Tag Archives | stakeholder

Directors Forum 2018: Best Stakeholder Interactions

Directors Forum 2018: Directors, Management & Shareholders in Dialogue brings together investors, directors and management to engage in open, off-the-record dialogue about today’s pressing governance issues. Speakers will put a spotlight on the escalating impact of “corporate culture” on business success.

Hosted by Corporate Directors Forum, Directors Forum 2018 will be held on January 21-23, 2018 at the University of San Diego.  It is designed to encourage interaction between attendees and the nation’s leading corporate governance authorities. Continue Reading →

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Board Seats for Franchisees: Democratic Paradigm

Franchisees DemocracyMcDonald’s shareholders will vote on a proposal to give franchisees a seat on its corporate board of directors at their annual meeting in May. See ‘McD’s must let investors vote on proposal to give franchisees a board seat.’ (Crain’s) Could similar, more inclusive, proposals use preferred shares to create new forms of stakeholder democracy? A report at Twitter could assess viable options. (#WeAreTwitter Record Date Approaches

Under the proposal, McDonald’s would have to issue franchisees a special class of stock with the right to elect one director, but carrying no economic interest in the company. Each franchisee would get one share of stock with one vote for each restaurant the franchisee owns.

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Video Friday: Rethinking the structure of corporations, Michael Yaziji

imagesMajor corporations are very good at maximizing revenue capture for their owners — but they do so by externalizing costs to society. This drives many of the fundamental problems we currently face, from environmental degradation to economic inequality. IMD Professor Michael Yaziji discusses limitations to the three current solutions to this root challenge: the free market, regulation and socialization. He also proposes a new fourth solution that deconstructs the concept of capitalism to maximize the benefits of market competition and minimize the societal impact of current systems: changing company ownership and governance structures to internalize the interests, and so create value for all stakeholders. Continue Reading →

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Stakeholder Theory: Impact and Prospects

Stakeholder Theory: Impact and Prospects edited by Robert A. Phillips provides a great education in history to those of us who have been using the term “stakeholder” but who have little idea of its origins.

Honoring the twenty-fifth anniversary of R. Edward Freeman’s Strategic Management: A Stakeholder Approach, Phillips assembles a collection of commentaries and critiques by some of the most influential scholars of
stakeholder theory, with concluding remarks from Freeman himself.

The book starts by delving into citations and moves quickly to address three mischaracterizations of the original work:

  1. The assumption that Freeman approves of CSR – sees CSR as actually Continue Reading →
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Moving Toward Democracy

Andrea Bonime-Blanc and Mark Brzezinski, writing for the NYTimes (Business and the Way of Democracy, 12/26/09) argue “Much like transitions to democracy over the past four decades transformed governments from mostly authoritarian to mostly democratic, we are currently witnessing a transformation of global corporations from a more or less opaque shareholder-centric model to a more transparent multi-stakeholder model.”

According to Bonime-Blanc and Brzezinski, companies are embracing five trends:

  1. Adopting better governance with stronger shareholder rights, board rules, director accountability and pay for performance.
  2. Integrating corporate integrity programs into business strategy and leadership development.
  3. Pursuing dialogue with multiple and increasingly vocal stakeholders.
  4. Engaging proactively with regulators intent on trans-border cooperation and enforcement (especially regarding anti-corruption, anti-money laundering, antitrust and anti-fraud).
  5. Catering to two critical constituents — employees and customers — who have shown greater willingness, and ability, to “vote with their feet.
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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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A Primer for Boards

Cornelis A. de Kluyver, an academic and practitioner with global experience, has written A Primer on Corporate Governance published by Business Expert Press. While not nearly as extensive as recent textbooks by Bob Tricker or Monks and Minow, this is a quick read that provides most of the basics for future directors and those who work with them.

He very briefly reviews the history of corporations, rise of fiduciary capitalism, recent moves to federalize corporate governance, various conflicts of interest, and provides a thumbnail international sketch. However, his short explanations sometimes over simplify. For example, in reviewing director duties he states, "the primacy of shareholder value maximization wa affirmed in a ruling by the Michigan State Supreme Court in Dodge vs. Ford Motor Company.

