How Network Governance Adds Value

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How network governance adds value, by Shann Turnbull (excerpt)

"Humans are governed by their brains. Our brains possess a rich network of control centres without a central controlling chief executive neuron. The brain allows humans to sustain and improve their existence in dynamic, complex, unpredictable and unknowable environments.

Social organisations could likewise sustain and improve their operations by adopting a rich form of network governance. While network governance can be found in various degrees in many organisations it is little noticed. Network governance requires the presence of two or more legally defined control centres or boards. Internal control centres of boards would be specified in the constitution of the organisation. External control centres are controlling shareholders, or regulators. Network governance can be applied to public, private or non-profit organisations.

Governance architecture is different from management. The constitution, charter and by-laws of organisations define its architecture. These documents specify the processes for appointing, removing and remunerating controllers of an organisation and holding them to account. Management powers are not specified. Universities teach management but not how to design the architecture of governance. Network governance reduces corruption. The ability of concentrated power to corrupt individuals or an organisation is reduced as governance and so management powers become more widely distributed to create checks and balances. The current systemic unethical conflicts of interest of directors can be removed. The inclusion of stakeholders in the governance architecture provides a basis for organisations to become self-regulating and self-governing.

Network governance introduces many operating advantages. Distributed control simplifies decision-making into less complex tasks. The responsibilities and liabilities of decision makers are reduced, as is the volume of data that they need to absorb and process. This allows humans to more easily process data and work as a team to manage greater complexity. The distributed intelligence of network governance empowers “ordinary people to achieve extraordinary results”. An example is the defeat of the US in Vietnam.

A game changer for organisations introducing network governance is that it creates a systematic way of engaging its stakeholders. All organisations require suppliers, contractors, employees, agents, distributors, clients or consumers etc. Governments introduce laws, regulations, regulators, standards and codes of practice to protect stakeholders affected by organisations. Network governance can be used to engage with stakeholders to directly provide them with information and influence to both protect themselves and enhance the operations of organisations. The sustainabiltiy and resilience of stakeholder network governance is revealed by stakeholder controlled firms. All recorded employee controlled firms that have sustained themselves over generations of management possess internal network governance.

Network governance allows stakeholders to become co-regulators of the organisation to directly negotiate the rectification of any concerns with management. It also integrates Corporate Social Responsibility (CSR) into governance with processes for expediently resolving issues on a more nuanced and efficient basis. Direct resolution of stakeholder concerns can remove the need for extensive CSR reporting and expensive and problematic social audits. Only unresolved issues need be reported and these would now be reported by the stakeholders rather than by executives.

Network governance establishes systematic processes for stakeholders to provide feedback intelligence on the Strengths, Weaknesses, Opportunities and Threats (SWOT) of an organisation and its managers. This provides directors with a process for crosschecking management reports independently of them. Network governance creates systematic processes for accessing information missed or not known by managers. Managers have incentives to bias or miss information on operating problems that could unfavourably reflect on them.

The science of governance demonstrates how “reliable messages can be transmitted over unreliable channels”. Network governance provides requisite variety of channels to assure integrity of information. It also provides a systemic, simple, economic and safe way to facilitate creditable whistle blowing.

Stakeholder engagement in network governance systematically provides intelligence on the “known knowns, the known unknowns and unknown unknowns”. This creates a competitive advantage for firms, social advantages for non-profits and political advantages for public sector organisations. Command and control information systems lack systemic processes for detecting unknown unknowns or for comprehensively accessing intelligence on the known unknowns. A strategic case in point is that research has revealed that 90% of innovations are obtained from users of goods and services rather than from corporate R & D departments.

A vital contribution of stakeholder governance is that it liberates management from “group think”. Many stakeholders will have contrary views to managers. Evolution has hard wired such contrary behaviour into our brains to identify risks and opportunities for survival. However, contrary behavior is inhibited in command and control hierarchies to make them less resilient and enterprising.


The ground breaking benefits of unleashing contrary viewpoints in organisations is that social and political competition is created within organisations for improving the common good. In this way, network governance removes the need to improve public sector operations through privatization.


Stakeholder governance provides a much more economic and effective way to enhance operations of government owned businesses than selling the business:

(a) through the stockexchange and relying on competition for corporate control to improve their efficiency or

(b) selling to a private owner with a strong incentive to trade-off the common good for profits.


The political attraction of stakeholder network governance is that it is a condition precedent for meaningful self-regulation and self-governance. Stakeholder engagement directly enriches democracy. As stakeholders supplement the role of government by becoming co-regulators they allow the size, cost and role of government to be reduced. The role of government would be changed from direct intervention to indirect interventions. Indirect intervention could involve a tax incentive for firms that reduced the cost of regulation by introducing stakeholders as co-regulators.

