tag:blogger.com,1999:blog-25829980496991217972024-03-06T12:00:42.845-08:00Corporate Governance Best PracticesAnonymoushttp://www.blogger.com/profile/10194436589647636157noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-2582998049699121797.post-25549192040672463482011-06-07T20:49:00.000-07:002011-06-07T21:10:26.293-07:00Humanist Corporate Governance: A universal model for balancing power and aligning interests<div style="text-align: center;"><strong><a name="OLE_LINK3"><br />Abstract</a></strong><br /></div><br /><p class="MsoNormal" style="margin-bottom:14.0pt;line-height:150%;tab-stops:center 186.0pt"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-bidi- mso-bidi-theme-font:minor-latin;font-family:Calibri;" >This monograph attempts to add clarity to the complex subject of corporate governance by offering an alternative conceptual model for a corporate board as a parental archetype, and the firm as its android child.<span style="mso-spacerun:yes"> </span>Costly, systemic power imbalances and conflicts of interest, inherent in the conventional model, are resolved by applying ancient Roman property law principles (<i style="mso-bidi-font-style:normal">usus</i>, <i style="mso-bidi-font-style: normal">fructus</i>, and <i style="mso-bidi-font-style:normal">abusus</i>).</span></span></span></span></p> <p class="MsoNormal" style="margin-bottom:14.0pt;line-height:150%;tab-stops:center 186.0pt"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-bidi- mso-bidi-theme-font:minor-latin;font-family:Calibri;" > </span></span></span></span></p> <p style="text-align: center;"> <span style="font-size:11.0pt;mso-bidi-font-family:"Calibri","sans-serif"; mso-ascii-theme-font:minor-latin;mso-fareast-Times New Roman"; mso-fareast-theme-font:minor-fareast;mso-hansi-theme-font:minor-latin; mso-bidi-theme-font:minor-latin;mso-ansi-language:EN-US;mso-fareast-language: EN-US;mso-bidi-language:AR-SAfont-family:";font-size:10.0pt;" ><br /></span></p><div style="text-align: center;"> </div><div style="border-width: 1pt medium; border-style: dotted none; border-color: rgb(99, 36, 35) -moz-use-text-color; padding: 1pt 0in 6pt; text-align: center;"> <p class="MsoTitle"> </p> <p class="Publishwithline"><span style="mso-bidi-mso-bidi-theme-font:minor-latin;color:#632423;mso-theme mso-themeshade:128;text-transform:uppercase;letter-spacing:2.5pt;mso-bidi-language: EN-USfont-family:Calibri;font-size:22.0pt;color:accent2;" >HUMANIST CORPORATE GOVERNANCE: A UNIVERSAL MODEL FOR BALANCING POWER AND ALIGNING INTERESTS</span></p> </div><div style="text-align: center;"> </div><p style="text-align: center;" class="Author"><br /></p> <p class="Author"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark: OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family: Calibri;mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font: minor-latinfont-family:Calibri;" > </span></span></span></span></p> <h1><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5">Introduction</span></span></span></h1> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >Corporate governance is a complex subject.<span style="mso-spacerun:yes"> </span>It has been defined in many different ways, and has been the subject of countless debates about its purpose, roles, and responsibilities.<span style="mso-spacerun:yes"> </span>Corporate directors’ legal obligations vary across jurisdictions, and opinions about corporate governance best practices, their value, and the means by which to adopt them are conflicting.<span style="mso-spacerun:yes"> </span>Overwhelmed by the myriad factors that shape our understanding of corporate governance, it is not surprising that the state of corporate governance worldwide is in a state of crisis and is subject to unprecedented scrutiny.</span></span></span></span></p> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >Reactive regulations that restrict corporate conduct in response to a series of corporate scandals and financial crisis have opened a space for massive reform.<span style="mso-spacerun:yes"> </span>The accelerating downward spiral of systemic failures and regulatory plugs, combined with the emergence of powerful competitive forces, has put western-style capitalism at a crossroads. <span style="mso-spacerun:yes"> </span>The soul-searching dialogue to improve understanding and redefine the desired future of corporate governance is already underway.<span style="mso-spacerun:yes"> </span>Now, even conventional wisdom and the most cherished beliefs are on the table and open for discussion.<span style="mso-spacerun:yes"> </span>However, what is now accepted as “good” corporate governance, if left uncontested, will keep capitalism on its current, unsustainable trajectory.<span style="mso-spacerun:yes"> </span>Left uncorrected, marginalized anti-capitalist forces will gain power and momentum, threatening to swing the economic pendulum to its opposite extreme.<span style="mso-spacerun:yes"> </span>By definition, neither extreme is sustainable and both are undesirable.<span style="mso-spacerun:yes"> </span>Choices that consider the full complexity of the business environment need to be guided by principles and frameworks that promote adoption of balanced approaches for addressing ever-changing demands on corporate governance.</span></span></span></span></p> <h1><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5">Conceptual Models </span></span></span></h1> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >Complex concepts and interactions are difficult to describe and comprehend.<span style="mso-spacerun:yes"> </span>Often metaphors and conceptual analogies can be useful techniques for relating what is known and familiar to things that may be difficult to grasp.