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What if people are basically good?

by Simon Longstaff

Have you ever noticed that most of the discussion about corporate governance seems to ignore the implications of a simple observation; namely, that corporations are made up of people? Specifically, advocates of various regimes for corporate governance are silent about an absolutely fundamental question: what (if anything) is the basic nature of humanity?

I have in another place (Longstaff, 1996) sought to distinguish between three rival versions of human nature. In doing so, a spectrum of opinion is drawn across the representative figures of Machiavelli, Robespierre and Rousseau. It is argued that Machiavelli presents an essentially negative view of human nature and, as such, recommends the use of fear and fraud to establish order and the primacy of the prince. Robespierre is seen as emblematic of a position that regards human nature in more 'neutral' terms – with 'bad apples' having to be controlled and ultimately, pruned.

In contrast to these positions, Rousseau offers an essentially positive account of human nature. It is this account that I wish to explore in this article. In doing so, I wish also to make some comments in relation to the field of corporate governance.

Rousseau presents us with a complex picture. While accepting that people may not be all that good he rejects, utterly, the Machiavellian depiction. Although somewhat unfair to Hobbes, the following quotation makes the point:

Above all, let us not conclude with Hobbes that man (sic) is naturally evil just because he has no idea of goodness, that he is vicious for want of any knowledge of virtue, that he always refuses to do his fellow-men services which he does not believe he owes them, or that on the strength of the right he reasonably claims to things he needs, he foolishly imagines himself to be the sole proprietor of the whole universe.

(Rousseau, 1984, p. 98)

What makes the picture complex is that Rousseau says, in his notes to the Origins of Inequality:

Men are wicked; melancholy and constant proof removes any need for proof. Yet man is naturally good; I believe I have demonstrated it.

(Rousseau, ibid, p. 147)

It is a curious confection that we are offered. Yet, for all that we can see a striking difference to the position adopted by Machiavelli.

Rousseau 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. Like Machiavelli, Rousseau has a set of solutions for resolving the problem. Many will find his economic prescriptions unpalatable as he traces the origins of inequality to the institution of private property. However, his more general prescriptions are of more immediate interest.

Machiavelli sought to meet the human condition by the intervention of a prince able to use fear, force and deceit and Robespierre sought to excise or control the vicious. Rousseau offers this alternative; those unable to return to a sublimely innocent natural state will endeavour:

... by the exercise of virtues which they commit themselves to practise while learning to understand them, to deserve the eternal prize that they ought to expect for them; they will respect the sacred bonds of the societies of which they are members; they will love their fellow-men and serve them with all their strength; they will scrupulously obey the laws and the men who are the authors and the ministers of the laws; they will honour above all the good and wise prices who know how to prevent, cure and relieve that mass of abuses and evils which are always ready to overwhelm us; they will animate the zeal of those worthy rulers, showing them without fear or flattery the greatness of their task and the rigour of their duty, ...

(Rousseau, ibid p. 153, my highlighting)

Rousseau recognises that, for the vast majority of humanity, it will be near impossible to recover the condition of innocence that existed prior to the 'fall' from a state of nature. However, he does offer an alternative response that echoes the traditions of Aristotle and Aquinas. That is, he advocates that people “exercise ... virtues which they commit themselves to practice while learning to understand them.”

Rousseau's 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. Most importantly, people are enjoined to move beyond mere imitation of virtuous behaviour and through practise, come to understand dispositions that they eventually make their own.

This is not the place to offer a comprehensive account of the means by which virtuous behaviour can be encouraged and developed. Suffice it to say that the development of virtuous individuals and organisations is only possible in an environment in which people are consciously reflective about the status of shared practices that define their daily activity. In this context, the two great enemies of progress are firstly, a lack of integrity through which people (or organisations) say one thing and do another and secondly, a lack of thought in which people do things “just because that's the way we do things around here”.

Rousseau offers a radical alternative in the area of corporate governance. Rather than using the primarily negative responses that flow from Machiavelli and Robespierre, Rousseau offers a multi-faceted approach that combines education about 'best practice' with an opportunity to take responsibility for one's deeds.

To talk of education (as opposed to indoctrination) is to allow room for consideration of the interests of those being educated. Thus, in this environment, there will be a legitimate expectation that adherence to best practice in corporate governance will be of benefit to each of the parties bound into the relevant relationships.

These benefits may be of two types. Some will be 'intrinsic' benefits – such as when things are done for their own sake. These might include reforms in relations between stakeholders based on respect for the inherent dignity of persons. For example, board functions designed to ensure that accounts are 'true and fair' (compelling concepts despite their official demise), would just as likely be based on a belief that lying and deceit are an affront to the dignity of persons, as a desire to ensure technical accuracy as a way of securing market approval or avoiding punishment.

Then there are 'extrinsic' benefits – goods that flow from an action and which are external to the deed. For example, returning a lost wallet in order to secure a financial reward is to act in order to receive an extrinsic benefit. As indicated above, a decision to determine the quality of annual accounts according to the likelihood of earning praise from the market or regulator would be to act in the expectation of extrinsic benefits. It should be noted, in passing, that unlike 'intrinsic' benefits (which are entirely positive) 'extrinsic' benefits can be in both a 'positive' and 'negative' form. By 'positive' extrinsic benefits I mean those that produce some good that would otherwise have been absent. By 'negative' extrinsic benefits I mean those which involve escaping some adverse outcome that might otherwise have occurred.

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. In circumstances where all or most matters are decided in advance by the legislature, or regulators, individual directors and boards are (somewhat paradoxically) relieved of their sense of responsibility. One hears comments like: “Why bother worrying about x. It's up to the government to decide. If they haven't said that it is wrong; if it is legal – then it must be ok”. In such circumstances, all manner of wrongs can be committed by otherwise decent people who have suspended their judgement in deference to the authorities.

At the 'micro' level, 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. That is, the Board will adopt policies that reward compliant behaviour and not just punish the errant.

This approach takes on even greater significance when attention is directed away from issues of compliance and towards the challenge of performance. In a significant passage from Strictly Boardroom, Hilmer writes:

The board's key role is to ensure that corporate management is continuously and effectively striving for above-average performance, taking account of risk. This is not to deny the board's additional role with respect to shareholder protection.

(Hilmer, 1993, p. 33)

If Hilmer is right in his recommendation, then it is clear that boards must do everything in their power to establish a framework of policies within which performance can be maximised, taking account of risk. Given recent developments in the theory of organisational behaviour there are good reasons for holding that people perform best when managed according to a paradigm which, like Roussear's, assumes the predominance of positive aspects in human nature. A responsible board should take full account of this sort of information and ensure that it informs its deliberations when approving policy. Not to do so, would be to court the charge of insincerity in the pursuit of improved performance.

Most of the points outlined above relate to prudential reasons for encouraging best practice in corporate governance. There are also ethical reasons which bring us back to the central theme of this article. Corporate governance is about setting a framework within which extraordinarily complex relationships unfold on a daily basis. As previously noted, business is a human institution. Whether human nature is set in stone or not is open to debate. My own view is that the good within people can be liberated within supportive social environments. If we want a better world, then it is incumbent on directors to exercise positive influence over those parts of society which they control.

There is a profoundly moral aspect to corporate governance. Not only does a board have to decide the broad parameters within which a company will operate, it also has to decide how the company will be. That is, the board has a vital role to play when helping the organisation to answer the questions, “Who are we? What do we stand for?”

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