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Wanted: Rising Stars of Corporate Governance. Nominations for Rising Stars of CorpGov due 3/31/2010. Recognizes young (<40 as of June 16, 2010) experts from any corpgov field.  June 17-18, 2010 Yale Governance Forum in New Haven, CT.  “Must attend” event. (Sticky post)

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Governance in a Disenchanted World: The End of Moral Society by Helmut Willke reasserts the spirit of liberalism invoked during the American and French Revolution when moral attitudes based on religion were trumped by secularization and the invention of modern politics and law. According to Willke, we are now facing second revolution, which will replace the dominant normative focus of the state with a global network of knowledge-based systems of governance.

In those first revolutions, we moved from a fundamentalist search for ultimate and final truths to a system that largely banished religious or moral definitions of ‘truth’ from public discourse. Whereas a continuing shared understanding under fundamentalism required the oppressive use of state power, the liberal state flourished based on developing democratic decision-making structures which allowed individuals to pursue individual freedom within the agreed upon rules.

Over the years, we developed mechanisms to lessen the likelihood of a tyranny of the majority, such as separation of powers, a hierarchy of laws and horizontal subsidiarity, allowing health, economic, university, family and countless other systems to be largely self-governing. As we transition to a knowledge-based economy, secular trends seep further into these self-governing systems. What were formerly moral questions are now discussed in the public square using scientific evidence, instead of moral exhortation, since religious morals can be less readily agreed upon than the rules for decision-making. While this frees public deliberation somewhat from moral passions, it also largely converts the power of those passions into the rational calculation of interests. Many find that wholly dissatisfying and continue to search for common touchstones and eternal truths.

Added to that, “social systems do not follow the motives and desires of people but instead follow their innate operation logics,” leading to ‘estrangement’ from our own social inventions… such as the modern corporation. A procedural approach provides guidelines for activities without assuming or mandating specific outcomes. While this liberates creativity and freedom it can also lead to a backlash by fundamentalists who witness the havoc of temporal complexities, absent any universal idea of social justice.

In the spirit of liberalism, Willke argues that rather than delimiting democracy to the level of nation-states and leaving global contexts to a laissez-faire regime, we would be better to support emerging global governance regimes like the ISO, WHO, Basel II framework and the WTO that strengthen self-organization and self-governance, even if as we lower our aspirations for more formal democracy at that level through world systems like the United Nations.

He sees globalizing knowledge societies as moving “from unitary order to complex order, from homogeneity to heterotopia, from linear order to a combination of order and disorder, and from hierarchy to heterarchy.” In fact, the new job of the political system is provide the preconditions for developing an array of distributed and decentralized collective intelligence, as well as coordinate and moderate the interplay of largely autonomous units.

As Charles Handy has pointed out, the transformation of wealth generation from tangible objects, to one largely based on knowledge, has huge implications for politics. “It is for instance, impossible to give people intelligence by decree or to redistribute it.” That leads Willke to the conclusion that “public policy and democratic decision-making are therefore inappropriate for dealing with questions of the creation and distribution of intelligence and expertise.”

Politics, it seems, retreats to the concern of deciding on the premises of decision-making. It is bound to leave the actual and factual decision-making to more knowledgeable and more competent actors, organizations and institutions, particularly in the fields of economic and financial policies.

Politics loses traditional command and control responsibilities of “telling people what to do,” while becoming more important in the role of capacity building and infrastructure. Institutions and professions become largely self-governing but political actors are still involved in requiring transparency, monitoring externalities, demanding accountability and arbitrating disputes. The idea of democracy itself must be transformed from one based on “moral demands for solidarity,” to one based on agreement upon methods for determining “moral hazard, misguided incentives, and counter-productive side effects of social security provisions or other well-intended legislation.”

In order to increase the collective intelligence of social systems it seems necessary to retire the time-honored ideal of ’security’ as stability in favor of a more daring idea of security as resilience… ‘having the capacity to change before the case for change becomes desperately obvious.’”

The retreat to moral authority undermines the unconditional rule of democratically created law.  Dissenting opinion is branded as fundamentally wrong or even treasonous in everything from global finance, terrorism, global warming, etc. Willke argues these and many other complex problems “exceed the coping mechanisms and capacities for understanding of simply too many people. In constellations of excessive uncertainty recourse to morals turns out to be an efficient way to reduce complexity.” Unfortunately, that leads to insoluble fragmentation and dissipation.

While I may disagree with Willke concerning the “capacities for understanding” of the masses, I certainly do agree that systems head in the wrong direction when they emphasize skill sets needed for twentieth century industry, rather than analytic reasoning and critical thinking, which are increasingly required in a world of growing complexity and uncertainty.

I like Willke’s exposition of the danger of social systems becoming “iron cages.” Like the sorcerer’s apprentice, we seem to have waved our magic wand only to have generated systems that have evolved beyond our control. Our desperate search for a grounding often leads to a regression to moral arguments that places guardians above the law and independent of empirical facts. Yet, in a pluralistic world guardians are soon challenged by others also claiming legitimate authority based on moral grounds. Willke’s alternative visions is a world of largely cognitive-based rule systems, deriving their legitimacy from a continuous process of criticism and revision as to what passes for empirical fact and congruence.

