Can Francis Fukuyama teach us something about corporate governance?

I recently finished reading a fantastic book: Francis Fukuyama's Origins of Political Order. He discusses the ways that political organization has taken place throughout the world, and this got me thinking about organizational structures in business, and their varying levels of quality.

There are several levels of organization from band, to tribal, to chiefdom, to state-level organizations. Building on the work of others before him, he describes such organizations according to three elements: the strength of the (central) state, rule of law, and accountability. A state with the right combination of all three elements is one that will generally function well. There are examples of states that lack one or more elements, and the effects can be seen.

India, for example, has always had a very strong rule of law (this is discrete from elements like corruption as he defines the terms; read the book!), so much so, in fact, that a strong state has never been able to form in India. Even today, a weak central state is one of India's problems. Political accountability, too, leaves something to be desired, though it is more apparent than in China.

China was the world's first modern state in that it had a strongly centralized and meritocratic bureaucracy long before these arose elsewhere. The rule of law and accountability, however, have never been present. Even today, the communist party sees the law only as a tool to be wielded or changed at the party's will, not as something that could ever restrict the party's power (as constitutions and courts in other countries do). Accountability is limited only to long-standing moral ideas about the responsibility of rulers to their people. There is no structure that supports this officially; no path for citizens to address grievances.

Business people often praise how well China (and places like Singapore) are run and may think China's system is preferable to India's. This is only true, however, if the current people in power are doing a good job. You will also only feel this way if you agree with the government. If the government is forcing you out of your home to build a shopping mall with little or no financial compensation, telling you you may not move out of your village to search for work, or restricting your procreation to one child, for example -- and you have no recourse against such actions -- you may feel a bit differently about China's system. Still, India's system is clearly sub-optimal as well. I will avoid holding any system as "just right," because this is hard to say. Heaven knows, America's system seems to have its difficulties as well, even if worries about it are probably overblown (see post), and this is true of everywhere.

So what does all this tell us about corporate governance? Honestly, I see a lot of similarities. Some companies are organized in a very top-down, hierarchical manner akin to China, others, like large conglomerates, may have loads of local fiefdoms and clashing rules and interests, more akin to India. (China's central government has difficulty controlling local governments, too, so this is all a bit oversimplified. Again, read the book!). Structures may also cause a high level of accountability, with clearly defined responsibilities, or a system where no one knows who's responsible, leading to impunity (rogue traders, anyone?). One problem with the "strong state" model, where the CEO and board can basically do what they want is the "Bad Emperor Problem" that China (think of Mao Zedong, whose Cultural Revolution resulted in the death of millions of Chinese peasants as just the most recent example) has had a few times. The safeguard against this is to prevent the concentration of power in one person's hands.

So accountability (and transparency) are good, but must be balanced, together with the rule of law, against central control. Too much "rule of law" could mean CEOs can't change a company. Even too much accountability could be bad news, not allowing leaders any wriggle room to make changes before they are instantly removed from power the moment the mob dislikes an action.

There's one more interesting aspect, though. Fukuyama asserts, quite convincingly, that religions formed the basis of political organization. I think there's something to this in the form of corporate ideologies/identities. What is the role of the CEO? Where are we going? What does the company stand for? What are the roles and duties of managers, workers, and departments? These ideas can form a structure of their own and can also be hard to change, regardless of any structure imposed from the top (a central problem in mergers and acquisitions, in business as well as in politics). If they're good ones, like the central ideas at IBM that have kept the tech company alive and competitive for a century, they are a source of the company's strength. If they're not good, or are too rigid, they may be the company's downfall.

In sum, then, accountability to shareholders and stakeholders balanced off against strong centralized control can be a formula for corporate success, but only if it is underpinned by a strong corporate identity. It's important to note, too, that accountability does not have to take the form of democracy and elections. In the case of public shareholders, this is more or less the case. In the case of most stakeholders, like workers, this is usually not the case. The structures embedded within the company, however, giving power to local "lords" (i.e. managers and vice presidents) and lower-level managers serve some of this function.

Fukuyama also has something to say about this, too. It may make a lot of sense to include regular old workers in the process of corporate governance. Kings were constantly at odds with the vested interests of dukes and local lords, who, through their positions, managed to extract privileges from the central power while reaping the gains of those beneath them. This may sound familiar to anyone who works in a larger company. It therefore makes sense to have ways for "lower" workers to bypass their direct bosses and be able to communicate with higher-ups about problems they see in the lower echelons of management. This decentralization of power can actually lead to a greater centralization, as the CEO and higher managers have a better idea of what's going on. The increased accountability of all levels of management, too, is something to strive for.


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