RE: Turnbull ideas and a proposal to develop an Experimentation Agenda

[Shann Turnbull <sturnbull@mba1963.hbs.edu>]

Deb

Thank you for the chance to clarify the ideas.  I HAVE INSERTED COMMENTS IN
CAPITALS

At 07:10 PM 8/1/2000 , Deborah Groban Olson wrote:
>Dear Shann:
>
>       I stand corrected on all points if your intent is to make all these
>changes voluntary. I understood that you were seeking to require these
>arrangements.  NO  NO  NO  NO AND ANOTHER NO FOR NORMAN!!!!!!!!!!!!!!!!!!!!!!!

Do I now understand that your intentions is simply to
>persuade corporations to adopt each of your proposed measures, including
>limited term investor ownership within in competition with other issues
>which provide "surplus profit"? YES.  THROUGH THE TAX INCENTIVES DESCRIBED
IN MY STAKEHOLDER GOVERNANCE ARTICLE AND IN MY BOOK If so, how will your
proposed securities
>attract investors.  LIKE ALL OTHER LIMITED LIFE EQUITIES IN PATENTS,
INTELLECTUAL PROPERTY OF ALL TYPES AND IN MINING LEASES, BOOT PROJECTS,
ETC, ETC. DECRIBED IN MY PREVIOUS POSTINGS TODAY

>
>       I am not familiar with BOOT projects. REFER TO
http://www.ozemail.com.au/~auscid/auscid.htm  AUSTRALIA LEADS THE WORLD IN
THESE TYPES OF PROJECTS SINCE I SUGGESTED TO THE STATE PREMIER OF NSW TO
FINANCE A POWER STATION BY THIS MEANS IN 1978.  FINANCE FOR THE DEAL WAS
ARRANGED BY JIMMY WOLFENSHOLN, NOW PRESIDENT OF THE WORLD BANK.
>
>       I am posting this to the Homestead section. I hope that is acceptable to
>you. YES  MANY OF THESE POINTS HAVE ALREADY BEEN POSTED IN THE ECONOMICS
OF OWNERSHIP ARCHIVES I am trying to stimulate discussion. Your responses
are very
>enlightening. One of the significant problems with this process is that
>there is a huge amount of material. YES.  WE NEED A FACE TO FACE
WORKSHOP/CONFERENCE/SEMINARS ETC. It is very easy for us to misunderstand
>each other, as it is quite difficult for many of us to find the time to
>read all the books and articles mentioned by all the participants.  IT
WOULD BE MORE COST EFFICIENT IN EVERYONES TIME TO FIND $2,000 FOR ME TO
ATTEND YOUR APRIL MEETING.
>
>       I am grateful for the legal research you have mentioned. Under the laws 
>of
>the states in which I practice, the "board of directors" has certain duties
>to the shareholders. If there is more than one board, do they all have
>these same duties? NO  THE EXECUTIVE BOARD HAS ALL ITS NORMAL POWERS
EXCEPT AS EXPLAINED BELOW

Do they divide them up? THE WATCHDOG BOARD HAS VETO ONLY POWERS OVER ANY
ACTIONS IN WHICH THE DIRECTORS HAVE A CONFLICT OF INTEREST.  SO IN PRACTICE
IT OBTAINS THE FUNCTIONS OFTEN DELEGATED TO AN AUDIT COMMITTEE,
REMUNERATION COMMITTEES AND NOMINATION COMMITTEE.

STAKEHOLDER COUNCILS PROVIDE INFORMATION FEEDBACK TO THE EXECUTIVE BOARD
AND WATCHDOG BOARD INDEPENDENT OF MANAGEMENT.  THEY ARE ONLY ADVISORY
BOARDS.  BUT THEY WOULD PROVIDE PERFORMANCE INDICATORS AND QUALITATIVE
REPORTS TO ASSESS MANAGEMENT AND SO INFLUENCE WHO WAS NOMINATED TO THE MAIN
BOARD.  IN EITHER PUBLIC OR PRIVATE SECTOR FIRMS.

