Shann Turnbull*


Fourteenth International Conference, International Association of Management, York Hotel, Toronto

2.30 pm, Sunday, August 4, 1996


25th Conference of Economists, Australian National University

2.00 pm, Tuesday, September, 24, 1996





A cybernetic perspective is used to evaluate firms with or without stakeholder participation in their information and control architecture. This approach also provides a basis for evaluating firms with more than one board or control center as found in Japan, Europe, and labor-managed firms. Empirical evidence supports the hypothesis that multi control centers with stakeholder participation can provide competitive advantages. This hypothesis is supported by the Law of Requisite Variety and the Williamson analysis of why Multi-divisional firms provide advantages over Unitary Form firms.

The opportunity to support stakeholder governance with stakeholder ownership is identified from an analysis of how corporate rights of perpetual succession permits investors to be overpaid. The public policy implications of investor overpayments are considered. Also considered is the use of cybernetic principles to introduce self-regulation as proposed by the US Vice President. Policy initiatives are identified to build a 'stakeholder economy' as proposed by the Leader of the Labor Party in Britain.

The paper concludes that appropriate stakeholder governance could improve equity and self-governance in the private sector, the quality of democracy in the public sector, and the efficiency of both sectors.




KEY WORDS: Bureaucracies; Corporations; Cybernetics; Governance; Government; Property rights; Public policy; Regulation; Self-governance; Stakeholders.




Published in: Corporate Governance: An International Review, Blackwood, Oxford, vol. 5, no. 1, pp. 11-23, January, 1997.

*Shann Turnbull is the foundation convenor of the Australian Chapter of the Society for the Advancement of Socio-Economics established in 1993.



Shann Turnbull, P0 Box 266 Woollahra, Sydney, NSW, Australia, 2025,

Ph: 612-9328-7466; Fax:612-9327-1497; e-mail:








This paper considers the performance implications of involving stakeholders in the control of corporations and related public policy issues for building a 'stakeholder society' (Economist 1996). The analysis draws upon the science of cybernetics which has developed a rigorous framework for analyzing communications and control. Corporate control arises from ownership rights. The utility of current concepts of corporate property rights are evaluated from their ability to contribute to economic efficiency, equity and self-governance.

The analysis leads to four hypotheses: (i) stakeholder ownership of firms can provide operating advantages and increased social equity; (ii) stakeholder control of bureaucracies can provide operating advantages; (iii) stakeholder participation in control requires a multi-board control architecture to provide operating advantages, and (iv) cybernetic analysis provides a basis for understanding and designing self-regulating social institutions.

Cybernetic analysis has established that no living thing or organization can survive and grow unless it has sufficient variety in its information and control system to cope with the diversity of its environment. This fact of life is formalized in the Law of Requisite Variety (Ashby 1968:202). Stakeholder participation in corporate governance provides a way to improve variety. This suggests that stakeholder participation provides a basis for improving self-regulation and operating advantages in either the private or public sector. Improvements in self-governance could reduce the need for regulation and so the role and cost of government (Turnbull 1994b; 1995c).

However, Sternberg (1996) identified a number of reasons for rejecting stakeholder theory and its application. The core premise used by Sternberg to reject stakeholder theory is that corporations should 'maximize long-term owner value'. However, this objective is inconsistent with either economic efficiency or social equity when shareholders are overpaid. The diversion of any investor overpayments to stakeholders provides a way of improving efficiency and equity. It also provides an incentive to bond and align the interest of stakeholders with the firm.

Sternberg (1996:7) used a slightly modified version of the Freeman (1984) definition of 'stakeholder'. The breadth of the Freeman definition also concerned Clarkson (1994) who states that 'Stakeholder theory should not be used to weave a basket big enough to hold the world's misery'. This paper adopts the Clarkson definition who defines stakeholders as persons or groups who either voluntary or involuntary become exposed to risk from the activities of a firm.1

Should corporations maximize long-term owner value?