<span style="mso-spacerun:yes"> </span>A conceptual model is valid when it provides a context that reliably infers meanings to occurrences and helps clarify uncertain cause and effect dynamics.<span style="mso-spacerun:yes"> </span>It is difficult, if not impossible, to reach consensus about a complex subject when people’s perspectives are rooted in incompatible conceptual models.<span style="mso-spacerun:yes"> </span>It would therefore be misguided to attempt a diagnosis or design of corporate governance systems by relying on incompatible views about its fundamental nature.</span></span></span></span></p> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >Although desirable, it may be equally unrealistic to expect everyone to hold the same world view of corporate governance as it is for everyone to share the same political values or religious beliefs.<span style="mso-spacerun:yes"> </span>Nevertheless, an explicit expression of one’s concept of corporate governance would be beneficial for gaining insights into how to evolve corporate laws, corporate governance systems, and board practices.</span></span></span></span></p> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >Many corporate directors see themselves as representing shareholder interests in monitoring the activities of management, analogous to a watchdog delegate.<span style="mso-spacerun:yes"> </span>Other directors see themselves as independent guardians of the integrity of the capitalist system, analogous to judges ruling on management conduct.<span style="mso-spacerun:yes"> </span>Yet others may identify with being a sounding board for management, akin to a mentor.<span style="mso-spacerun:yes"> </span>Most would likely feel uncomfortable choosing any one archetype.<span style="mso-spacerun:yes"> </span>Instead, they might prefer to provide a description of their primary roles and responsibilities as corporate directors.<span style="mso-spacerun:yes"> </span>The challenge with picking just one archetype is that it may not fit all corporate forms (private, listed, non-profit, etc.) and situations, or it may not fully encompass the director’s conceptual model of corporate governance.<span style="mso-spacerun:yes"> </span>However, this is problematic, because it allows for inconsistencies and contradictions to infect any viable unifying conceptual model of corporate governance.</span></span></span></span></p> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >Consider the possibility that the purpose and role every corporate board, of any corporate form, in any situation, best fits a <i style="mso-bidi-font-style:normal">parental archetype</i></span></span></span></span><a style="mso-endnote-id:edn1" href="http://posterous.com/posts/new/1904142#_edn1" name="_ednref1" title=""><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span class="MsoEndnoteReference"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" ><span style="mso-special-character: footnote"><span class="MsoEndnoteReference"><span style="font-family:"Calibri","sans-serif";mso-ascii-theme-font: minor-latin;mso-fareast-Times New Roman";mso-fareast-theme-font: major-fareast;mso-hansi-theme-font:minor-latin;mso-bidi-theme-font:minor-latin; mso-ansi-language:EN-US;mso-fareast-language:EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[i]</span></span></span></span></span></span></span></span></a><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri;mso-hansi-theme-font: minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >.<span style="mso-spacerun:yes"> </span>A parent’s overriding objectives are to develop their child into a productive and valued member of society.<span style="mso-spacerun:yes"> </span>It is a complex role, because success depends on many factors both within and outside the parent’s control (genetics, family, friends, external influences, etc.), and there is generally not a direct cause-effect relationship between what parents do and how the child responds.<span style="mso-spacerun:yes"> </span>After giving birth to their child, parents create supportive conditions for the child’s development, protection, and self-determination.<span style="mso-spacerun:yes"> </span>These characteristics are strikingly similar to the role of a corporate board.<span style="mso-spacerun:yes"> </span>Similarly, the legal relationship between the parent and the child is essentially the same as the fiduciary duty the board has to the corporation.</span></span></span></span></p> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >Consider also the possibility that the corporation, a legal person in law, is an incomplete person, analogous to an android</span></span></span></span><a style="mso-endnote-id:edn2" href="http://posterous.com/posts/new/1904142#_edn2" name="_ednref2" title=""><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span class="MsoEndnoteReference"><span style="mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri;mso-hansi-theme-font: minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" ><span style="mso-special-character:footnote"><span class="MsoEndnoteReference"><span style="font-family:"Calibri","sans-serif"; mso-ascii-theme-font:minor-latin;mso-fareast-Times New Roman"; mso-fareast-theme-font:major-fareast;mso-hansi-theme-font:minor-latin; mso-bidi-theme-font:minor-latin;mso-ansi-language:EN-US;mso-fareast-language: EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[ii]</span></span></span></span></span></span></span></span></a><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri;mso-hansi-theme-font: minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >.<span style="mso-spacerun:yes"> </span>A corporation exists as a member of society, but does not have the same human needs as natural members of society.