Shann Turnbull: How good is “good” governance?

In The Director’s Chair with David W. Anderson: Don’t let the friendly appearance fool you. Shann Turnbull’s best ideas have the power to bust up a boardroom

Most doctorates awarded to business leaders with lengthy careers are of the honourary kind. Not Australia’s Shann Turnbull’s. His 2000 PhD thesis proposed a science of governance inspired, in part, by communication in nature. A prolific thinker and reformer, with contrarian views on independent directors (more problem than solution), wealth redistribution (much needed) and plenty more, he’s spent 50 years on every side of the ball: CEO, chair and non-executive director; private equity fund boss; serial entrepreneur; policy adviser; shareholder activist, and pioneer in governance and director education. Here, in conversation with David W. Anderson, Turnbull explores his big ideas and their background.

Conquering corporate conflicts: "The only way to remove the most fundamental conflict of interest," say Shann Turnbull, "is to have the shareholders control the audit committee, not the directors."

David Anderson You’ve not been shy in the scope of your thinking or action as a director, CEO or investor. You’ve taken aim at how we practice capitalism, particularly in the allocation of wealth generated, management of conflicts of interests and engagement of stakeholders; you’ve also identified a way of organizing information flow, called network governance, to aid in the exercise of corporate power. Why haven’t your prescriptions been widely adopted?

Shann Turnbull I’ve asked myself that for years! Others have made the same observations I have about what’s not working, but the solutions offered by business leaders, regulators and governance experts address superficial problems and offer cosmetic answers, often promoting more self-interest.

David Anderson Let’s explore your ideas, starting with capitalism. Following your Harvard MBA, in the first class to which women were admitted, you returned to Australia and became what was then called a “corporate raider,” defining the sharp edge of capitalism—buying, fixing and selling companies for profit. How did this experience shape your thinking?

Shann Turnbull Starting in the 1960s, a small group of entrepreneur capitalists I belonged to took control of 12 public companies and made a lot of money. The experience challenged my thinking about the role of shareholders and stakeholders. Investors make a decision to own equity with an expected return in mind that, if met, would justify their capital allocation. Any returns beyond that threshold would be surplus to the incentive to invest. Yet I watched our foreign investors get grossly overpaid, taking hundreds of millions of dollars of surplus profit from my country that could have been reinvested where that wealth was generated.

David Anderson What was your motivation for not taking this excess profit that most investors would regard as their right of ownership?

Shann Turnbull There’s no natural limit to human greed, so there’s no point at which people will stop on their own accord. I realized that no firm can survive without customers, suppliers, workers and a host community. Shouldn’t they share in the profits alongside investors? I realized we could distribute the wealth of nations to people who create that wealth, not just the investors, and achieve a better use of capital.

David Anderson You developed this idea in your 1975 book Democratizing the Wealth of Nations, promoting worker ownership as a means to spread wealth and promote capitalism. How does this work?

Shann Turnbull You can raise money without giving away ownership forever, because investors make decisions based on a time and quantum-of-return function. So make corporate ownership time-limited, as was the case when corporations were invented, by transferring to stakeholders 5% a year for 20 years. At the end, the original owners are gone, having got their desired return, and the stakeholders own the company. This is important because as soon as you have stakeholder shares, you have local reinvestment. And ongoing, instead of CEOs taking a chunk of shareholder wealth, the stakeholders are rewarded. I demonstrate in my social capitalism manifesto how a living income from stakeholder shares limits the need for taxes and welfare, creating smaller government in the process.

David Anderson Conflicts of interests among decision-makers vexes you. You see a distortion in decision-making that leads to unjustified and unfair outcomes, privileging and protecting those with power and under-serving the rest. One standard solution to this in corporate governance is the independence of directors. How do you view this?

Shann Turnbull Director independence is an attempt to solve the wrong problem that succeeds in making matters worse because it both misses the point and gives the impression of everything being alright. What we need to do is disentangle the conflicts, separating the power to decide a course of action from those who may benefit from it. Currently, our so called independent directors have the absolute power to identify and manage their own conflicts of interests without any outside oversight. The status quo deliberately concentrates power, leading to unconscionable, unethical and counterproductive conflicts of interests which we then say directors have a duty to avoid. This is how good people can be enticed to do bad things. The truth is people don’t want to solve this. The substantive solution I used in my own companies as the basis for conflict-of-interest-free governance faces resistance from business leaders precisely because it takes away the discretionary powers of directors to corrupt themselves, the businesses they run and even the financial system. So much of what we see today as “good governance” came about as a result of self-interested business actors trying to prevent more significant government action to reduce the very conflicts of interest which afford benefits disproportionally to entrenched business powers.