The answer to this question depends upon how ownership is defined and what we mean by long-term. Ownership is a social construct historically developed to serve the objectives of un-elected political rulers to exercise control throughout their domains without direct personal involvement with the property in their realm. Political, social and economic control by sovereigns and their vassals was based on establishing property rights to land by force.

The economic, social and environmental reasons for re-defining the concept of ownership will not be developed here as my views have been expressed in a number of other writings.2 These writings suggest the need for replacing static, monopoly and perpetual property rights with dynamic, co-ownership and time limited rights. As a result, individuals who did not directly personally involve themselves with their property rights would gradually lose their rights to those who did.

The principle is illustrated by squatters rights, divorce settlements, vesting rules of employee share plans, etc. With this concept in place and strategic stakeholders obtaining rights to ownership, the maximizing of 'long-term owner value' could also improve economic efficiency and equity by limiting the degree to which investors could be overpaid as described below.

As to the question as to what we mean by long term ownership, the legal life of patents provides a useful guide. Ownership of patents expires after 20 years. If we wished to create a level investment playing field, then property rights to corporations would need to have similar limits as they commonly did in the past (Grossman & Adams 1993).

When corporations are allowed to obtain the rights of perpetual succession, it is possible for investors to be overpaid. Equity investors are overpaid whenever they obtain any returns after their investment time horizon. The value of any overpayment will be referred to as 'surplus profit'. Surplus profits are not trivial and may exceed the cost of the initial investment.

Take, for example, a $100 million investment which is made on the expectation that it will pay back all its costs and provide a 27.3 per cent compound after tax return within the foreseeable future of 10 years. The investment decision is made on the expectation that all costs are written off within the ten year time horizon and that there is no residual value. However, if the operations were to continue on the same basis for another ten years surplus profits of $264 million would be generated, refer to Figure 1.

Figure 1

Surplus Profits

With a ten year investment time horizon and a twenty year operating life

for a $100 million investment depreciated over the 10 year time horizon


Table 1

$100 million investment with ten year

YEARS 0-10

YEARS 11-20

investment time horizon and 20 year life

Millions p.a.

Millions p.a.

Earnings before depreciation and tax






Earnings before tax



Tax at 36%



Profit after tax



Cash return



Accounting return



Surplus profit



Discounted Cash Flow return (DCF)



This illustrates the possible magnitude of surplus profits. It indicates how the ownership of productive assets can become highly concentrated. This forces governments to redistribute income through taxes and welfare. It is instructive to note that the profits reported annually by accountants during the first ten years would be a 20 per cent return on the $100 million investment. In the second ten years the reported annual profits would rise because there would be no depreciation. If we assume that the tax rate remains constant at 36 per cent, the reported profit in the last ten years increases to a 26.4 per cent return. So even though the surplus profits represent a 264% return on the investment the return reported by accountants is a modest 26.4%.

Investment horizons must always be within the foreseeable future. The investment horizon is defined to be that time after which no possible gain or loss is recognized in making the decision to invest. By definition, any loss of surplus profit cannot provide any disincentive to invest for profit maximizes. Investors who seek to maximize profits will be described as commercial investors.

By definition, equity investors have no contractual basis for either getting their money paid back or obtaining a profit. The time taken to get their money back is called the pay-back period. Investment profits can only arise after the pay-back period. Commercial investors will only invest if they expect to obtain all their money back with sufficient profit to provide the incentive to invest.

Investment profits and surplus profits are not reported because they are not measured by accountants. Investment profits are not reported because accounting doctrines require the cost of the investment to be written off during its operating life. The calculation of accounting profits depend upon estimating the operating life. This permits accounting profits to be reported before the investment pay-back period. If operations ceased before the pay-back period and the investment had no scrap value, then accounting profits could be reported even though the investor lost money!

Surplus profits are likewise not identified because the operating life of an investment may not have any relationship to the investor's time horizon. In addition, accounting doctrines do not require investment time horizons to be identified or profits to be related to particular shareholders over time.

