridge Financial Solutions. Voting instructions issued by Broadridge to those American Funds shareholders simply referenced “a shareholder proposal described in the proxy statement.” Each of the other seven questions were clearly described in Broadridge’s voting instructions. Broadridge’s online voting instructions were similarly vague.

Given that the voting process encourages shareholders to vote with management across the board, and genocide was not clearly flagged to voters as an issue, many shareholders did not know that they had an opportunity to vote on a matter of important social significance. The specifics are more fully described in a letter from Eric Cohen, Chairperson of Investors Against Genocide, to the SEC. More coverage of the issue at Mutual fund activists claim more voting problems, Reuters, 11/23/09. An American Funds spokesman says the most support at any of the funds where ballots were counted Tuesday was about 12 percent. (‘Genocide-free’ measure rejected at American Funds, AP, 11/24/09)

I suspect Broadridge claims they don’t have to follow the rules required for proxies because they use a voter information form (VIF), not a proxy. This is the same logic they gave for turning blank votes into votes for management (See petition to the SEC. Send comments to [email protected] with File 4-583 in the subject line.)

By that logic, based on technicalities, none of us are shareowners either. Almost all shares are owned by Cede & Co., a subsidiary of the Depository Trust & Clearing Corporation (DTCC). For many companies, Cede & Co. is the only shareowner of record. Cede gives participants an "omnibus proxy," that they in turn issue to their customers. Or their customers use the VIF to request voter instructions. We don’t actually buy and sell shares, we buy and sell claims against the accounts of "immobilized" shares held by DTCC and Cede. This method of clearing settlements was imposed by the 1975 Securities Acts Amendments.

It was supposed to be a temporary measure. Brokers were in a panic because they didn’t have the backroom staff necessary to clear the exchange of registered certificates. In response, the markets shortened the trading day and closed on Wednesdays. Still, over a hundred brokerage firms went bankrupt or sold out. The 1975 Act ended the physical movement of securities certificates and the panic. Stocks were "immobilized" at Cede and we began trading something more akin to poker chips, as Glyn Holton characterizes it. The "immobilized" system was supposed to be temporary, until a direct registration system could be developed around "uncertified" or "dematerialized" shares. Legal changes were needed in many states and computer systems needed to gear up and integrate.

That has all happened but too many business earn money off the current system. It has become entrenched because everyone now depends on intermediaries like brokers, banks and Broadridge. Of course, brokers and banks don’t want a direct registration system because they are the only ones who know who owns what at ground level. They have all the names and names are worth money. What we have been stuck with is a system that can’t accurately count ballots because it can’t audit back to the beneficial owner, only to the bank or broker, whom we are supposed to trust to reconcile the voting… and they can do it either before or after the fact.

As a result, there is lots of "empty voting." I imagine it also facilitates tax evasion, although I haven’t seen much written about that. Since voting happens through many layers, the system is overly complex. Rules, like the one cited by Investors Against Genocide with regard to proxy requirements and the issue I petitioned the SEC on (blank votes going to management, instead of being counted as abstentions), are easily circumvented.

A growing number of us think a direct registration system, where all shareowners hold their stock directly, will solve many of these issues. The company will know who their shareowners are. Shareowners would all potentially know each other and be able to communicate directly with each other. Transparency; it is good for the market and is good for knowing who supports or opposes policies, such as those that support or fight genocide.

I’m participating with a group coordinated by Glyn Holton, of the U.S. Proxy Exchange and the Investor Suffrage Movement. We are putting together comments to the SEC advocating direct, rather than "street name," registration, which we hope they will consider as they take up "proxy plumbing/mechanics" issues." We would love to have you join us in this effort. If interested, send me an e-mail.

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MoxyVote.com

MoxyVote.com launched on November 20, 2009 in Beta and has already attracted considerable attention. Philly.com jumped right in with West Chester’s Moxy Vote boosts rebel shareholders on opening day. Cari Tuna did something a little more substantial with her Proxy-Voting Advocates Pool Resources on the Web (WSJ/11/23/09).

Of the systems utilizing the internet to increase retail investor participation in proxy voting by providing guidance on proxy issues from institutional investors, advocates or analysts, MoxyVote.com is the only one attempting to do so as a profit-making business, except perhaps FundVotes and CorpGov.net. The others – Investor Suffrage Movement, ProxyDemocracy.org, Shareowners.org, TransparentDemocracy.org, and VoterMedia.org – are all using some sort of non-profit form.