<span style="mso-spacerun:yes"> </span>For that reason, corporations need to be socialized to fit in with society and function as productive and valued participants.<span style="mso-spacerun:yes"> </span>Left to their own devices, despite being comprised of individuals engaged in a common enterprise, corporations are distinct entities that do not have the same needs or sensibilities as the people with whom they interact and whose lives they affect.<span style="mso-spacerun:yes"> </span>As such, they need a systemic human connection that assures their productive integration into society.<span style="mso-spacerun:yes"> </span>That responsibility resides squarely with the board of directors.<span style="mso-spacerun:yes"> </span>Hence, the overriding purpose of corporate governance may well be to productively integrate corporations into society.</span></span></span></span></p> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >Although these analogies might sound reasonable in theory, closer scrutiny reveals significant incongruence with experience.<span style="mso-spacerun:yes"> </span>Most notably, for-profit corporations are considered to be the property of their shareholders.<span style="mso-spacerun:yes"> </span>Unfortunately, this contradicts the principle that people are not property.<span style="mso-spacerun:yes"> </span>It can therefore be argued that ownership of legal persons is analogous to slavery, which is illegal.<span style="mso-spacerun:yes"> </span>Any universal view of corporate governance would have to be equally valid for all corporate forms, including non-profit corporations that do not have owners, but instead have members who serve as their principles (effective owners).<span style="mso-spacerun:yes"> </span>The conventional view of the corporation as property considers non-profits to be a special case, and therefore invalidate its universality.</span></span></span></span></p> <h1><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5">Ownership</span></span></span></h1> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >Another way to look at the ownership dilemma is from a property rights perspective.<span style="mso-spacerun:yes"> </span>Ownership of shares, does not carry the same rights as title to real property, such as a plot of land</span></span></span></span><a style="mso-endnote-id:edn3" href="http://posterous.com/posts/new/1904142#_edn3" name="_ednref3" title=""><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span class="MsoEndnoteReference"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" ><span style="mso-special-character: footnote"><span class="MsoEndnoteReference"><span style="font-family:"Calibri","sans-serif";mso-ascii-theme-font: minor-latin;mso-fareast-Times New Roman";mso-fareast-theme-font: major-fareast;mso-hansi-theme-font:minor-latin;mso-bidi-theme-font:minor-latin; mso-ansi-language:EN-US;mso-fareast-language:EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[iii]</span></span></span></span></span></span></span></span></a><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri;mso-hansi-theme-font: minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >. Shares are an abstract legal instrument that conveys specific rights and obligations to shareholders, but does not pass on a title to the corporation.<span style="mso-spacerun:yes"> </span>It is therefore invalid to infer that stock ownership is the same as company ownership.<span style="mso-spacerun:yes"> </span>Shareholders are not company owners.<span style="mso-spacerun:yes"> </span>And since we know that members of not-profit companies are also not company owners, who is - if anyone?<span style="mso-spacerun:yes"> </span>This is where conventional wisdom breaks down.<span style="mso-spacerun:yes"> </span>Nobody owns a corporation, not even founding entrepreneurs.<span style="mso-spacerun:yes"> </span>A corporation is a legal person, and it is illegal to own people.</span></span></span></span></p> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >This clearly suggests a materially different conceptual model of the corporations in the western capitalist system, which is founded on inexorable principles of property ownership.<span style="mso-spacerun:yes"> </span>If corporations are not owned, but contracted, then what could be legitimate claims of shareholders and other stakeholders?<span style="mso-spacerun:yes"> </span>Under contract law, they are only entitled to what is contracted and mandated by law.<span style="mso-spacerun:yes"> </span>Shareowners have no innate claim to the property of a solvent corporation.<span style="mso-spacerun:yes"> </span>Although, shareholders typically have a right to sell their shares, vote for corporate directors and certain other matters, and claim the residual value of the corporation</span></span></span></span><a style="mso-endnote-id:edn4" href="http://posterous.com/posts/new/1904142#_edn4" name="_ednref4" title=""><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span class="MsoEndnoteReference"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" ><span style="mso-special-character: footnote"><span class="MsoEndnoteReference"><span style="font-family:"Calibri","sans-serif";mso-ascii-theme-font: minor-latin;mso-fareast-Times New Roman";mso-fareast-theme-font: major-fareast;mso-hansi-theme-font:minor-latin;mso-bidi-theme-font:minor-latin; mso-ansi-language:EN-US;mso-fareast-language:EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[iv]</span></span></span></span></span></span></span></span></a><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri;mso-hansi-theme-font: minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >, only equity participation is inherent to the concept of an equity share.<span style="mso-spacerun:yes"> </span>All other rights and obligations are contracted between the issuer (the corporation) and its shareholders.