In practice, equity time horizons are less than 20 years and mostly they are less than 10 years. The foreseeable future or time horizon decreases as the risk of a venture increases. Venture capitalists seeking after tax returns above 40 per cent p.a. can have investment time horizons of less than three years. Even if there is little risk, there is little utility in adopting a long time horizon. This is because money received in the future is worth less because it loses the opportunity to earn money immediately. The investment opportunity rate for equity investments is typically above 20 per cent. Using a 20 per cent discount rate, the Present Value (PV) of receiving a dollar in ten years is 16.2 ˘ and only 2.6˘ after 20 years.

However, because of uncertainty, investors will ignore receiving any cash beyond the reliable foreseeable future. This is why equity time horizons are usually less than ten years except when there is some contractual protection and/or monopoly position to make the foreseeable future reliable for a longer period. Equity financing of infrastructure projects such as the Sydney or Hong Kong harbor tunnels provide examples. The ownership of the project transfers from the investors in both cases.

While government franchises can reduce risks, this can also be achieved by corporations including their strategic stakeholders in sharing long-term values. Strategic stakeholders are defined as those individuals who are essential for the activities of the business. These individuals would include customers, employees, suppliers and some members of the host community. Members of the community who were not customers, employees or suppliers, would be classified by Clarkson (1994) as being 'involuntary' stakeholders. While investors may be essential to establish most businesses they do not remain essential unless they have another role.

Individuals do not usually discount the value of money required in the future when it is needed to sustain their life. This is because money required for consumption cannot have an investment opportunity rate. For this reason, the value of future pensions and superannuation payments are not discounted by the beneficiary. The utility and hence value of a dollar accruing to individuals in 20 years time can be much greater than that for a commercial investor who discounts future values at a compound rate. This provides a basis for both investors and stakeholders to obtain advantages through ownership transferring from the former to the latter as considered later.

The practice of stakeholder ownership and control

An indication of the practical efficacy of stakeholder ownership is provided by the widespread practice of investors agreeing to dilute their equity to allow strategic stakeholders to share ownership. While employees are the principle beneficiaries in most countries, customers and suppliers also participate in Japan (Refer to Figure 2).

Figure 2

Comparison between Anglo and Japanese dispersed ownership and control architecture

Analytica (1992:130) noted that: 'It has become standard practice among Japanese companies to exchange small amounts of stock with lenders and business partners as a gesture of goodwill, sincerity and commitment'. These shares are rarely sold, creating a stable block of shareholders who typically own 60 to 80 per cent of all shares (Refer to Figure 2). Only 20-30 per cent of all shares tend to be in general circulation. Around 90 per cent of Japanese employees have shares in their employer, the highest participation rate in a developed economy.

In Germany, Baums (1994:40) points out that: 'Other stakeholders, especially the employees, are considered to be "members" of the firm [Unternehmen] as well, although with different rights'. Baums describes the extensive interlocks of directors in German industrial firms and of bank ownership in industrial firms. Wymeersch (1994:106) reported that: 'Enterprise-related pension funds, being entitled to invest a large percentage of their reserves in the enterprise the employees of which they promise their pension, are major contributors to the enterprises' stable funds and thereby create a unique link between capital and labor'.

Porter (1992:11) states: 'Both Japanese and German companies practice a form of decentralization involving much greater information flow among multiple units in the company, as well as with customers and suppliers'. To make US companies more competitive with Japanese and German firms Porter recommended that 'customers, suppliers, employees, and community representatives', i.e. the strategic stakeholders, participate in corporate control.3

A highly developed system of stakeholder ownership and control has been created by the employee-customer-supplier co-operatives formed around the town of Mondragón in the Basque region of Spain (Turnbull 1994c). A World Bank study by Thomas and Logan (1982: 126-127) reported:

Various indicators have been used to explore the economic efficiency of the Mondragón group of cooperatives. During more than two decades a considerable number of cooperative factories have functioned at a level equal to or superior in efficiency to that of capitalist enterprise.