David Anderson As an owner, you practiced what you preached, showing discipline and restraint by imposing on yourself constraints to mitigate conflicts of interests that otherwise work against minority shareholders. How did you disambiguate control issues where self-dealing is generally accepted?

Shann Turnbull The only way to remove the most fundamental conflict of interest is to have the shareholders control the audit committee, not the directors. Director independence is a smoke screen to hide the fact that they are just as accountable as executive directors for the accounts. No court of law would have a judge preside over the court if those being judged had power over the judge. Yet in modern corporations following the U.S. and English models, directors control the audit which forms the basis of their own performance review. Thus in the companies I’ve created, the audit committee was comprised of shareholders. I also made this the governance committee—in essence a governance board—which operated on the principle of one vote per shareholder. This way the smaller shareholders controlled the governance board and thus the nomination, tenure and pay of directors, as well as the appointment of the auditor.

I called this the corporate senate, which had veto powers over these matters, but it couldn’t direct the corporation. The veto powers could be overturned by the directors only by going to a special meeting of shareholders where the conflicts of interest had to be made public and the shareholders could then vote one vote per share rather than one vote per shareholder. This created checks and balances against self-dealing such that the minority shareholders protected their interests first with veto power. The corporate senate, independently elected by the smaller shareholders, was compelling enough that regulators allowed us to avoid the expense of a special meeting for a transaction—because the corporate senate was regarded as fair and legitimate. The regulator said the public interest was protected through this mechanism and thus warranted their dispensation to not hold a special shareholder meeting.

So this is why I suggest company directors and venture capitalists should provide leadership in trying out these different ways to get progressive deregulation by proving that we can do better self-regulation and self-governance. We don’t need to wait for regulators to impose codes or regulation. We can innovate and write these principles and practices into corporate constitutions. This can reduce red tape by creating more self-reliance and social accountability, and thus lessen the need for government regulations and associated costs.

David Anderson One implication of your work is that powers now held by the unitary board of directors should be divided. Practically, when could that happen?

Shann Turnbull Yes, there is no reason why directors should have the power to manage and the power to govern. Think of venture capitalists as they put money into a start-up. What do they do? They create a shareholders’ agreement in which they, the venture capitalists, stipulate that they take over the power of nominating, appointing and paying directors and controlling the auditor. Think about this—the most sensitive time in business, a new business start-up, the directors don’t have standard governance powers. The shareholders make sure of that as a condition of investing money. The capitalists understand this and it works very well. In leveraged buyouts, the same arrangements happen. A buyout association is a second board, a governance board, stripping governance powers from the management board. Rather than lose this arrangement when it dissolves on going public, we should instead embed it in the corporate constitution so that the minority shareholders can have a governance board to take over the powers the venture capitalist has to give up.

David Anderson Compared to the status quo, while this addresses conflicts of interests, it may appear overly bureaucratic. In your experience, does it slow down decision-making?

Shann Turnbull It actually makes decision-making quicker, because you avoid information overload. With separation of powers—one board to govern and one to manage—you’ve immediately reduced the conflicts and the compliance work. You reduce complexity with the decomposition of decision-making labour. And you have access to richer information that you otherwise won’t get from the independent board—the reason today we have regular board and in camera meetings. Venture capitalists find no trouble with this model in the most sensitive time—they insist on taking away the governance powers. It’s well understood in cultures around the world that we need third parties to manage embedded conflicts of interests. Aboriginals in Australia have this as well in managing relationships—somebody outside who can say things that others can’t. But we don’t institutionalize this in our corporate governance. We need to embed this wisdom in the corporate constitution so it doesn’t exist at the grace and favour of management or the board.

David Anderson The major thrust of your work goes beyond fixing faults, such as conflicts of interests, in the current system. How would you describe the potential value arising from your efforts?