Unfortunately, he’s not alone in perpetuating this myth. In Why We Should Stop Teaching Dodge v. Ford (pdf, Virginia Law & Business Review, spring 2008), Lynn Stout argues more convincingly that credit for the concept that corporations exist only to make money for shareholders should go to law professors, not the courts. Dodge v. Ford is best viewed as a case that deals not with directors’ duties to maximize shareholder wealth, but with enforcing the fiduciary duty of controlling shareholders to minority shareholders. Because different shareowners have different investment time frames, tax concerns, attitudes toward risk, etc. it is impossible to discern a single, uniform measure of shareholder wealth to be maximized. Additionally:

  • Articles of incorporation typically don’t say they are organized primarily to profit shareholders but, instead, for anything lawful.
  • Similarly, state corporation codes typically provide their purpose is "to conduct or promote any lawful business or purpose" and many authorize corporate boards to consider other stakeholders.
  • Judges routinely refuse to impose any legal obligation on directors to maximize shareowner wealth.

De Kluyver does explore stakeholder theory but concludes shareholder value maximization "will continue to dominate the U.S. approach to corporate law for the foreseeable future," with the courts giving boards increasing latitude.

Elsewhere, he discusses governance reforms and concludes, "There is real danger, however, that the rise in shareholder activism, the new regulatory environment, and related social factors are pushing boards towards micromanagement and meddling." Many of us wish there had been a lot more "meddling" by boards prior to the current financial crisis, but de Kluyver is writing for board members, not shareowners.

Although he appears to reject recent moves to require specific subsets of directors to be independent, he appears to agree they should be more allied with shareowners than with management and that separating the roles of chairman and CEO "gives boards a structural basis for acting independently."

In discussing stock options, de Kluyver notes, "Until recently, many U.S. companies were not very diligent in assessing the cost and value of options and treated options as being cost-free." He says nothing about the Business Roundtable’s campaign to undermine the Financial Accounting Standards Board. An uninformed reader could be left with the impression that CEO’s had no role in this effort to hide costs. Likewise, he says "most of the pressure on boards on the last 25 years has come from shareholders." Hasn’t more pressure come from CEOs who are there providing direction at every board meeting? Even with recent steps empowering shareowners, CEOs still hold more sway over boards, including who is nominated.

In discussing shareowner proposals, de Kluyver says, "One of the most popular shareholder proposals today demands that shareholder be allowed to directly nominate and elected directors rather than work with the slate recommended by the board’s nominating committee." Popular in what sense?

The SEC allowed such proposals for many years until it looked like the proposals would obtain majority votes. Then the SEC, without changing the governing regulations, decided such resolutions violated the rules. That position stood for many years until challenged by AFSCME. When the underground regulations were overturned by the court only about three such proposals were introduced before the SEC, under Cox, banned them through new regulations. Now, under Schapiro, such proposals will again be legal, probably in 2010. To describe "proxy access" proposals in 2009 to be "the most popular shareholder proposals today," without much explanation, seems misleading.

In the book’s epilogue de Kluyver revisits the issue of "proxy access." However, rather than clarifying the issue he informs readers that the SEC considered proposed rules to allow it, but rejected them. Of course this is true, but de Kluyver gives the impression the issue is dead, whereas everyone following this issue has known for years that "proxy access" would be back on the table under a new administration. It would be important to note that majority voting requirements, the end to "broker voting" and proxy access will require boards to cooperate more closely with shareowners.

The book is at its best in borrowing liberally from thought leaders and consensus shaping organizations by providing various lists of best practices: Succession Planning is an Ongoing Process; CEO Selection: Common Board Mistakes; Succession Planning: Best Practices; Red Flags in Management Culture, Strategies, and Practices; 10 Questions About Ethics and Compliance for the Board; Five Questions About Hedging; Enterprise Risk Management: The Board’s New Tool; Executive Compensation: Best Practices, What Defines Best In-Class Boards?,; etc.

Regardless of my nitpicking, de Kluyver gets the big picture right. "The tug of war between individual freedom and institutional power is a continuing theme of history. Early on, the focus was on the church; more recently, it was on the civil state. Today, the debate is about making corporate power compatible with the needs of a democratic society." De Kluyver offers readers information that can help them to become better directors and better corporate citizens.

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