The compatibility question in this case has been solved without doubt. Efficiency in terms of the use made of scarce resources has been higher in cooperatives; their growth record of sales, exports and employment, under both favorable and adverse economic conditions, has been superior to that of capitalist enterprises.

A number of studies by the National Center for Employee Ownership (NCEO) in the US have shown that corporate performance is improved by employee ownership (Equity Report, 1992:7-8). An important finding of the studies was that performance was improved with active participation by employees in control.

A 1987 report by the General Accounting Office of the US government found 'that firms that combined ownership with participation had a productivity growth rate that was 52 per cent higher with Employee Share Ownership Plans (ESOPs) than they would have achieved without it' (Equity Report, 1992:7-8). Equity Report, quoted The Wall Street Journal of February 13th, 1992, who stated that: 'when employees own a big stake, it's a buy signal for investors'. Australian research has also shown that employee ownership significantly improves corporate performance (Equity Report, 1992:2-4).

The ability of stakeholder ownership and control to improve corporate performance is consistently supported by evidence from around the world. Empirical evidence does not support the rejection of Stakeholder Theory by Sternberg.

The competitive advantages of stakeholder governance

Not withstanding the claims made by Sternberg that stakeholder governance should not work, the empirical evidence outlined above not only shows that it does work but that it can provide superior performance. Rather than consider the defects in the assumptions and analysis made by Sternberg, it is more instructive to discuss how and why stakeholder governance can provide competitive advantages.

If the analysis of Coase (1937) and Alchian and Demsetz (1972) is viewed from the perspective of communicating information, one can conclude that firms exist because markets fail to provide information to govern productive activities as efficiently as authority systems or teams. Firms can fail when incomplete, incorrect, irrelevant and/or late information is used by their authority system, team, group and/or network. Firms can also fail from limitations in the operating behavior of humans which include their ability to receive, process, store and communicate information.

While markets may fail to provide information efficiently, this can also occur in hierarchies. Information transmitted in hierarchies can 'lead to an effective loss of control through incomplete or inaccurate transmittal of data moving up and instructions moving down' (Williamson 1975:134). This problem is analyzed in greater detail by Tullock (1965) and Downs (1967). The establishment of additional channels provides the means for reliable messages to be transmitted over unreliable channels (Ashby 1968:190).

When information processing requirements exceed the capabilities of a computer chip, engineers overcome this limitation by dividing the information to be processed into different channels to allow parallel processing. This is how information overload of executives is managed when firms increase in size and complexity. Low frequency strategic information is separated from high frequency operating information with the operating information being processed in parallel through different divisions. Each division may typically have its own sales, manufacturing, engineering and finance department (Williamson 1975:138). The decomposition of communications into operating and strategic information reduces information overload and provides a basis for establishing what is described in cybernetics as 'double feedback' (Williamson 1985:282).

Williamson quotes Ashby (1960:131) in noting that the survival of any organism under natural selection is depended upon developing 'two readily distinguishable feedback’s'. Cybernetic analysis demonstrates that double feedback is an essential feature for the self-regulation for any living thing, machine, device or organization.

While pure and applied scientists, and design engineers, have developed the theory and practice of self-regulation, this knowledge is little known by political scientists, lawyers and law makers.4 As a result these experts do not believe that self-regulation is either possible or practical in social institutions. It is also against the self-interest of government regulators, supervisors, advisers and elected officials to suggest ways to reduce their power, status and influence.

However, a high degree of self-regulation is demonstrated in labor-owned and controlled firms (Bernstein 1980). Stakeholder-controlled firms found in Mondragón demonstrate a high degree of self-governance. This is no coincidence. Implicit in the concept of a voluntary stakeholder is feedback. A person who affects the firm by becoming an employee, customer or supplier, can then in turn be affected by the firm. Without feedback, individuals or corporations cannot learn from their mistakes as described by Argyis (1994).