Are all the members of each
>board liable for the actions of all the others? NO.  THE EXECUTIVE BOARD
RETAINS ALL LIABILITIES AS BEFORE.
UNDER AUSTRALIAN LAW I HAVE BEEN ADVISED BY JUDGES THAT THE LIMITED VETO
POWERS OF THE WATCHDOG BOARD WOULD NOT EXPOSE ITS MEMBERS TO LIABILITIES.
>
>       I have created a variety of unitary board structures in which various
>constituencies are represented. THIS CREATES UNACCEPTABLE CONFLICTS OF
INTEREST AS SET OUT IN MY 893 WORD ARTICLE BELOW  I have done the same with
ESOP trustee
>structures. SAME CONFLICTS CAN ARISE Please give me some examples of
situations under English,
>Australian or US state laws where such boards are constituted and how they
>divide up their duties and liabilities.  AN OUTLINE OF THE CORPORATE
CHARTER WITH A WATCHDOG BOARD AND ADVISORY STAKEHOLDER COUNCILS IS SET OUT
IN MY ACADEMIC PAPER PRESENTED TO COLUMBIA UNIVERSITY LAW SCHOOL IN 1998
REFER TO Corporate Charters with Competitive Advantages', St. Johns Law
Review, St. Johns University, New York City, Winter, 2000.
http://papers.ssrn.com/sol3/paper.taf?ABSTRACT_ID=10570  [BILL ALLEN, THE
FORMER CHANCELLOR OF THE DELWARE COURT WAS IN THE AUDIENCE WITH MANY OTHER
LEADING US CORPORATE GOVERNANCE SCHOLARS. THE CONFERENCE WAS ALSO FINANCED
BY THE FORD FOUNDATION]

WORKER OWNED FIRMS IN THE UK LIKE THE JOHN LEWIS PARTNERSHIP AND SCOTT
BADER HAVE NUMEROUS BOARDS AS DO THE EMPLOYEE PLYWOOD FACTORIES ON THE WEST
COAST OF THE US.  I CAN PROVIDE DETAILED DESCRIPTIONS OF EACH OF THESE
EXAMPLES FROM MY WRITINGS.   VISA INTERNATION HAS HUNDREDS OF BOARDS EACH
WITH ITS OWN FUNCTIONAL AREA OR TERRITORIAL RESPONSIBILITY ACCORDING TO THE
FOUNDER DEE HOCK. 
>
>       Thanks,
>       Deb
>
ARTICLE PUBLISHED LAST MONTH BY THE CORPORATE DIRECTORS ASSOCIATION OF
AUSTRALIA

                        Democratising employee ownership

                        Shann Turnbull*

Employee ownership without participation in control can be
counter-productive to adding shareholder value.  This occurs when
management votes the shares of their employees to entrench their own
position, remuneration and perks. Employees are now the biggest
shareholders in BHP and many other large Australian companies.

However, the sharing control as well as ownership with employees can be
counter-productive with a unitary board.  All non-trivial sustainable
employee-owned industrial firms in the world possess two or more boards.
This was a finding of Paul Bernstein in his book on Workplace
Democratization: Its internal dynamics.  

Bernstein identified six minimally necessary conditions for sustainable
employee governance: (i) Participation in decision making, (ii) Economic
return to the participants based on the surplus they produce, (iii) Sharing
management-level information with employees, (iv) Guaranteed individual
rights, (v) An independent appeals system, and (vi) A complex
participatory/democratic consciousness.  The lesson for publicly traded
corporations with growing employee ownership is that they need to introduce
each of these six minimally necessary conditions if they are not to
jeopardise the performance of their business or give employee ownership a
bad name.  

Without a division of power into different boards, it is not possible to
establish either “an independent appeals systems” or provide “guaranteed
individual rights”.  The division of information and control rights into
what I describe as a “compound board” also facilitates constructive
“participation in decision making” and “sharing management-level
information”.  