For reasons mentioned above network governance increases economy, efficiency and effectiveness of organisations in superior ways to hierarchies. It provides the only way for regulators to reliably control complex organisations. This is because the science of governance “absolutely prohibits any direct and simply magnification” of regulation “but it does not prohibit supplementation”. Regulation or control can only be amplified indirectly through establishing a “requisite variety” of “supplementary” co-regulators. The requisite variety of control and communication channels for communicating and managing complexity can be provided through stakeholder governance made possible with network governance.

The John Lewis Partnership in the UK, the Mondragón Corporación Cooperativa (MCC) in Spain and VISA International in the US provide highly successfull examples of organisations with network governance. These firms demonstrate that no changes in the law are required to introduce network governance. What is missing is an education on how to design constitutions to provide sustainable operating advantages as achieved by these firms.

Graduate schools of business, management, law and government base their education on the assumption that centrally governed command and control hierarchies are the universal form of organisational architecture. As a result organisations blindly adopt sub-optimal and dysfunctional constitutions, charters and by-laws in all three sectors. This creates grounds for privatisation of activities that would be better governed by its stakeholders.

Organisations with a network of boards increase the number of individuals participating in governance processes to simplify complexity. In this way network governance achieves operating benefits, sustainability and resilience. However, simplification becomes dependent upon a more complex architecture as illustrated in Figure 1. This creates the biggest challenge for those marketing or presenting an education course on designing organisational architecture for operating advantages. To counter any such concerns they should take note of Dee Hock, the founding CEO of the very successful network governed VISA credit card corporation who pointed out the "second law of the universe: Nothing can be made simpler without becoming more complex".


Hock went on to state:

Industrial Age, hierarchical command and control pyramids of power, whether political, social, educational or commercial, were aberrations of the Industrial Age, antithetical to the human spirit, destructive of the biosphere and structurally contrary to the whole history and methods of physical and biological evolution. They were not only archaic and increasingly irrelevant, they were a public menace.

Network governance simplifies the life of directors, executives and managers. Tasks responsibilities and liabilities become widely shared to further and protect the interest of all stakeholders, including the government and society by facilitating democratic self-governance." ([1])


References

  • Turnbull, S. 2002, A New Way to Govern: Organisations and society after Enron, The New Economics Foundation, Public Policy Pocket Book No. 6, London, http://ssrn.com/abstract=319867.


More Information

Selected Turnbull bibliography on Network Governance

‘Network Governance Theory Development and Examples, August, 2013, Summary of PhD dissertation completed at Macquarie University, Sydney, Australia, 2000, http://ssrn.com/abstract=2343456

‘The governance of firms controlled by more than one board: Theory development and examples’ PhD dissertation, Macquarie University, Sydney, Australia, 2000, http://ssrn.com/abstract=858244.

‘A sustainable future for corporate governance theory and practice’ in S. Boubaker, B. Nguyen and D. N. Guyen (Eds.) Corporate Governance: Recent Developments and New Trends, pp. 347–368, Springer-Vertag, Heidelberg 2013. Chapter only 29.99 Euros from http://link.springer.com/chapter/10.1007%2F978-3-642-31579-4_15 or http://ssrn.com/abstract=1987305.

‘Sustaining society with economic democracy’, 2013 International Conference on Economics and Social Science (ICESS 2013), Melbourne, January 20, posted at: http://ssrn.com/abstract=2220072.


‘Integrating social responsibility into corporate governance’, in Ivan Tchotourian (Ed.), Company Law and CSR: New Legal and Economic Challenges (analysed from a Comparative Perspective). Paris: Bruylant, 2013, http://ssrn.com/abstract=2261518.

‘Re-inventing Governance Using the Laws of Nature’, in Best Practice in Corporate Governance, Volume 1, pp. 42-45, ed. John Peters, 2013, Greenleaf Publishing, Sheffield. http://ssrn.com/abstract=2062579.

‘How can non-profit organizations enhance performance and legitimize their operations? Working Paper 2013 http://ssrn.com/abstract=2223032

‘A Transaction Byte Paradigm for Researching Organisations’, in Giulia Mancini & Mariarosalba Angrisani, eds. Mapping Systemic Knowledge, Chapter XI, pp. 243-267, 2013, Lambert Academic Publishing: Saarbrucken, Germany, available at: http://ssrn.com/abstract=2220047.

‘Could the 2008 US Financial Crisis been avoided with Network Governance?’ in Turnbull, S. & Pirson, M. 2012 International Journal of Disclosure and Governance, Special issue on Financial Crises and Regulatory Responses, 9(1): 1–27, posted at http://www.palgrave-journals.com/jdg/journal/v9/n3/full/jdg201126a.html (Working paper at: http://ssrn.com/abstract=1855982).