While parallel channels of information can reduce overloads and correct communication errors this may not produce any changes in control to correct operational errors. Error control in social institutions not only requires feedback information to take corrective action but also the will and power to act (Regan 1993).

The divisional heads of a M-Form firm are all subjected to the power of the Chief Executive Officer (CEO) to whom they are accountable. Error correction or creation remains with management as does the possibility of agency costs (Jensen and Meckling 1976) and X-inefficiency (Leibenstein 1987).

The M-Form information and control architecture was first developed in the US during the early 1920s. They arose from the functional or Unitary (U-Form) of organization. Williamson (1975:141) notes that it took 50 years for this innovation to spread to Europe. However, European firms had an information and control architecture with multiple control centers to collect, process and distribute information while US and other Anglo countries relied on a unitary board to both direct and control all their activities.

European Supervisory Boards concern themselves with strategic matters while leaving operating concerns to the Executive Board. In this way European firms had already established 'double feedback' and achieved some of the advantages of M-Form organization. In addition, information in European firms may also be collected, processed and distributed by Works Councils and financial 'watch-dogs'. The latter are described in France as Censeurs or Cours des Comptes (Analytica 1992:104-7). These various types of control centers add variety in the information and control system to correct errors in communications or activities.

When a company has two or more independent centers of control it will be described as having a compound board. Even if a corporation has a unitary board it can still be described as having a compound board if it has a controlling shareholder. The controlling shareholder becomes, in affect, a supervisory board. Compound boards may also arise from the existence of Workers Councils, Investor Watch-dog Committees, Citizens' Utility Boards (CUBs), Supplier Panels, Customer Assemblies and User Groups.5

Information is power. The distribution of information through various forums creates a division of power with checks and balances to manage conflicts of interests. Unitary boards concentrate power and so the ability of management to serve their own interest unless there is a relationship investor who can act like a supervisory board. A Keiretsu Council (Refer to Figure 2) plays the role in Japan of a Supervisory Board. However, it is far better informed and independent of management than a European Supervisory Board.

A Keiretsu Council has as its members, the CEOs of major suppliers and customers. It also has representatives from a Bank or Trading House who monitor operations. Each member of a Keiretsu Council has an independent constituency to which he is accountable.

Unlike the divisional heads in a M-Form firm who are accountable to management, keiretsu members are independent of management. They are strongly bonded to their own constituency and the interest of the lead banker or trading house. This inhibits them being co-opted by management. A Keiretsu Council meets the test of being an independent control center to provide not only error correcting information but more importantly, error rectification. It also has the will and power to act to rectify problems as described by Kester (1991).

As noted earlier, firms exist because markets fail to provide information efficiently to govern productive activities. A vital short-coming of markets is that prices do not provide qualitative information about goods and services. The quality of a good or service and the time of its delivery can be more important than price. The integrity of qualitative information (Akerlof 1970) and the integrity of the parties to the transaction (Klein, Crawford, & Alchian 1978) can also be a deciding factor if business is to proceed.

To minimize transaction costs and risks, trust needs to be established. This requires the establishment of non-market relationships with strategic stakeholders. Modern management techniques such as Just In Time (JIT) delivery of supplies, Total Quality Management (TQM) of output, other quality assurance processes, worker participation, and autonomous learning centers, contribute to non-market relationships. All these relationships involve the participation of strategic stakeholders in the information and control system of a firm.

Processes for defining and auditing quality production have now been established by the International Standards Organization (ISO). In some firms, ISO processes are becoming institutionalized as a governance mechanism for productive activities through the establishment of forums constituted by, and accountable to, strategic stakeholders.

A Keiretsu Council is composed of strategic stakeholders who have the knowledge, means and incentive to improve operations. Compare this situation with independent directors on a unitary board. Because they are independent they cannot have inside information to evaluate management. Nor are they likely to have specialized firm or industry specific information to add value. Hawley and Williams (1996:64-5) state:

Directors inevitably can not know as much about the firm as management. Most importantly, directors do not devote their entire professional efforts to a single company and therefore are not enmeshed in the day-to-day information flow of the company. This is compounded by management's control of the information that does reach the board. The result can be a board knowing too little, too late and, even if it is willing and able to act to confront a growing problem or crisis, it is often unable to do so.