It is not constructive to have an employee representative appointed to the
management board, as done at the Australian Broadcasting Commission to
promote either “participation in decision making” or “sharing
management-level information”. This simply introduces unconscionable
conflicts of interest for the nominee(s).  It generates suspicion by the
nominees' board colleagues that confidential information will be widely
shared and/or a suspicion by the nominees’ constituency that their nominees
have been captured and/or has misplaced loyalties.  A compound board avoids
the lose/lose position for all parties.

The decomposition of decision-making labour into the components of a
compound board provides operating advantages even if firms are not
employee-owned.  The complication in structure is more than offset by the
simplification and improvement in decision making.  Non-Executive Directors
(NEDs) on unitary boards become subjected to the problems of information
overload and having to make decisions on strategic technical issues beyond
their experience, training or knowledge.   The competitive advantages of
compound board increases, as businesses become more complex and knowledge
intensive.  The success of VISA International is based on it being
controlled by hundreds of boards each with its own exclusive functional or
regional discretions.

NEDs cannot properly carry out their duties for shareholders to monitor and
evaluate management unless they have access to qualitative information
about management independent of management.  The best source of this
information is the employees, customers and suppliers. 

These strategic stakeholders are recorded in the books of a business to
provide firms a basis to facilitate the formation of self-nominated and
self-elected stakeholder councils in the form of employee forums, customer
panels and supplier assemblies.  The establishment of formal advisory
boards with these crucial stakeholders provides a basis to obtain both
operational and competitive advantages.  It was for these reasons that
Harvard Professor Michael Porter recommended the involvement of strategic
stakeholders in both the ownership and control of companies in his 1992
report for The Council on Competitiveness. 

The need to introduce stakeholder governance becomes increasingly critical
as the extent of employee ownership increases.  Stakeholder Councils
introduce an internal loyal opposition to any misguided strategies,
policies or self-dealing by employees.  In this way they can directly
protect the interests of investors much more effectively than institutional
shareholders that do not have detailed operational information.
Stakeholder councils introduce internal competition for corporate control,
which can act far more quickly, economically, sensitively and efficiently
than competition for control through the stock market.  

Policies for encouraging employee ownership will become counter-productive
as employed shareholders increase unless stakeholder governance is also
introduced.  For taxpayers to obtain the best value for tax incentives used
to further employee ownership stakeholder governance will need to be tied
in for medium and larger sized firms.

An additional incentive for formally including stakeholders in the
governance of publicly traded firms is the lack of involvement by
shareholders in making management accountable.  Institutional investors are
now the largest owners of public companies but are mostly negligent in
taking an active interest in corporate governance.  The number of
significant institutional investors in either Australia or the UK is less
than the number of individual members in either of their respective
national Parliaments.  So even if institutions were active it would raise
questions as to the political legitimacy of capitalism.

Even in 1976, when the proportion of institutional ownership was less than
half its present level, Peter Drucker, wrote, The Unseen Revolution: How
Pension Fund Socialism Came to America.  The irony is that while more
voters than ever are sharing in the ownership of public corporations,
control is becoming ever more concentrated.  This is undermining the
accountability of firms and so their political legitimacy.

Employee ownership provides a way to not only improve economic performance
but to also provide political legitimacy to business.  For employee
ownership to achieve both objectives, companies will need to introduce the
six minimally necessary conditions identified by Bernstein.  This depends
on stakeholder governance, which directly enriches democracy and provides
the firmest possible basis to establish the political legitimacy of
corporations.

                               oooOOOooo
                                  893/121999

*Shann Turnbull introduced loan financed share plans to Australia when he
organised their US inventor, Louis Kelso, to visit Australia in 1975 with
the publication of his book, Democratising the Wealth of Nations.  He is a
founding member and past President of the Australian Employee Ownership
Association.

Shann Turnbull
P.O. Box 266 Woollahra, Sydney, Australia, 1350
Phone: 02 9328 7466 office; 02 9327 8487 home
Fax: 02 9327 1497 home & office.  Mobile 0418 222 378
Outside Australia, replace first "0" with "61" after international access code
Life long E-mail: sturnbull@mba1963.hbs.edu
Alternate:sturnbull@optusnet.com.au
http://members.optusnet.com.au/~sturnbull/index.html