MoxyVote’s most direct competition at this point is ProxyDemocracy.org and TransparentDemocracy.org. All three systems provide users with information on how others are voting or advocate voting. ProxyDemocracy.org appears to be far ahead at this point with regard to actually being able to look up an individual company and finding recommendations, since they are collecting votes from some very huge funds like CalSTRS and Florida SBA, which own shares in thousands and thousands of companies.

Those reporting or advocating on MoxyVote and TransparentDemocracy.org tend to be smaller, like Calvert Investors or Investors Against Genocide. However, MoxyVote has the distinct advantage of being able to be tied in with your brokerage accounts and by allowing you to vote your shares right through the site. It is the only site that allows users to receive their proxies, obtain guidance from multiple sources and submit their votes all at one place.

Since proxy season isn’t in full swing, I don’t have any proxies to vote right now, so couldn’t test that function yet. However, when we do, another feature I like is that we will be able to see how many voters used MoxyVote to vote how many shares. That’s going to be a powerful tool in building involvement. Yes, you may only be voting 40 shares with the recommendations of Calvert or Change to Win but if you see on the site that 100, 1000, or 10000 others did the same, you begin to see that small votes do add up.

MoxyVote also employs a form of client directed voting (CDV) that allows users to set it and forget it. The CDV system advocated by the Business Roundtable has five choices: always vote for management, always vote against management, abstain, vote in proportion to shareowner vote within my broker, let my broker decide. These feel relatively meaningless to me. MoxyVote allows you to set your voting default to your list of advocates (your trusted “brands“). Right now, I’ve got mine ranked as follows:

  1. Investor Environmental Health Network
  2. Center for Political Accountability
  3. Change to Win
  4. Calvert Investments
  5. Boston Common Asset Management

Therefore, I could set up my account so that four days before the meeting, my stock is voted as recommended by IEHN. If IEHN has no recommendation by then, it is voted per the recommendation of CPA. If CPA has nothing, then it looks to CtW and on down the line until one of my advocates has a position. If none do, I can set the default position to vote with management, against them or abstain. If I elect to abstain, MoxyVote withholds my votes from director nominees.

For individual shareowners, MoxyVote provides access to various information sources, the convenience if automated voting and the ability to align your votes with those supporting like-minded organizations. For shareowner advocates, it appears to be a cost-effective way to get out their message and recruit new members with similar values. Once the site begins to attract a large following, corporate management may also see value in getting involved. They could use the site to communicate with owners and potential owners, as a listening post to get a sense of where their retail investors stand on various issues, and in helping them meet quorum requirements.

I encourage readers to try all three of these sites: MoxyVote’s, ProxyDemocracy.org and TransparentDemocracy.org. Please let me know what you think of each.

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Latham at Stanford: Governance Reform for Corporations and Democracies

On November 16, 2009, the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University presented a lunch-time lecture with Mark Latham, Director of VoterMedia.org and MarkLathamProxyDemocracy.org. Latham is also a member of the SEC’s Investor Advisory Committee, as a representative of individual investors. He has written extensively on how the internet can be used to allocate resources to facilitate voter education using a democratic marketplace model. Previously, Latham was a professor at UC Berkeley and a money manager with Salomon Brothers and Merrill Lynch. LathamLunch

Mark Latham has spent the last seven years developing new tools for voters (investors and citizens) to hold elected leaders accountable in corporations and democracies. The financial crisis, changes at the SEC and the decline of mainstream media are opening doors for implementing these ideas. Latham’s lunch-time talk at Stanford’s law school attracted mostly a young crowd of students to a presentation that was much more discussion than lecture.

Latham briefly discussed his role on the SEC Investor Advisory Committee and some of the recent developments that have laid fertile ground for his ideas, including:

  • the financial crisis and our poor systems of accountability,
  • 25% of the stock market is held directly by individuals but the other 75% held through institutions is also held for our benefits. We should have more input into how proxies are voted
  • broker voting no longer applies to director nominees
  • most large companies have instituted majority voting requirements for electing directors and that is now filtering down to medium and small companies, and
  • proxy access will bring more focus on proxy voting and the need to facilitate more intelligent voting with minimal effort.

He described something of the developing battle for the hearts and minds of investors as proxy "plumbing" or "mechanics" issues are explored by the SEC and interested parties. The Business Roundtable is lobbying hard for a system that allows management to communicate directly with shareowners. One component they have been pushing is client directed voting, CDV. Various proposals by Stephen Norman, the corporate secretary of American Express, have outlined that under CDV, investors would give their brokers general instructions on how they wanted their shares cast on all matters, routine and not routine. One frequently cited variant involves five options, including:

  1. always voting as management recommends;
  2. always voting against management recommendations;
  3. abstaining on all matters;
  4. voting according to the brokerage firm’s voting policies; or,
  5. voting shares in proportion to the way the brokerage’s other clients have voted their shares.