If a labor-owned firm had a unitary board then the CEO could dismiss the workers and the workers could dismiss the CEO. This creates an untenable conflict of interest situation. It is a significant fact that the most notable labor-owned firms have multiple boards, councils or forums to resolve this problem which can frustrate competitive performance (Bernstein 1980; Turnbull 1995a, 1995d). The Mondragon Corporacion Cooperativa (Turnbull 1995b) has a highly developed division of power which creates variety in both information and control channels. The superior performance of Mondragón through both favorable and adverse economic conditions supports the hypothesis that stakeholder governance provides operating advantages for both the enterprise and its stakeholders. It also provides evidence that cooperative relationships with strategic stakeholders produces competitive advantages.

The ability of any living thing, machine, device or organization to constructively adjust to a changing environment depends upon its information and control system. The Law of Requisite Variety requires sufficient variety in the information and control systems to match the variety of changes in the environment. The ability of a control center to regulate in a timely fashion is improved by expanding the capacity of its information channels (Ashby 1968:211). The capability to process increased information may depend upon parallel processing in the form of distributed intelligence. A unitary board does not represent distributed intelligence or variety in information and control. We must conclude that firms with a unitary board lack the capabilities of those with compound boards.

From purely cybernetic considerations we can state that (i) the participation of strategic stakeholders in the control system can increase the capability of firms to adjust to changes in their environment and (ii) compound boards can increase the capability of a firm to process information. In other words, a necessary condition for firms to have superior performance and competitive advantages is to have a governance architecture which uses compound boards and the involvement of strategic stakeholders. A more general formulation of this conclusion is that the ability of social institution to become self-governing is depended upon them having requisite variety in their information and control systems.

Policy implications

The general introduction of stakeholder ownership and control in corporations would provide a step in building a 'stakeholder economy' (Blair 1966).6 By redistributing surplus profits in the private sector the efficiency and equity of the economic system is improved. As all citizens are consumers, all voters would obtain some private income entitlements from participating in the ownership of wealth producing assets. This would reduce the need for governments to redistribute income through taxes and welfare. The size, role and cost of government could be reduced.

The introduction of stakeholder governance into the public sector also provides a basis for improving its efficiency and effectiveness (Turnbull 1994b; 1995c). Stakeholder governance creates a participatory democracy compatible with existing political structures. It provides a way to improve the quality of democracy at the institutional level in either the private or public sector.

The political attraction of a stakeholder economy is that it allows 100 per cent of voters to directly participate in the ownership and control in private sector wealth creation. Only a minority of voters enjoy direct participation in share ownership even in the most advanced industrialized countries. A stakeholder economy would also provide voters direct participation in controlling the quality of private sector goods and services and the quality of public sector services. In this way a stakeholder economy could improve economic equity and the quality of democracy.

The introduction of stakeholder governance to the public sector, or in government enterprises being privatized, only requires administrative initiatives. Tax incentives may be required to make stakeholder ownership and control an attractive option for commercial investors. The cost of the tax incentive could be self-financing to provide a win-win outcome for government, investors and stakeholders (Turnbull 1994c).

Table 2

Cost of losing ownership of a income producing investment



PV of $1.00 received each

Percentage loss of not receiving

$1.00 each year in perpetuity after:


year in perpetuity

5 Years

10 Years

15 Years

20 Years

























The cost of an incentive to persuade shareholders to vote for a change in their corporate constitutions to limit their property rights to twenty years is surprisingly small. This is because the PV of cash received in 20 years approaches zero, even without uncertainty. Table 2 shows the PV of losing ownership after the stated number of years as a percentage of the initial ownership value.