I can’t envision a better grounded system myself but it would only seem to work if a majority of citizens are immersed in “scientific communities” and “communities of practice.” Even in the United States, McKinsey estimates that only about 40% of jobs are mostly based on knowledge work involving abstraction, system thinking, experimentation and collaboration… and how many of them work in an environment where empirical evidence usually prevails over systemic rules-based iron cages? We sure have a long way to go in any transition from individual morals to collective interests. Willke is dealing with the most crucial issues of our time. After reading it, I certainly have a better understanding of the challenges… unfortunately, most of the answers, like the challenges, aren’t simple.

Two of the members of the Shareholder Communications Coalition — the Society of Corporate Secretaries & Governance Professionals and the National Investor Relations Institute — have developed a Discussion Draft on Proxy Advisory Services, to help policymakers and regulators in their review and evaluation of the proxy voting systems. The Discussion Draft presents recommendations for improving the regulatory oversight and transparency of proxy advisory firms, as a starting point for policy deliberations on these issues.  Proxy Advisory Services: The Need for More Regulatory Oversight and Transparency can be downloaded as a pdf. Recommendations include the following:

• Regulatory Oversight of the Proxy Advisory Industry.
• Public Disclosure of the Proxy Governance Models Used by Advisory Firms.
• More Robust Due Diligence Regarding Proxy Vote Recommendations.
• Public Disclosure of Proxy Voting Recommendations and Decisions.
• Public Company Input into Advisory Recommendations.
• Public Disclosure of Voting Errors.

The draft is certainly worth discussion. I’m especially fond of the recommendation that “All institutional investors using proxy advisory services-including pension funds, hedge funds, and private equity funds-should publicly disclose the actual proxy votes cast by them (or on their behalf), if they are not already disclosing their voting records.”

Two of the UK’s largest pension funds, Railpen and the Universities Superannuation Scheme (USS), have formed an alliance to coordinate their share voting at company meetings, with a view to creating a global voting resource to be used by other pension funds. (UK pension funds, Railpen and USS, create shareholder voting alliance, Responsible Investor, 3/17/10) Could these funds be setting an example that US funds may want to follow?

Unlike the growing popular movements of angry Americans who want to end the Fed or have it controlled by Washington politicians and bureaucrats, the “Coalition for Capital Homesteading” wants every citizen to “Own the Fed.” This new Coalition held its first rally at the Fed in 2005 to mobilize, transform and democratize the Fed and its money-creating powers, in order to bring about a more productive, participative and just free market economy.
• Thursday, April 15, 2010, we’ll gather at noon for the Sixth Annual “Own the Fed” rally at the Federal Reserve (Washington, DC). Our keynote speaker will be State Rep. Anastasia Pittman of Oklahoma City who is spearheading community Capital Homesteading economies through local Citizens Land Cooperatives for financing land and infrastructure development in Oklahoma. Speakers from around the U.S. and other nations will call for the new policy goal of “Every Citizen an Owner” through capital homesteading. We’ll tell our citizens and leadership “Why We Need a Capital Homestead Act.” (For more information on the 2010 “Own the Fed” Rally, the Capital Homestead Act, and the Coalition for Capital Homesteading, visit ownthefed.org.)

•  Friday, April 16, they’ll hold the Second Social Justice Collaborative on “Planning Community, National and Global Initiatives,” which will convene organizations, community leaders and activists to chart the road map to the goal of “Every Citizen an Owner” through the Capital Homestead Act of 2012. Community, national and global demonstrations of capital homesteading will be presented, as part of a step-by-step strategy timed for the 150th anniversary of Lincoln’s Homestead Act of 1862. (Click the link here for more information on the Second Social Justice Collaborative.)

•  Saturday, April 17, CESJ will hold its annual meeting and celebrate our 26th Anniversary with a Syrian-Lebanese feast prepared by Chef Chris O’Connor. (The luncheon is $25 per person.)  Join as we embark on our journey to “Every Citizen an Owner: On the Road to the Capital Homestead Act.” (Click the link here for more information on the CESJ Annual Meeting and 26th Anniversary Luncheon.)

R.S.V.P. by e-mailing thirdway@cesj.org.

Senator Dodd  finally introduced his bill. I’m sure it will get a massive coverage and comment. I will have little to add. Find a quick overview at The Corporate Library (Dodd’s Bill, 3/15/10). The Dodd Bill: Weighing In at a Portly Six Pounds, by Broc Romanek at TheCorporateCounsel.net/Blog provides the best guide I’ve seen.

However, I would also draw your attention to Restoring American Financial Stability Act of 2010: Reforming the Independent Director Standard and Federalizing Executive Compensation and other posts by J. Robert Brown at theRacetotheBottom.org, 3/16/10. Brown brings to our attention a couple of good “sleeper” provisions that may help override provisions now controlled by exchanges and Delaware. However, he also points with disappointment to a requirement for listed companies that directors be elected by majority vote in uncontested elections.

The legislation would merely require directors not receiving a majority to resign.  The board would then have the discretion to reject or accept the letter.  As RiskMetrics has noted, somewhere around 100 directors in 2009 did not receive a majority vote and none of them lost their position because of this failure.

In many cases, companies did not have a majority vote provisions in place.  But where they did (Axcelis and Pulte), the companies did not accept the letters of resignation.  In other words, these provisions do not provide shareholders with any additional rights or protections.  Directors lose but the board doesn’t remove them.  The provisions are, therefore, a myth.

I hope CII and others will take up this issue. Brown writes, “Real reform would provide that directors who do not receive a majority lose and cannot take office.” I’m willing to concede there may be circumstances where that could create a problem. However, if a board doesn’t accept a resignation, they should be required to immediately find a replacement and do so within six months.