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Relationships, behaviours and interactions of people in corporate governance

by Simon Longstaff

There is nothing like the prospect of a controversial annual general meeting to get the blood racing over issues to do with corporate governance.

Debate rages about the propriety of related party transactions, the use of share options to remunerate executive directors, what counts as an acceptable level of disclosure to shareholders and so on. Yet, for all the sound and fury, it is quite remarkable that few ever pause to ask some basic questions touching on the nature of the debate.

Like most things in life, issues arising in the field of corporate governance boil down to a set of questions about relationships. Behind the legal fiction of the corporation lies a reality constituted entirely by the actions and interactions of people: people interacting with other people; people interacting with the products of technology; people interacting with systems and people interacting with the full variety of the natural world.

This may seem to be a fairly obvious point to labour. However, most of the discussion about corporate governance seems to ignore the implications of this simple observation. Specifically, advocates of various regimes for corporate governance are silent about an absolutely fundamental question; namely, “What (if anything) is the basic nature of humanity?”.

Three alternative perspectives appear to shape thinking in this area. For the sake of convenience, let each perspective be named after three 'students' of human nature: Machiavelli, Robespierre and Rousseau.

Machiavelli argues, in The Prince, that human nature is basically flawed. He counsels the prince to act like a beast - learning from both the fox and the lion. He observes that “... contemporary experience shows that princes who have achieved great things have been those who have given their word lightly, who have known how to trick men with their cunning, and who, in the end, have overcome those abiding by honest principles.”

The implications for corporate governance are fairly obvious. If we accept Machiavelli's view of the world (and there is plenty of evidence that many do!), then the 'natural' response will be to establish corporate governance structures and procedures that are designed to constrain and punish subordinates. It's distressingly common to find people in the public and private sectors who continue to operate out of fear of the consequences. In such an environment, the vital force of responsible discretion is crushed. Instead a culture of subservience is allowed to develop and eventually, fail.

Robespierre held what might be called the 'rotten apple' view of human nature. According to this perspective, most people are good (or at least harmless). However, there are some who are unwilling or unable to be reformed. Society will only be perfected if such people are eliminated. For the rest, a sufficiently rigorous scheme of checks and balances, complemented by a comprehensive system of surveillance, will ensure the habits of compliance.

When compared to Machiavelli, the 'Robespierrist' perspective is relatively enlightened in its view of the basic human constitution. At least it allows the possibility of virtue in some cases. On the other hand, it is uncompromising in its response to irremediable 'vice'. The finality of the guillotine allows neither appeal nor the possibility of reform.

Those who see the world in these terms develop systems of corporate governance that are similar to that produced under a 'Machiavellian' regime. Those looking for an analogy in the world of corporate governance might turn to examples of boards dominated by a strong executive chairman whose primary response to dissent is to lop off the heads of dissident directors and/or managers. One of the characteristics of a 'Robespierrist' framework is that the person in charge retains a nominal right to define what might be considered 'virtuous' behaviour. In these circumstances, the definition of what constitutes a 'rotten apple' amounts to nothing more than he or she who displeases the chairman.

One further consequence of this approach is a weakening of the conditions under which best practice and innovation might flourish. The 'Robespierrist' will only accept advice from the virtuous (who, in the end, are the only survivors). Given that the only ones to survive are those made in the image of Robespierre, there is little room for the kind of fresh approach that might be liberated by a dissident.

At the other end of the spectrum we find Rousseau who believes in the inherent goodness of people. His problem is that human society has evolved in a manner that has buried this goodness under a cover of selfish behaviour. His recommendation is based on his belief that people can take positive steps to orient their practice in line with their underlying goodness. The inculcation of virtue requires people to accept personal responsibility for their lives and places a premium on self-discipline and exemplary behaviour.

As in the case of the views attributed to Machiavelli and Robespierre, those of Rousseau have their practical application in the field of corporate governance. Fear of punishment or an over-reliance on control mechanisms are replaced with a fair degree of self-regulation as the preferred basis for ensuring sound practice in the field of corporate governance. The reason for this is simple. Virtuous dispositions can only be developed through practice. Similarly, a sense of personal responsibility only develops in an environment where choice is a genuine option.

Rousseau suggests that good corporate governance will be fostered by the adoption of 'inclusive' procedures designed to bring all the relevant parties into the process. For example, if compliance is an issue, say, for a Board's Due Diligence Committee, then it might achieve best practice by encouraging management to focus on developing a culture (or ethos) that is supportive of compliant behaviour.

So, where do things stand in Australia? Unfortunately most companies seem to reject a positive view of human nature. Instead they remain wedded to outmoded and expensive compliance regimes that provide the illusion of certainty.

The sad fact is that an unhealthy number of Australian companies act as if fearful of the risks associated with trusting people to absorb and apply the basic values and principles that lie at the heart of all effective systems of corporate governance.

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