<span style="mso-spacerun:yes"> </span>It is therefore<span style="mso-spacerun:yes"> </span>not inconceivable that a corporation could choose to issue non-voting equity shares,<span style="mso-spacerun:yes"> </span>transfer-restricted capital stock, and/or even non-equity voting rights (as with members of non-profit corporations) to satisfy various corporate governance objectives.</span></span></span></span></p> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >If shareholders are only contractually entitled to equity participation, without ownership rights, to whom should corporate boards be accountable?<span style="mso-spacerun:yes"> </span>After all, even if one were to accept the possibility that the overriding purpose of corporate governance is to ensure corporations are productive members of society, then who in society should control the board?<span style="mso-spacerun:yes"> </span>Few would disagree that shareholders who have contributed capital to the business, capital stockowners whose capital is at risk of uncertain returns, are entitle to a voice on how the corporation is governed.<span style="mso-spacerun:yes"> </span>But should shareholders who purchased their shares from other shareholders, rather than the issuer, be entitled to the same rights?<span style="mso-spacerun:yes"> </span>The relationships of the capital stockowner and the market shareholder to the issuer are clearly not equivalent, and it would not be unreasonable for them to be entitled to distinct shareholder rights</span></span></span></span><a style="mso-endnote-id:edn5" href="http://posterous.com/posts/new/1904142#_edn5" name="_ednref5" title=""><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span class="MsoEndnoteReference"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" ><span style="mso-special-character: footnote"><span class="MsoEndnoteReference"><span style="font-family:"Calibri","sans-serif";mso-ascii-theme-font: minor-latin;mso-fareast-Times New Roman";mso-fareast-theme-font: major-fareast;mso-hansi-theme-font:minor-latin;mso-bidi-theme-font:minor-latin; mso-ansi-language:EN-US;mso-fareast-language:EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[v]</span></span></span></span></span></span></span></span></a><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri;mso-hansi-theme-font: minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >.</span></span></span></span></p> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >Subordinated rights of one class of shareholders that expose these shareholders, without remedy, to oppression by a majority equity holder (analogous to dual class share structures, whereby one class enjoys disproportionate voting rights relative to the equity value of the shares they hold) is generally undesirable.<span style="mso-spacerun:yes"> </span>However, if the relative powers of the classified shareholders were distributed equitably, such meritocratic (distinct from democratic) share structures could be made acceptable. </span></span></span></span></p> <h1><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5">Property Rights</span></span></span></h1> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >Ancient Roman principles of property rights were designed to prevent oppression by any one property reliant party over another by balancing property rights between all property stakeholders.<span style="mso-spacerun:yes"> </span>No property stakeholder, whether landlord or tenant, was allowed to hold all three rights of <i style="mso-bidi-font-style:normal">fructus</i>, <i style="mso-bidi-font-style: normal">abusus</i>, and <i style="mso-bidi-font-style:normal">usus</i>; namely the right to the yield from the land, the sale of the land, and to work the land.<span style="mso-spacerun:yes"> </span>Landowners had the right to <i style="mso-bidi-font-style:normal">abusus</i> (sell) and a portion of <i style="mso-bidi-font-style:normal">fructus</i> (yield), but not <i style="mso-bidi-font-style:normal">usus</i> (forbidden to work the land).<span style="mso-spacerun:yes"> </span>The tenant had the right to part of the <i style="mso-bidi-font-style:normal">fructus</i> and to <i style="mso-bidi-font-style: normal">usus</i>, but not to <i style="mso-bidi-font-style:normal">abusus</i>.<span style="mso-spacerun:yes"> </span>In the feudal system, no individual, not even the king, was allowed to own all three property rights</span></span></span></span><a style="mso-endnote-id:edn6" href="http://posterous.com/posts/new/1904142#_edn6" name="_ednref6" title=""><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span class="MsoEndnoteReference"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" ><span style="mso-special-character: footnote"><span class="MsoEndnoteReference"><span style="font-family:"Calibri","sans-serif";mso-ascii-theme-font: minor-latin;mso-fareast-Times New Roman";mso-fareast-theme-font: major-fareast;mso-hansi-theme-font:minor-latin;mso-bidi-theme-font:minor-latin; mso-ansi-language:EN-US;mso-fareast-language:EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[vi]</span></span></span></span></span></span></span></span></a><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri;mso-hansi-theme-font: minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >.<span style="mso-spacerun:yes"> </span>Consider the property rights enjoyed by today’s shareholders.<span style="mso-spacerun:yes"> </span>They enjoy all three rights; a portion of <i style="mso-bidi-font-style:normal">fructus</i> in the form a residual share of the equity, <i style="mso-bidi-font-style:normal">abusus</i> with a right to sell their shares, and <i style="mso-bidi-font-style:normal">usus</i> with voting rights.