The PV of receiving $1.00 each year in perpetuity is set out in the second column of Table 2 for the discount rates shown in the first column. The cost of giving up perpetual ownership after 5, 10, 15 and 20 years is shown in the table as a percentage of the value of possessing continuous ownership. With a 20 per cent discount rate, the cost of giving up ownership after 20 years is 2.6 per cent of the PV of obtaining $1.00 in perpetuity. The tax benefit required today to offset the value of losing ownership after 20 years is only 2.6 per cent of $5.00. That is, the value of perpetual ownership after 20 years is only 13˘ before discounting for uncertainty.

Table 2 indicates the cost of a single initial incentive without uncertainty. Another approach is to offer a continuous incentive to introduce a process of continuous ownership transfer. In this way, dynamic co-ownership property rights are introduced to create an Ownership Transfer Corporation (OTC). Corporations could be given the option of two tax rates. A reduced rate being available to corporations who transferred ownership to their stakeholders. A reduction in corporate taxes from 40 to 30 per cent would provide an incentive for commercial investors to transfer 5 per cent of their ownership each year to their stakeholders even if uncertainty was not recognized nor the benefits of stakeholder participation (Turnbull 1994b:352).

The introduction of OTCs would resolve many of the problems identified in 'Fiduciary Capitalism' by Hawley and Williams (1996). A major problem was the concentration of control with institutional investors who, as fiduciaries, lack the incentive and knowledge to monitor and control investee corporations. OTCs would introduce individuals as owners and controllers. These strategic individuals would have: (i) the knowledge to directly add value (ii) direct personal ability and involvement to add value (iii) a long term interest in the enterprise (iv) detailed company specific knowledge, and (v) strong incentives to act as owners.

For these reasons, OTCs could establish a symbiotic alliance between strategic individual stakeholders and institutional investors. Institutional investors and/or their board nominees would obtain access to specialist operating information independent of management to evaluate management and the company. Management would be forced to take notice of stakeholder concerns because they would also become concerns of investment institutions if they jeopardized operating performance. The institutions would be in a analogous position to the lead banker or trading house in a keiretsu.

Because OTCs dilute investors equity over time, institutional investors would demand dividend pay-outs to be maximized. Growth would be financed by the formation of corporate 'offspring' funded through rights issues. The decision to re-invest corporate cashflows would be made by the finance markets rather than by management. In this way, management would be subject to continuous scrutiny and discipline of market forces. The efficacy of financial markets as a governance mechanism would be enhanced while also increasing the role of stakeholders in corporate governance. The liquidity and efficiency of the of equity markets would also be increased (Turnbull 1974a).

Sternberg (1996:15) states that 'stakeholder theory undermines private property, agency and wealth'. However, as stated earlier, there are ground for taking the view that stakeholder relationships can legitimate and protect the concept of private property, agency and wealth creation.

Sternberg (1996) also states that stakeholder theory is 'incompatible with business', 'incompatible with corporate governance' and that its 'accountability is unjustified'. However, there is much empirical evidence which does not support this view. Evidence is provided by Mondragón (Turnbull 1995c), Japan and Germany (Analytica 1992; Porter (1992), worker-owned firms (Bernstein 1980), and ESOP companies in general (Equity Report 1992). There are economic, equity and cybernetic arguments to support the evidence. The cybernetic arguments are particularly compelling and robust.

Sternberg (1966:13) also argues that the role of government is and should be separate from the role and functions of corporations. This paper argues that corporations could and should take over the role of government in distributing wealth by becoming OTCs and identifies the opportunity for improving the self-governance of corporations to reduce the need for government regulation.

Corporate concepts evolved in England to take over some of the roles and functions of government. Corporate charters were created as a means to delegate some of the absolute powers of the sovereign to allow degrees of self-management to monasteries, universities, towns, and local government authorities. The first commercial use of corporate charters were to license merchant adventurers to trade with, and colonize, foreign lands in the late 16th century. The rights of perpetual succession were created to match the hereditary rights of the Crown. US colonists resisted perpetual rights for their corporations to avoid being colonized by English investors (Grossman & Adams 1993:6).