If investors did not declare a preference, the default choice would be proportional voting, and investors could always override these choices with their own. Latham noted the need to expand the concept of CDV to include options provided by ProxyDemocracy.org, TransparentDemocracy.org, MoxyVote.com and others as they develop.

A lively discussion ensued on issues such as: LathamAud

  • Why should we think recommendations by these groups, or indeed the current advisors to institutional investors are any good?
  • How important is making money and what part would other values play in CDV options?
  • Would these organizations not only lead to greater participation by retail shareowners but also greater financial literacy?
  • Are there various legal issues that need to be addressed around free speech, fiduciary duties, and/or proxy solicitation? (download, for example, a request to the SEC re guidance)
  • How will these sites drive the selection of mutual funds and the limited options available to most workers through 401(k) type plans?KimCranston

I spotted Kim Cranston, President of TransparentDemocracy.org, in the back of the room and had a few minutes to chat with him after the event. Their site covers both civil and corporate elections and is designed to will help you…

  • Learn more about the contests on your ballot,
  • See how organizations and individuals recommend that you vote,
  • Create a printed ballot based on your opinions that you can use to mark your real ballot,
  • Share your opinions with friends.

A video recording of the session with Mark Latham will be posted on the Arthur and Toni Rembe Rock Center site by early December. The next stop for Latham was the Institute of Governmental Studies at the University of California at Berkeley.

Mark Latham"We can support public interest journalism with our tax funds, by letting voters allocate the funding to competing media organizations. This would prevent the government from controlling the publicly funded media and their messages. Such a system has been implemented for three years at the University of British Columbia’s student union, and tested in Vancouver’s 2008 civic election. Each voter community can fund its own media: each municipality, state, country, student union, labor union, corporation etc. The city of Berkeley may be a good fit for the next implementation."

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How to Govern Corporations So They Serve the Public Good: Wrong Title, Right Book

William Sun’s excellent book is less on how to govern corporations to serve the public good than it is an analysis of corporate governance from the perspective of ontology, epistemology, and sociology of knowledge. Sun does an absolutely fascinating job of tracing the development of two pre-Socratic cosmologies that continue to shape modern thought. Heraclitus emphasized the primacy of a fluxing, changeable and emergent or processual world. Parmenides insisted on the permanent and unchangeable nature of reality… a homeostatic and entitative conception of reality.

Sun favors a processual perspective, since it allows us to understand corporate governance as is is socially constructed. By stripping away the semiotic mask, he reveals how much of what is known in shareowner and stakeholder models of corporate governance is based on political power.

Reading his book was a personal joy to me, since my mind was transported back to graduate school days as a student of Peter Berger during his all too brief tenure at Boston College. I found Berger and Luchmann’s The Social Construction of Reality a liberating work, since it implied that reality could be reconstructed to diminish coercion and domination.

However, Berger and Luchmann excluded from their treatise on the sociology of knowledge epistemological problems which they felt “belong” to the discipline of philosophy. “The sociology of knowledge must first of all concern itself with what people ‘know’ as ‘reality’ in their everyday, non- or pre-theoretical lives…” In other words, they didn’t seek to explore the possibility of obtaining a better approximation of the “truth,” but rather a better explanation as to how commonsense knowledge is externalized, internalized and institutionalized.

The failure of Berger and Luchmann to weigh historical factors and their abandonment of ultimate concerns left no grounding or basis for analyzing coercion, long-term trends or future possibilities. Instead, through his body of work we are largely provided a description of how social reality constructed in the past is maintained in the present. The resulting static relativism limited Berger’s emancipatory potential, since a critical theory must evaluate whether the naive realism of everyday life is a necessity due to biosocial needs or a mere justification of false consciousness, necessary to maintain the status quo.

Berger lays blame for society’s ills largely on the state, which he sees as “devoid of personal meaning.”

One of his most liberating works, To Empower People, stresses the need for increasing the individual’s political efficacy through the mediating structures of neighborhood, family, church and voluntary associations. The only institutions not viewed by Berger as political are businesses. Failure to include that sphere may serve Berger from the “trap of politicizing all of life” but it largely dooms his efforts to empower people to failure.