<span style="mso-spacerun:yes"> </span>Based on ancient Roman principles of property ownership, today’s shareholders have disproportionate power over issuers and other corporate stakeholders.</span></span></span></span></p> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >Applying Roman property law principles to today’s capital markets may seem like a step back rather than progress, but what if it were to offer a simple solution to many of the problems plaguing modern capitalism?<span style="mso-spacerun:yes"> </span>Suppose that capital stockowners had the right to part of the residual equity of the firm (<i style="mso-bidi-font-style:normal">fructus</i>) and the right to vote for corporate directors and other matters (<i style="mso-bidi-font-style:normal">usus</i>), but were restricted from selling their shares on public markets (<i style="mso-bidi-font-style:normal">abusus</i>).<span style="mso-spacerun:yes"> </span>This has historically been the customary practice of family-owned businesses, as they preferred to not exercise their right to sell (<i style="mso-bidi-font-style:normal">abusus)</i> in order to keep the business in the family.<span style="mso-spacerun:yes"> </span>Suppose, also that all other shareholders retained their right to an equal proportion of the gains (<i style="mso-bidi-font-style:normal">fructus</i>) and exclusivity to sell (<i style="mso-bidi-font-style:normal">abusus</i>), but their right to vote (<i style="mso-bidi-font-style:normal">usus</i>) were restricted or rescinded.<span style="mso-spacerun:yes"> </span>This could potentially eliminate the problem of shareholder oppression by removing the incentive of capital stockowners to expropriate capital resources from other non-voting shareowners.<span style="mso-spacerun:yes"> </span>It would also systematize long-term stockownership by contributors of capital (and specified opt-in shareholders), analogous to today’s buy-and-hold,<span style="mso-spacerun:yes"> </span>long-term shareholders.</span></span></span></span></p> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >This approach potentially offers an added benefit of unraveling the snarl of regulations that attempt to align management interests with shareholders.<span style="mso-spacerun:yes"> </span>By also replacing shares given to management with a class that restricts selling (<i style="mso-bidi-font-style:normal">abusus</i>)<i style="mso-bidi-font-style: normal">,</i> same as capital stockowners, management interests would inevitably become better aligned with voting stockowners, and would remove a major incentive for them to “play the expectations game”</span></span></span></span><a style="mso-endnote-id:edn7" href="http://posterous.com/posts/new/1904142#_edn7" name="_ednref7" title=""><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span class="MsoEndnoteReference"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" ><span style="mso-special-character: footnote"><span class="MsoEndnoteReference"><span style="font-family:"Calibri","sans-serif";mso-ascii-theme-font: minor-latin;mso-fareast-Times New Roman";mso-fareast-theme-font: major-fareast;mso-hansi-theme-font:minor-latin;mso-bidi-theme-font:minor-latin; mso-ansi-language:EN-US;mso-fareast-language:EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[vii]</span></span></span></span></span></span></span></span></a><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri;mso-hansi-theme-font: minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" > of stock price timing and manipulation.<span style="mso-spacerun:yes"> </span>Corporate directors, together with other strategic stakeholders, could receive transferrable (<i style="mso-bidi-font-style:normal">abusus</i>), non-equity voting (<i style="mso-bidi-font-style:normal">usus</i>) shares.<span style="mso-spacerun:yes"> </span>This would give society a direct voice in corporate governance, rather than being relegated to proxy voting of equity shares.</span></span></span></span></p> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >A derivative benefit would be the cost savings associated with stockowners not having to vote on every issue, thereby largely eliminating the plethora of current incarnations of internal and external proxy voting resources.<span style="mso-spacerun:yes"> </span>Instead, voting considerations by capital stockholders would largely be oriented toward considerations that affect long-term financial performance of the business.<span style="mso-spacerun:yes"> </span>Voting by other stakeholders (possibly including trading shareholders) could be conducted via stakeholder councils elected to represent the interests of the firm’s strategic stakeholders.<span style="mso-spacerun:yes"> </span>As a result, relatively few proxy votes would need to be counted.</span></span></span></span></p> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >There are also other implications to this system of corporate governance.<span style="mso-spacerun:yes"> </span>Most notable is the means by which capital stockholders divest, since their shares would not trade on public stock markets.<span style="mso-spacerun:yes"> </span>Also, valuations for capital stock would likely differ from the stock market prices of tradable shares. <span style="mso-spacerun:yes"> </span>Special liquidity requirements for capital stockowners (such as modifications to those currently used for private equity, share buy-backs, share conversions, etc.) would therefore need to be addressed.