Limited life companies were the rule rather than the exception until the middle of the last century throughout the world except in England. Many US States only granted corporate charters for a limited time period. 'Over several decades starting in 1844, nineteen states amended their constitutions to make corporate charters subject to alteration or revocation by legislatures' (Grossman & Adams 1993:13). Charters were commonly revoked or not renewed if the company did not meet satisfactory standards of performance. In the language of the 'Tomorrow's Company' (RSA, 1995) their 'license to operate' was determine by the government. Much of the role of government could be replaced by market forces and stakeholder relationship with OTCs.

Since corporations evolved to carry out some of the roles and functions of government, the nature of government has changed. Instead of hereditary rulers with the rights of perpetual succession, democratic governments have emerged with limited terms. However, the rights of perpetual succession in corporations has not only continued but has become widely adopted. OTCs would reverse this trend as they have a limited term with business succession depended upon the formation of offspring entities.

The role of government was raised in speech by the US Vice President, Albert Gore (1996a), who asked, 'How must we update our notions of self-government to bring them into harmony with the discoveries and new capacities of the information age?' He answered this question by pointing out that 'in the realm of governance or economics or public policy the model of distributed intelligence has enormous explanatory power' (Gore 1996b). Application of the theory and practice of cybernetics in firms and all other social institutions would provide the basis for organizations to become self-governing. In this way, the role of government and the need for regulation would be reduced.

Gore (1996a:1) proposed that the role of government should be to 'imprint the DNA' (of social institutions). He noted that law-makers do not have the technical training to understand the possibilities. The theory and practice of self-governing machines is only 50 years old. Gore (1996a:5; 1996b:1) pointed out that public policy is still formulated with the metaphors of the pre-industrial age such as 'pump priming' and 'winding down'.

It has only been in the last 35 years that we have learnt that DNA contains the information to build living things from inanimate molecules. It is only during this period that we have learnt to manufacture computer chips by etching or 'imprinting' circuits into silicon. The architecture of the circuits determines how the chip operates and its performance. The performance and competitive advantages of humans, or any other living thing, is determine by the architecture of the molecular circuits encoded into their DNA. DNA contains the design information to build self-regulating organisms. Cybernetics provides rigorous rules for specifying and communicating the design characteristics for building self-regulating devices or organizations (Ashby 1968:244).

Social institutions, and firms in particular, could obtain both operating advantages and become self-governing if they had information and control systems which met cybernetic criteria. The basic information and control architecture of firms is determined by both their formal constitutions and their relationships to other institutions.

If governments wished to regulate firms then the most efficient way to achieve this is through formal cybernetic techniques to 'amplify regulation' as described by Ashby (1968:265). This strategy would not involve establishing government regulations on how firms should operate or behave. It would not even involve the adoption of procedures and processes as proposed by Cadbury (1992) or Hawley and Williams (1996:71-84). Instead, the government would act indirectly by specifying basic design criteria for corporate constitutions. This is how one could interpret the role of government proposed by Gore when he said it should 'imprint the DNA'.

Mondragón provides an example. It 'imprints the DNA' of any new firm or support organization created in the system so as to make them self-governing and to support the self-governance of the system. This is achieved by designing the constitutions of new organizations according to the purpose for creating them (Turnbull 1995b). The constitution in turn defines the information and control architecture of the organization and how this integrates with the strategic stakeholders and support organizations. Outside Mondragón, tax incentives could be used to encourage the adoption of self-governing constitutions (e.g. as proposed for OTCs).

Concluding remarks

This paper has attempted to indicate how the rich and rigorous body of cybernetic knowledge and practice can be used to both understand and design the governance architecture of firms. As the cybernetic perspective is not based on transactions or costs, it provides a basis for analyzing and designing the governance systems of non-profit organizations and any other type of social institution. A cybernetic perspective introduces the opportunity for the study of corporate governance to evolve into the science of self-governance. Let the work and/or debate begin.



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