BOOK REVIEW

Transforming 'top-down' corporations into democratic networks

A New Way to Govern

Organisations and Society after Enron

Shann Turnbull
New Economics Foundation
ISBN N/A £4.99

review by Patrick Mangan and Anne Burke

The collapse of large and apparently sound corporations such as Enron, which at one time was the world's biggest energy trading company, illustrates that severe problems can arise with the command and control management structures which are the accepted norm for large organisations. Dr. Shann Turnbull is best known for his book Democratising the Wealth of Nations which advocates employee share ownership and land trusts¹ . In his new book, Turnbull, the principal of the International Institute for Self-governance and an Australian with a Harvard MBA, applies his knowledge of governance to analyse the failures of management and accountability in what he describes as "top-down" corporations. He identifies three fundamental weaknesses in their structure:

• The tendency of power to corrupt when it is concentrated in a few individuals.
• The difficulty in managing complexity, particularly as an organisation grows.
• The suppression of normal human checks and balances, supposedly for the benefit of corporate efficiency.

Turnbull suggests that new forms of organisation are needed to avoid these pitfalls and that the solution may lie in "network governance", where power, responsibility and decision-making authority are delegated to those best positioned to decide. He believes that organic organisations with the ability to self-replicate and self-manage may hold the key to resilience and robustness, attributes which Enron manifestly lacked.

Organisational networks such as the human body link diverse and competing systems by maintaining the functions of each component while preventing the domination of any one component over the others. Built-in feedback loops and the limits imposed by competing systems ensure that the sum is greater than the parts. Turnbull argues that if a highly complex organisational structure like a human can be managed effectively by its component systems then this model should provide some lessons for good corporate governance. He also compares organisational networks to the way ants work through complex networks without a CEO and yet can achieve extraordinary results.

The version of the capitalist system which developed after World War II in a period in which environmental issues were not a concern, is neither equitable, ecologically sensitive nor efficient. This may be partly due to the management theories upon which it is based. Much of today"s command and control theories are based on colonial practices, which are totally inappropriate in the 21st Century.

According to Turnbull, the unitary board of directors of a large corporation has absolute power over the organisation which the directors are meant to serve. They both set and mark their own exam papers, which hardly bodes well for shareholders or the public. It is "the directors who determine the size of profit which the company reports, irrespective of whether the financial reports conform to accounting standards".

Since the value of many assets are assessed subjectively, current accounting procedures are sufficiently flexible to allow accounts to be manipulated. Profits are therefore based on subjective assessments of value. So are liabilities, which must raise serious concerns about the value of accounting and audit procedures if deception is part of corporate culture. The integrity of auditors must be compromised if they are hired and fired by the directors on whom they are reporting.

Even when the directors have been shown to have "failed the exam" they may not be accountable to the shareholders as they also control the annual general meeting. Turnbull goes on to say that "the reliance of governments and regulators on non-executive directors to protect investors, or even creditors, is naïve and dangerous".

He notes that various attempts at reform were made in the 1990s by Cadbury, Greenbury, Hampel, and Turnbull himself. However, he feels these reforms were inadequate and although widely promoted around the world, merely lull minority investors into a false sense of security.

Turnbull suggests that current company design can be corrected by making focused changes. The basic steps he suggests are:

• Establish stakeholder panels
• Establish a stakeholding council to bring together different stakeholders into one forum
• Establish a senate to act as arbiters
• Set up a community governance board representing the "unofficial" stakeholders.

The structure Turnbull proposes is more complex than conventional structures and he suggests that the more complex a business becomes, the more it needs a matching complexity in its governance. Among his proposals are:

• Businesses should become self-financing as the current capitalist system over-rewards investors.
• Equity investors should be phased out
• Replace shareholders by members reflecting stakeholding interests
• Accounts in general contain too little information, due to compression of data.
• Don't police, transform

He illustrates the way that these panels, councils and boards can work together in practice by profiling Visa International, the Spanish cooperatives controlled by the Mondragon Corporacion Cooperativa (MCC) and the loose conglomerations of companies called keiretsu in Japan which organize around a single bank for their mutual benefit. The companies sometimes, but not always, own equity in each other.

While Turnbull's proposals are a distinct improvement on current corporate management practice, they are only a starting point for the development of more democratic organisational structures. For example, he still acknowledges the role of the managing director and board of directors and fails to suggest that they may not be appropriate in a truly democratic organisation where authority is delegated to a well educated staff capable of managing a complex and diverse structure without a central authority directing operations. The book also fails to develop his suggestions on self-organising institutions, on the amoeba-like splitting of enterprises when they grow too large, on decentralising of decision-making to staff, and on the development of corporate or staff learning networks.

So, while the book suggests changes to the present management and governance structures of large corporations, it fails to design a new governance structure.

Overall, though, it is a rewarding book which will stimulate your thinking on what companies are about, who they exist to serve and who should benefit from organisational profits.

Continue to Nadia Johanisova's review of Soil and Soul, by Alastair McIntosh

This book review is from Growth:The Celtic Cancer, the second Feasta Review. Copies of the Review can be ordered online from Green Books, priced at £9.95 plus postage and packaging.

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