</span></span></span></span></p> <p> <span style="line-height:150%;font-family:"Calibri","sans-serif"; mso-ascii-theme-font:minor-latin;mso-fareast-Times New Roman"; mso-fareast-theme-font:major-fareast;mso-hansi-theme-font:minor-latin; mso-bidi-theme-font:minor-latin;mso-ansi-language:EN-US;mso-fareast-language: EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" ></span></p> <h1><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5">Conclusion</span></span></span></h1> <p class="MsoBodyText"><span style="mso-bookmark:OLE_LINK3"><span style="mso-bookmark:OLE_LINK4"><span style="mso-bookmark:OLE_LINK5"><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" >These proposals are clearly on the fringe of mainstream thinking about corporate governance.<span style="mso-spacerun:yes"> </span>They paint a picture of corporations as incomplete persons, rather than property; corporate boards as their parents, rather than representatives of owners; and shareholders as holders of contractual rights rather than owners of the corporation.<span style="mso-spacerun:yes"> </span>Boards become accountable primarily to stockowners who contributed capital to the corporation, but whose rights to sell their stocks are restricted.<span style="mso-spacerun:yes"> </span>All other strategic stakeholders have aggregated voting rights via a representative stakeholder council, which gives them a legitimate voice and counterbalancing power.<span style="mso-spacerun:yes"> </span>Executives are measured against financial and causal indicators of performance, regardless of share valuations, and do not receive tradable shares as compensation.<span style="mso-spacerun:yes"> </span>Together, these measures help to humanize the corporation and offer a humanist approach to corporate governance that puts the needs of people with legitimate, yet diverse, interests in the corporation at the forefront.<span style="mso-spacerun:yes"> </span>One can expect powerful, vested interests to vehemently resist any attempts to move in this direction.<span style="mso-spacerun:yes"> </span>Nevertheless, open dialogue and vociferous debate about the desired future state of corporate governance is gravely needed.<span style="mso-spacerun:yes"> </span>Adding humanist corporate governance to the discussion agenda could open new possibilities for correcting the inherent excesses of today’s capitalist system.</span></span></span></span></p> <div style="mso-element:endnote-list"><br /><hr align="left" size="1" width="33%"> <div style="mso-element:endnote" id="edn1"> <p class="MsoEndnoteText"><a style="mso-endnote-id:edn1" href="http://posterous.com/posts/new/1904142#_ednref1" name="_edn1" title=""><span class="MsoEndnoteReference"><span style="mso-ascii-font-family: Calibri;mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font: minor-latinfont-family:Calibri;" ><span style="mso-special-character:footnote"><span class="MsoEndnoteReference"><span style="font-size:10.0pt;mso-bidi-font-family:"Calibri","sans-serif";mso-ascii-theme-font:minor-latin; mso-fareast-Times New Roman";mso-fareast-theme-font:major-fareast; mso-hansi-theme-font:minor-latin;mso-bidi-theme-font:minor-latin;mso-ansi-language: EN-US;mso-fareast-language:EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[i]</span></span></span></span></span></a><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" > Wikipedia, “Parenting is the process of promoting and supporting the physical, emotional, social, and intellectual development of a child from infancy to adulthood…. Usually, parental figures provide for a child's physical needs, protect them from harm, and impart in them skills and cultural values until they reach legal adulthood, usually after adolescence.”</span></p> </div> <div style="mso-element:endnote" id="edn2"> <p class="MsoEndnoteText"><a style="mso-endnote-id:edn2" href="http://posterous.com/posts/new/1904142#_ednref2" name="_edn2" title=""><span class="MsoEndnoteReference"><span style="mso-ascii-font-family: Calibri;mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font: minor-latinfont-family:Calibri;" ><span style="mso-special-character:footnote"><span class="MsoEndnoteReference"><span style="font-size:10.0pt;mso-bidi-font-family:"Calibri","sans-serif";mso-ascii-theme-font:minor-latin; mso-fareast-Times New Roman";mso-fareast-theme-font:major-fareast; mso-hansi-theme-font:minor-latin;mso-bidi-theme-font:minor-latin;mso-ansi-language: EN-US;mso-fareast-language:EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[ii]</span></span></span></span></span></a><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" > “An <span style="mso-bidi-font-weight: bold">android</span> is a robot or synthetic organism designed to look and act like a human.”<span style="mso-spacerun:yes"> </span>Wikipedia, <i style="mso-bidi-font-style:normal">Android (robot),</i> June 1, 2011, <a href="http://en.wikipedia.org/wiki/Android_%28robot%29">http://en.wikipedia.org/wiki/Android_%28robot%29</a> </span></p> </div> <div style="mso-element:endnote" id="edn3"> <p class="MsoEndnoteText"><a style="mso-endnote-id:edn3" href="http://posterous.com/posts/new/1904142#_ednref3" name="_edn3" title=""><span class="MsoEndnoteReference"><span style="mso-ascii-font-family: Calibri;mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font: minor-latinfont-family:Calibri;" ><span style="mso-special-character:footnote"><span class="MsoEndnoteReference"><span style="font-size:10.0pt;mso-bidi-font-family:"Calibri","sans-serif";mso-ascii-theme-font:minor-latin; mso-fareast-Times New Roman";mso-fareast-theme-font:major-fareast; mso-hansi-theme-font:minor-latin;mso-bidi-theme-font:minor-latin;mso-ansi-language: EN-US;mso-fareast-language:EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[iii]</span></span></span></span></span></a><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" > Charles M. Nathan, <i style="mso-bidi-font-style:normal">A 12-Step Program to Truly Good Corporate Governance</i>,<span style="mso-spacerun:yes"> </span>May 18, 2011, <a