William Sun’s offering suffers no such limitations. While the book speaks only indirectly to how corporations can be governed to better “serve the public good,” implicit is that such positive changes will follow once people realize how the corporate governance we know as “real” was socially constructed and once we employ a processual framework of time, space and context, leading to reflexive dialogue.

Sun is under no delusions. He writes, “living in a processual reality, we cannot ‘mirror’ corporate governance practices accurately, and cannot construct corporate governance ideally.” “To improve corporate governance we should not force-fit corporate reality into the established abstract templates… we need to turn away from the current dichotomized, entative and static way of theorising… We need to dive into the underlying living experiences and processes that comprise corporate practices to understand the internal impetuses and environmental dynamics that drive the processes and changes of corporate reality.”

After leading the reader through an exceptional deconstruction of Cartesian dualism, Locke’s empiricism, Kant’s objective idealism, the fallacy of representationalism, the realities of shareholder and stakeholder perspectives, the myth of market and economic efficiency, and much more, Sun focuses on the value of a processual view of knowledge, borrowing from a bevy of resources, including Richard Rorty.

Rorty aimed for a “philosophy without mirrors,” believing that what we need “is the ability to think about science in such a way that its being a ‘value-based enterprise’ occasions no surprise.

All that hinders us from doing so is the ingrained notion that ‘values’ are ‘inner’ whereas ‘facts’ are ‘outer.'” In his seminal work, Philosophy and the Mirror of Nature, Rorty wrote that “Hermeneutics is not ‘another way of knowing’ – ‘understanding’ as opposed to (predictive) ‘explanation.’ It is better seen as another way of coping.”

If we see knowing not as having an essence, to be described by scientists or philosophers, but rather as a right, by current standards, to believe, then we are well on the way to seeing conversation and the ultimate context within which knowledge is to be understood. Out focus shifts from the relation between human beings and the objects of their inquiry to the relation between alternative standards of justification, and from there to the actual changes in those standards which make up intellectual history. (p. 389)

Likewise, Sun has a similar aim for what he terms the processual approach, which is “not a denial of substance; rather, it views substance as merely stabilized clusters or patterns of variable processes.” “Processism tends to be ontologically realistic; yet, it is not a ‘being’ realism, but a ‘becoming’ realism.” Those who rail against a “one-size fits all” approach to corporate governance will find a strong advocate for structures that contextually emerge, rather than are pre-designed.

The shareowner model may be waning, because as Sun notes, physical assets and financial resources used to be more important than human resources and social capital. In the stakeholder perspective public corporations must be aware of their social obligations, such as fairness, social justice and the protection of employees. Human-capital intensive firms are more likely to move in the direction of the stakeholder model. Under a processual approach, political institutions, indeed all institutions, cannot take human nature as a given but must accept some responsibility for their involvement in its creation.

“Unlike the current theoretical models that rest their solutions on scientific measures and universal recipes, we suggest the explicit change of corporate governance to be initiated and triggered in the sense of collective construction and discourse formation.” “The key factor in context-making is to find or create a more powerful ‘attractor’ to compete with the dominant ‘attractor’ and to shift the old one to the new one to create a new context.” “Corporate governance and control must be realised through our collective representations – representations of our will, desire and sense-making, representation of a specific mode of thought and social convention, and the representation of social negotiation, selection endorsement and rationalism… in an ideal construction process, corporate governance is not seen as universally good, but as partial, selective and interested.”

While Sun appears relatively certain that a processual approach will bring new insights and open dialogue, he is less certain about the criteria for judging governance, “all of which depend on the social construction of ‘faith.'” Ultimately, he aims for “balanced and pluralistic thinking.”

“Although the damage caused by corporate violations is far more serious than the individually perpetrated crime, it is regarded by the public as less of a crime.” To get people to understand that requires a change in conciousness. Corporate governance is best understood in the context of capitalism, where Sun finds three dilemmas:

  1. The conflict between self-interest and others’ interest, or private interest and public interest. Capitalism presupposes the sacredness and inviolability of private property rights as its first principle. Other interests must be considered within that context.
  2. The conflict between the economic interest and the social interest. All other possible principles and values such as justice, equity, humanity, and religion are subsumed to protecting capitalist interests. This rationality leads to its own contradiction and such notions as “the only responsibility of the corporation is to make profit.”
  3. The conflict between shareowner and manager interests. How capitalist interests are protected from management’s manipulation is a serious concern of politicians, academics and corporate owners. Agency theory, will it hold back the coming pitchforks?