Shann Turnbull I think the answer lies in the course title being created for Columbia law school graduate students based on my work: “Designing corporate constitutions for optimizing operating advantages.” I use this language because it applies to the private, government and not-for-profit sectors. The reason I emphasize the need to get information independent of management via stakeholders is because I care about creating resiliency, getting feedback and being informed by the mistakes to spark innovation based on customer and supplier input, managing risk, improving efficiency and yes, making sure organizational resources aren’t misused by management. There’s a bigger picture. When you involve stakeholders fully, you can actually reduce the need for government regulation, because stakeholder self-interests are brought directly to the table. The reason we have regulations and regulators is to look after the voting public. Shouldn’t it be part of the license to operate for a company to look after the public directly rather than have regulators do it?

David Anderson You’ve integrated much of your thinking and experience into “network governance,” a description of and prescription for the optimal exercise of corporate power. You present this in your book A New Way to Govern: Organizations and Society after Enron. What inspired your reasoning?

Shann Turnbull Network or stakeholder governance is a better way to operate. In a systemic way, it gets to the heart of power and control and results in higher-quality decision-making, which gets us to the right outcome for the business and its customers. My inspiration was nature itself—in seeing the advantages of being contrary. We can be cooperative and competitive, trusting and suspicious. This gives us a huge variety of behaviour and learning patterns to survive in unknowable, dynamic and complex environments. Why don’t we build contrariness or contestability into our organizations? It’s all command and control, tow the corporate line, taking off the table discussion of things that can damage us. In nature we can see simple animals have much more success at managing complexity than chief executives with an MBA from Harvard. The science of information and control tells us to match environmental complexity with leadership systems that can handle it. How many times have we heard that boards are swamped with information and can’t possibly know enough, but still have and exercise authority? Let’s use the lessons of nature to “self-govern” organizationally, to reduce the role and cost of government, be more socially responsible and accountable—and more effective and efficient.

David W. Anderson, MBA, PhD, ICD.D is president of The Anderson Governance Group in Toronto, an independent advisory firm dedicated to assisting boards and management teams enhance leadership performance. He advises directors, executives, investors and regulators based on his international research and practice. E-mail: david.anderson@taggra.com. Web: www.taggra.com.

Shann Turnbull — Biography

Primary role Principal, International Institute for Self-governance

Additional current roles Cofounding member: Sustainable Money Working Group (UK); New Garden Cities Alliance (UK)

Former CEO Public: Barwon Cotton Ltd.; Direct Acceptance Corp. Ltd.; Buckingham’s Holding Ltd. Private: Development Trade Pty. Ltd.; M.A.I. Ltd.; Home Loan Investment Corp. Ltd.; Aviation Facilities Pty. Ltd.; Performance Property Ltd.; Equity Funds of Australia Ltd. (joint); Jefferson Approtrac Company Inc.; JAC Tractor Ltd.; Tjuringa Securities Ltd. (joint); JAC Tractor Ltd.; Barwon Farmlands Ltd. Non-profit: Australian Ski Federation

Former chair Public: Direct Acceptance Corp. Ltd.; Alfarm Australia Ltd.; Barwon Cotton Ltd. Private: Turnbull Krishnan Pty. Ltd.; Flight Facilities Pty. Ltd.; Shann Turnbull Pty. Ltd.; Merelen Pty. Ltd.; Angus & Robertson (Bookshops) Pty. Ltd.; Agricultural Resources Management Pty. Ltd.; Barwon Farmlands Ltd.; Barwon Farm Management Pty. Ltd. Non-profit: Australian Employee Ownership Association

Former director Public: Saxonvale Vineyards Ltd. Private: Donlan Developments Pty. Ltd. (alternative director); Australian Film Underwriters Pty. Ltd.; Australian Employee Ownership Association; Fesca Qualos Gears Pty. Ltd.; Pacific Enginering Pty. Ltd.; Hi-tech Power Drives Pty. Ltd. Non-profit: Company Directors Association of Australia; Australian Shareholders’ Association

Education Diploma of Electrical Engineering, Hobart Technical College, 1957; Bachelor of Science, University of Melbourne, 1960; Master of Business Administration, Harvard Business School, 1963; Doctor of Philosophy, Macquarie University Graduate School of Management Sydney, 2000

Current age 82

Age when first became a director 29

Years of board service 53

Photography by Peter Gumpesberger

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