href="http://blogs.law.harvard.edu/corpgov/2011/05/18/a-12-step-program-to-truly-good-corporate-governance/">http://blogs.law.harvard.edu/corpgov/2011/05/18/a-12-step-program-to-truly-good-corporate-governance/</a> </span></p> </div> <div style="mso-element:endnote" id="edn4"> <p class="MsoEndnoteText"><a style="mso-endnote-id:edn4" href="http://posterous.com/posts/new/1904142#_ednref4" name="_edn4" title=""><span class="MsoEndnoteReference"><span style="mso-ascii-font-family: Calibri;mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font: minor-latinfont-family:Calibri;" ><span style="mso-special-character:footnote"><span class="MsoEndnoteReference"><span style="font-size:10.0pt;mso-bidi-font-family:"Calibri","sans-serif";mso-ascii-theme-font:minor-latin; mso-fareast-Times New Roman";mso-fareast-theme-font:major-fareast; mso-hansi-theme-font:minor-latin;mso-bidi-theme-font:minor-latin;mso-ansi-language: EN-US;mso-fareast-language:EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[iv]</span></span></span></span></span></a><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" > Ibid</span></p> </div> <div style="mso-element:endnote" id="edn5"> <p class="MsoEndnoteText"><a style="mso-endnote-id:edn5" href="http://posterous.com/posts/new/1904142#_ednref5" name="_edn5" title=""><span class="MsoEndnoteReference"><span style="mso-ascii-font-family: Calibri;mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font: minor-latinfont-family:Calibri;" ><span style="mso-special-character:footnote"><span class="MsoEndnoteReference"><span style="font-size:10.0pt;mso-bidi-font-family:"Calibri","sans-serif";mso-ascii-theme-font:minor-latin; mso-fareast-Times New Roman";mso-fareast-theme-font:major-fareast; mso-hansi-theme-font:minor-latin;mso-bidi-theme-font:minor-latin;mso-ansi-language: EN-US;mso-fareast-language:EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[v]</span></span></span></span></span></a><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" > Roger Martin, <i style="mso-bidi-font-style: normal">Why CEOs Don't Owe Shareholders a Return on Market Value</i> - Harvard Business Review <a href="http://blogs.hbr.org/martin/2010/03/why-ceos-dont-owe-shareholders.html">http://blogs.hbr.org/martin/2010/03/why-ceos-dont-owe-shareholders.html</a> .</span></p> </div> <div style="mso-element:endnote" id="edn6"> <p class="MsoEndnoteText"><a style="mso-endnote-id:edn6" href="http://posterous.com/posts/new/1904142#_ednref6" name="_edn6" title=""><span class="MsoEndnoteReference"><span style="mso-ascii-font-family: Calibri;mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font: minor-latinfont-family:Calibri;" ><span style="mso-special-character:footnote"><span class="MsoEndnoteReference"><span style="font-size:10.0pt;mso-bidi-font-family:"Calibri","sans-serif";mso-ascii-theme-font:minor-latin; mso-fareast-Times New Roman";mso-fareast-theme-font:major-fareast; mso-hansi-theme-font:minor-latin;mso-bidi-theme-font:minor-latin;mso-ansi-language: EN-US;mso-fareast-language:EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[vi]</span></span></span></span></span></a><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" > Pierre-Yves Gomez and Harry Korine, <i style="mso-bidi-font-style:normal">Enterprise and Democracy: A political theory of corporate governance</i>, Cambridge University Press, 2008</span></p> </div> <div style="mso-element:endnote" id="edn7"> <p class="MsoEndnoteText"><a style="mso-endnote-id:edn7" href="http://posterous.com/posts/new/1904142#_ednref7" name="_edn7" title=""><span class="MsoEndnoteReference"><span style="mso-ascii-font-family: Calibri;mso-ascii-theme-font:minor-latin;mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font: minor-latinfont-family:Calibri;" ><span style="mso-special-character:footnote"><span class="MsoEndnoteReference"><span style="font-size:10.0pt;mso-bidi-font-family:"Calibri","sans-serif";mso-ascii-theme-font:minor-latin; mso-fareast-Times New Roman";mso-fareast-theme-font:major-fareast; mso-hansi-theme-font:minor-latin;mso-bidi-theme-font:minor-latin;mso-ansi-language: EN-US;mso-fareast-language:EN-US;mso-bidi-language:EN-USfont-family:";font-size:11.0pt;" >[vii]</span></span></span></span></span></a><span style="mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-mso-bidi-theme-font:minor-latinfont-family:Calibri;" > Roger Martin, <i style="mso-bidi-font-style: normal">Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL</i>, Harvard Business Press, 2011</span></p> </div> </div>Anonymoushttp://www.blogger.com/profile/10194436589647636157noreply@blogger.com1tag:blogger.com,1999:blog-2582998049699121797.post-20134726286018030752009-04-06T14:32:00.001-07:002009-04-06T14:43:57.533-07:00Why do corporations need boards of directors?If I hear another corporate governance "expert" tell me that the role of a board of directors is to make management accountable to the company's owners (read shareholders for for-profit and members/public for not-for-profit companies) I am going to... Well, on second thought, I'll blog about it now and get it off my chest.<br /><br />No law of any jurisdiction that I am aware of, even Delaware (the most shareholder-friendly state), says directors owe a fiduciary duty to shareholders. They all say, directors owe fiduciary duties to "the corporation". In fairness, the courts of some jurisdictions, namely Delaware, have interpreted that to mean "shareholders", reasoning that shareholders are the rightful owners (really?, even day traders who own the stock for a few days, if not minutes) of the corporation, and the board of directors' role is to monitor management in order to protect shareholder interests. However, keep in mind, this is only one interpretation of the law. Is it really true that a corporation is simply an extension of its owners? Is a corporation not a distinct entity, in fact a legal person, with most of the same rights and obligations as its owners?