‘The limitations in corporate governance best practices’, in The Sage Handbook of Corporate Governance, Thomas Clarke and Douglas Branson (eds.) Chapter 19, 428–449, Sage: London & Thousand Oaks, CA, 2012, http://ssrn.com/abstract=1806383.

‘Corporate Governance, Risk Management, and the Financial Crisis- An Information Processing View’ with Michael Pirson. In Corporate Governance: An International Review, 19(5): 459–470 September, 2011, http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8683.2011.00860.x/abstract.

‘Towards more humanistic governance: Network governance structures’ with Michael Pirson. In The Journal of Business Ethics, 99(1): 101–114, March 2011, http://ssrn.com/abstract=1679450 & http://www.springerlink.com/content/k26w255266718176/fulltext.pdf.

‘Could the 2008 US Financial Crisis been avoided with Network Governance?’ with Michael Pirson, presented to the 10th Annual Society of Heterodox Economists (SHE) Conference, December 6, 2011, hosted by University of New South Wales, Coogee Crown Plaza Hotel, Sydney, available at: http://ssrn.com/abstract=1855982.

‘Why “Best” Corporate Governance Practices are Unethical and Less Competitive?’ In Laura Hartman and Joseph Des Jardins (eds.), Business Ethics for Personal Integrity and Social Responsibility, 2nd ed. Burr Ridge, pp 576–583, IL: McGraw-Hill, 2010, http://ssrn.com/abstract=1260047.

‘Mitigating the exposure of corporate boards to risk and unethical conflicts’ in Risk Management and Corporate Governance, Robert Kolbe, ed. Wiley-Blackwell Publishing, Loyola University Monograph Series, Chapter 7, pp. 143–74, 2009, http://papers.ssrn.com/abstract_id=1106792.

‘The science of governance: A blind spot of risk managers and corporate governance reform’, Special Issue of the Journal of Risk Management in Financial Institutions on The Blind Spots of Risk Management, Henry Stewart Publications Volume 1 No. 4. 360–8, July-September, 2008, available at http://ssrn.com/abstract=1742584.

‘Corporate Governance: Theories, Challenges, Paradigms’, in T. Clarke and M. dela Rama, Fundamentals of Corporate Governance Volume 1 Ownership and Control, London: Sage Publications, pp 40–78, http://papers.ssrn.com/paper.taf?abstract_id=221350.

‘Analysing Network Governance of Public Assets’, Corporate Governance: An International Review, Volume 15, Issue 6, December, pp 1079–89, http://papers.ssrn.com/abstract_id=786805.

The use of bytes to analyse complex organizations’, in Managing the Complex: Philosophy, theory and Applications, Kurt Richardson, Ed., A Volume in: Managing the Complex, Chapter 9 pp. 152165, Charlotte, NC: Information Age Publishing Inc: Information Age Publishing Inc. 2005, http://ssrn.com/abstract=645281.

‘Why Anglo corporations should not be trusted: And how they could be trusted’, FSR Forum, Financiële Studievereniging Rotterdam, Erasmus University Rotterdam, 6:2, pp. 6,7,9,10,11,12,14,15, February 2004, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=492524

‘Corporate accountability – an impact on community expectations, Corporate Ownership and Control: International scientific journal, 1:1, pp. 2634, Sumy, Ukraine, Fall, 2003 (English and Russian)

‘Network governance not Western practices: To protect directors and stakeholders’, Corporate Governance International, 6:3, pp. 414, September, Hong Kong, 2003, http://ssrn.com/abstract=492522.

‘The Case for Introducing Stakeholder Corporations’ prepared for the Institute for International Corporate Governance and Accountability, The George Washington University Law School, November 2003, http://ssrn.com/abstract=436400 .

‘The science of corporate governance’ Corporate Governance: An International Review, 10:4, 256–72, October, 2002 http://ssrn.com/abstract_id=316939>.

A New Way to Govern: Organisations and society after Enron, The New Economics Foundation, 2002, London, http://ssrn.com/abstract_id=319867.

‘The competitive advantages of compound boards’, Corporate Governance International, 4:2, pp. 22–38, June, Hong Kong, 2001. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=277537.

'Stakeholder Governance: A cybernetic and property rights analysis', in Corporate Governance: The history of management thought, R.I. Tricker, ed., pp. 401–413, 2000, Ashgate Publishing: London. Originally published in Corporate Governance: An International Review, 5:1. pp. 11–23, January, 1997, http://ssrn.com/abstract=11355.