Perhaps Sun will shake up the world of corporate governance like Werner Karl Heisenberg shook up physics. But, as Robert Chia notes in the book’s introduction, “despite the advent of quantum mechanics the assumption regarding the primacy of substance and entities over patterns and relationships remains pervasive and overwhelming.” Our conceptions of reality take a long time to change. Unfortunately, time for central issues like corporate governance may be running out, given the moral and environmental challenges we face.

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Handbook of Social Capital

When Tocqueville visited the United States in the 1830s, it was our propensity for civic association that impressed him as the key to making democracy work. "Americans of all ages, all stations in life, and all types of disposition:’ he observed, "are forever
forming associations. There are not only commercial and industrial associations in which all take part, but others of a thousand different types–religious, moral, serious, futile, very general and very limited, immensely large and very minute…. Nothing, in my view, deserves more attention than the intellectual and moral associations in America." Robert D. Putnam’s famous 1995 essay, Bowling Alone, introduced many to the concept of social capital.

Gert Tinggaard Svendsen and Gunnar Lind Haase Svendsen have edited an informative and greatly expanded update. The "Handbook Of Social Capital: The Troika of Sociology, Political Science and Economics" examines how three disciplines work together in developing and shaping networks. Economics primarily focuses on transaction costs. Political science focuses on institutions and sociology focuses on the norms that regulate behavior.

Life is easier in communities with high social capital. Networks of civic engagement foster generalized reciprocity and trust. Communication and coordination amplify the growth of reputations, facilitating collective action. Well worn templates and success lead to future collaboration and broaden our sense of empowerment. I read the essay’s mainly thinking of how these concepts might be applied to internet sites, such as the Investor Suffrage Movement, Proxy Democracy.org, Shareowners.org, TransparentDemocracy.org, MoxyVote.com, and VoterMedia.org.

One concept discussed by the editors was that of bridging vs. bonding. Bridging implies open networks across social cleavages, inclusion, and generalized trust. Bonding implies closed, inward looking networks based on particularized trust. Bridging seems more important for organizations attempting to facilitate shareowner action.

According to Elinor Ostrom and T.K. Ahn, "trust is the core link between social capital and collective action. Trust is enhanced when individuals are trustworthy, are networked with one another and are within institutions that reward honest behavior." One interesting study found that reciprocal agents using conditionally cooperative strategies have a higher chance to interact with one another and the surrounding population than agents who defect. "Information regarding a potential transaction partner’s trustworthiness is crucial when trustworthy individuals try to initiate cooperation."

Reputation is everything. "Self-governing systems in any arena of social interaction tend to be more efficient and stable not because of any magical effects of grassroots participation itself but because of the social capital in the form of effective working rules those systems are more likely to develop and preserve, the networks that the participants have created and the norms they have adopted." For example in in development projects, even "primitive" irrigation systems developed with the involvement of farmers often outperform those using more modern concrete and steel headworks. Investment by participants makes the difference.

In other words, in project planning we need to focus as much on the incentives of participants as we do on the physical or virtual technical infrastructure. Simply agreeing on a set of rules put in place with by others may get something up and running but doesn’t engender participation or long-term success.

Poulsen discusses research on cooperation, such as the "Prisoner’s Dilemma." Cooperation often falls over time because reciprocally minded subjects give up contributing if they feel like they are the only ones doing so. Punishing or expelling nonparticipants can generate higher and more stable cooperation but only if group members have information about each other’s contributions.

The chapter, "Corruption," by Uslaner found unequal distribution of resources in a society to be at the heart of the problem. Inequality leads to low generalized trust and high in-group trust, which leads to corruption, which leads to more inequality. Corruption thrives on particularized trust, where people only have faith in their own kind or small circle. "The policies that work best to reduce inequality and promote trust – universalistic social welfare policies – also depend upon honest governments to deliver the good and upon a social compact to provide benefits such as universal education and health care to the rich and poor alike."

Rothstein carries the theme forward by noting the services for the poor tend to become "poor services," whereas if all are included, middle and upper classes will demand higher quality. Popular movements of protest and self-help stand in contrast with charities dominated by middle and upper classes. "Needs testing and bureaucratic discretionary power are often more difficult to reconcile with principles of procedural justice, compared with universal public services. Since selective welfare institutions must test each case individually, they are to a greater extent subject to the suspicion of cheating, arbitrariness and discrimination, compared with universal public agencies."

That should give potential readers a rough idea of some key discussions. While the Handbook is geared toward an academic audience, especially those concerned with economic, political and social development, the more general reader will also find important insights in the cross-disciplinary approach.

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