<br /><br />If God created people, then who created the corporation? The state created corporations by granting them a corporate charter for public policy purposes (remember, the state has other options). If God giveth and taketh away natural life, then the state has the same power over corporations. So why is it that boards of directors are deemed to vicariously have a fiduciary duty to shareholders, rather than the state? In fact, why is it that boards of directors should have derivative fiduciary duties to any single stakeholder? Aren't corporations legal members of society? Do people have a duty of loyalty and care to any other person or group of people? The answer is generally not, except parents have a fiduciary duty to care for their children while they are minors. Parents do not, however, have a duty to their employers, parents, creditors, the state, or any other entity that may have entrusted them with assets.<br /><br />Consider for a moment the possibility that the primary role of a board of directors is to ensure the corporation is properly socialized as a legal person - in effect to provide the human link between the legal person and the natural persons with which it interacts. And it does this by assuming a paternal role; a father figure for the corporation. Yes, I am suggesting that a board of directors is a paternal archetype.<br /><br />Some time ago I wrote a brief article that offers an evolutionary argument for this point of view: "<a href="http://www.forceforgood.com/Articles/Restoring-Trust-in-Corporations---The-role-of-the-board-of-directors-370/1.aspx">Restoring Trust in Corporations</a>".<br /><br />How would this view of the role of the board of directors affect your perceptions about corporate governance best practices?<br /><img src="data:image/png;base64,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" style="position: absolute; visibility: hidden; z-index: 2147483647; left: 228px; top: 290px;" id="kosa-target-image" />Anonymoushttp://www.blogger.com/profile/10194436589647636157noreply@blogger.com2tag:blogger.com,1999:blog-2582998049699121797.post-30163373377848311392009-04-05T12:44:00.000-07:002009-04-05T19:39:03.949-07:00Why I am Blogging on Corporate Governance Best PracticesI am honoured to have been invited to contribute a chapter on Corporate Governance Best Practices for a book on Corporate Governance being published by Wiley in 2010.<br /><br />I started researching corporate governance practices when I was invited to present a paper to the Doctoral Consortium of McMaster University's <span style="color: rgb(102, 102, 102);font-size:100%;" > 2006 McMaster World Congress on Corporate Governance. My paper, "<a href="http://trustenablement.com/local/Trust_Enabled_Corporate_Governance-posted.doc">Trust Enabled Corporate Governance</a>"</span>, attempted to connect the issue of shareholder trust to corporate governance practices. I subsequently wrote an article, entitled "<a href="http://trustenablement.com/local/Corporate_Governanc_Best_%20Preactices-mar08_icsa_intnl.pdf">Corporate Governance Best Practices: One size does not fit all</a>", disclosing my research findings that discrete governance styles appear to be associated with distinct business performance metrics. One of them was the Trusted Board Style, which I found to be correlated with higher business (stock) valuations. A logical derivative of this insight was the possibility that corporations with superior revenue growth may be more trusted by their customers. Those companies, by the way, tended to have a Management Controlled Board Style. I also found that the most profitable companies had a Sovereign Board Style. What might this suggest about relationship between profitability and the trust of other stakeholders? Moreover what is the legitimate role of boards of directors in helping corporations achieve their strategic objectives, and by extension, enabling trust in their business relationships?<br /><br />A few months ago, I posed this question to a panel of corporate governance gurus in Toronto. They were advocating for improved board competency in risk management. At the same time, one of them observed that business leaders are no longer considering the impact of their decisions on their reputation, instead only on their survival. I found this to be an apparent contradiction, since, to me, survival considerations are an acute example of risk management. If reputation, a method of developing trust, was being subsumed by survival considerations, then this would be an example of excessive risk management. In my mind, the solution is not more risk management, but more Trust Enablement. So what can a board of directors do to enable trust? After all, the current economic recession is the direct result of a loss of trust and confidence by all stakeholders. Their answer floored me. One panelist suggested it was the role of the World Bank to restore trust by restoring credit liquidity to banks, not that of boards of directors. The other, an academic, said he had no opinion, and later admitted privately that he had never thought about it.<br /><br />This blog and the resulting book chapter will help us to begin thinking about the role of the board of directors, so that we can define valid criteria for corporate governance best practices. I look forward to engaging you in a provocative discussion on these contentious issues.<br /><img src="data:image/png;base64,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" style="position: absolute; visibility: hidden; z-index: 2147483647; left: 587px; top: 434px;" id="kosa-target-image" />Anonymoushttp://www.blogger.com/profile/10194436589647636157noreply@blogger.com4