10/08/2012 § 2 Comments
“That government is best which teaches us to govern ourselves.” Johann Wolfgang von Goethe.
I’ve been enjoying the Olympics over the last few days, far more than I expected. It’s inspiring to see ordinary people reap the rewards of hard work and dedication to a goal.
Competition can bring out the best in people. The rowers, cyclists, runners and jumpers are inspired to train so hard and go so fast so they can beat other athletes. Their medals mean so much because they’ve been won in competition against the best in the world.
Yet there is a dark side to competition too. The desire to win can cause people to cheat, to take shortcuts, to bend the rules. Competition needs to be regulated.
In sport, there are lots of different ways of regulating events. In some sports, like horse-riding or running, the judges sit at a distance and observe proceedings. But where there is physical contact between individuals, such as in football or judo, the referee steps into the arena alongside the combatants, so he can spot fouls and intervene where necessary. In boxing, he is inside the ring.
We are far less imaginative, and far more tentative, in our regulation of business, even though the consequences of unfair or dishonest behaviour in the business arena are usually far more serious than in sport. Recent scandals involving pharmaceutical companies, banks, the media remind us of this. Yet regulators of these industries all sit at a distance and only step in when something goes badly wrong.
Why don’t we put regulators in the heart of businesses – in other words, why don’t we, as society, require businesses to self-regulate?
In theory, non-executive directors play a regulatory role. However for the most part they do it very badly because they are deeply conflicted. It is not clear whether they should prioritise leading the business, or keeping an eye on the their fellow board members. Besides, the law (section 172 of the Companies Act) says their highest duty is to shareholders. Thus we cannot expect them to prioritise broader interests such as the interests of society.
Some businesses do it. The John Lewis Partnership has a number of internal regulatory structures. Aside from the partnership council, and their local committees, there is an internal ombudsman that any employee can appeal to. It also has an in-house newsletter, the content of which is driven largely by staff, not by management. Any employee can write to the newsletter, anonymously or otherwise, and their letter must be published and the responsible director must respond.
At Riversimple, a business I work with that is developing an eco-car powered by hydrogen, we have set up a “Stewards Board” appointed by the members, to serve as a critical friend of the operating board.
We can learn a lot from seeing how democracies work. For example, an important constitutional element of UK democracy is the official opposition. Our businesses might look very different if they had someone working within the organisation to serve as a critical friend, challenging the accepted wisdom of the executive team, and publicly presenting different possible approaches to corporate strategy. This is similar to the wise fool employed by kings and queens in the past, someone to “speak truth to power”. Introducing such bodies into a business would, I believe, make them more successful, not just financially but also in terms of staff and customer satisfaction and in making a positive impact on society and the planet.
It wouldn’t be difficult to devise a law that would require every business over a certain size to have an internal regulator with a duty to serve broader interests such as society and the planet. What holds us back is our underlying assumption that private property rights take priority. If a starving man steals an apple from my land, I can get him put in prison. My property rights prevail. So it is with shareholders – their rights to require directors to serve them above all others takes priority over the needs of staff, society and the planet. Their property rights are sacrosanct.
It wasn’t so long ago that the rights of individuals extended to the right to beat each other to death in a bare-knuckle fight. At a certain point we decided that it is not in the interests of society to allow individuals to do this. So we regulated boxing. Maybe it is time to do the same with business.
This shouldn’t be a scary idea. After all, it has turned out that what is in the interests of society is also in the interest of the boxers – they can practice their craft with far less risk to their person than they used to, and can expect to have long careers and quit with (most of) their faculties. So it is with the changes I propose. Everyone will benefit from well-regulated businesses. But this can only be achieved by changing them from the inside, not by regulating from the outside. We need to put the business referees inside the ring, at the heart of the decision-making.
I know – a crazy idea. But one whose time has surely come.