Are you ready to enter the Governance’s Innovation Era?

"You may think I am a dreamer, but I am not the only one"

After almost 25 years of existence of the concept, when ESG approaches are put into practice the “G” (for “Governance”) is intriguingly overlooked. An explanation could be that Governance is, for most people, considered as an abstract subject. However, Governance is anything but an abstract or theoretical subject. Because Governance is about debating and defining “Who decide who decide”, another plausible reason could be that when changes or improvements of “Governance” are brought to the conversation they almost systematically trigger highly emotional reactions, anxiety, strong opinions & politics due to the potential implications of these changes in term of shift of power.

Effective governance is, generally, described as a well-functioning?governing body which is a specific group of people entrusted with the?authority?and responsibilities to make decisions about the rules, enforcing them and overseeing the smooth operation of the group within the broader framework of governance.

Based on this definition, it is no surprise that addressing Governance, in the corporate world, initially consisted into a growing scrutiny on the composition of the Board of Directors in terms of gender parity, complementarity of expertise, and independence of Directors. The first evolution is leading to the perceptible shift in power from CEOs to the Board of Directors that we see happening nowadays.

Are you ready to imagine even deeper shifts in power in the corporate world? How comfortable are you with questioning the very ownership structure of Enterprises? ?

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1/ Where do you stand between “Ceremonial” and “Progressive” Boards?

In the early 2000’ the failure of Boards to root out fraud, some of which destroyed whole companies (ie Enron, Worldcom, Tyco, Healhtsouth, Adelphia, etc) led to the Sarbanes-Oxley act (passed in 2002) requiring Boards to implement Audit Committee, Internal Control, and Fraud prevention.

At that time, most of the Boards were “Ceremonial Boards” composed by Corporate Directors dominated by the CEO. Board meetings were highly prescribed by the senior leadership team and the CEO communicated very limited information with the Board between the meetings. Many directors served for the prestige and rarely spoke among themselves without the CEO present.

Nowadays, we see an increasing number of “Liberated Board” composed of Directors who become active and have liberated themselves from the CEO. Liberation is good news, but it doesn’t necessarily mean an evolution towards a highly performing Corporate Directors team. It can also mean that each Corporate Director is singing a different tune (which might not give one harmonious song) deteriorating the CEO and senior leadership team effectiveness by asking too many things and further diluting the CEOs and leadership teams limited time to run the company.

Ultimately, the ambition of most Boards is to evolve and become a “Progressive” Board composed of active Directors effectively cooperating as a team of equals. They meticulously comply with their obligations while ensuring the success of the company is longer than any CEO reign, business opportunity, or product cycle. The Board view is not a collection of viewpoints, it is a team view built through consensus (or consent) mechanisms. The Board focuses on key issues without becoming a time sink for the management. The Progressive Board evaluates their own effectiveness as a collective body as well as at individual Director’s level.

This evolution in the aspiration for a more democratic and transparent governance in the Board room is a very good thing. However, we are still at the very beginning of the journey considering that fraud scandals still happen (ie Volkswagen, Synapse, Purdue Pharma, Johnson & Johnson, AmerisourceBergen etc etc) and most of the Boards (including the reputable consulting firms advising them) have a very limited experience in implementing new governance practices (such as sociocracy) to support Corporate Directors in effectively operating as a team of equals.

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2/ But are you ready to talk about the Governance elephant in the room?

A good Governance ensures that company success is about maximizing long term stakeholders value generation. Here stakeholders may include investors, employees, customers, suppliers, communities, governments, and trade associations.

Considering this larger set of Stakeholders (not only shareholders) opens the door to existential questions such as: Who – within these Stakeholder - is the right arbiter of value generation? Who owns the enterprise? What rights are associated with that ownership?

Typically, conventional enterprises have a single class of ownership, delineated by shares. That share ownership comes with two core bundles of rights for shareholders: economic rights, which provide monetary value, and governance rights, which grant control over the enterprise. Our legal system is designed to protect the interests of these shareholders—outside investors distant from the company itself—above other stakeholders in the company, including its workers, the communities it affects, and the planet.

Because investors control the enterprise and want to increase the financial value of their investment, they seek avenues to amass capital, often at the expense of other stakeholders. This is often called shareholder primacy. Of course, shareholder primacy may seem like common sense. Investors risk their own capital, so why shouldn’t they be rewarded? But share ownership is concentrated in the hands of a few individuals and investment institutions. ?Even mission-oriented enterprises struggle to achieve net positive impacts since the logic of shareholder primacy always encourages them to maximize profit at the expense of everything and everyone else.

After the shift of power between CEOs and Board of Directors, we are entering an Era of unprecedent structural changes within the global workforce that might contribute to accelerate the redefinition of the balance of power between “Investors” and “Investees”:

• Firstly, Ai could replace around 85 million jobs by 2025 and 300 million full-time jobs by 2030 (Some estimates claim that up to 800 million people - about 30% of the global workforce - could lose their jobs due to AI by 2030).
• Secondly, the long lasting & generalized high level of employees’ disengagement. According to Gallup's State of the Global Workplace report: Globally, 62% of employees are "not engaged" at work, 15% are "actively disengaged". The report estimates that low engagement costs the global economy US$8.9 trillion, or 9% of global GDP.
• Thirdly, the upcoming “Silver Tsunami”, where over $10 trillion in assets are transitioning to new owners as baby boomers retire. This massive transfer of ownership opens a unique window of opportunity to reevaluate Enterprise Ownership structures to maximize the value generation for the Stakeholders.

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3/ So, how can we actively participate in Governance innovation?

It is all about building an economy that works for everyone through alternative ownership enterprises (AOEs). Those firms significantly shift economic value and decision-making power toward the non-investor stakeholders they impact, such as workers, producers, consumers, community members, or even a nonfinancial purpose.

There are many different models of AOEs. Some are well established, while others are still nascent. They include:

• Cooperatives: They are organizations collectively owned by their members and managed with a one member, one vote principle. Worker cooperatives are a core structure of the social & solidarity economy (representing approx. 7% of global GDP and 12% of jobs in some countries). Other types of cooperatives include those owned by consumers, producers, farmers, or a mix of multiple stakeholders.

• Employee stock ownership plans (ESOPs): They are trusts that hold all or (a very substantial) part of a company’s stock on behalf of its employees. ESOPs grant shares to employees over time, who can then sell those shares back to the firm upon leaving. ESOPs are the most numerous AOE model in the United States thanks to a highly favorable tax treatment. The retailer Publix and the food company King Arthur Baking Company are both owned by ESOPs.

• Steward ownership: They are models designed to protect the mission of a company. Examples include perpetual purpose trusts (PPTs) (a trust holds all voting shares in a company to continue its mission in perpetuity), foundation ownership (a charitable foundation owns the shares of a company), and golden shares (a third party holds a special share to vote on major decisions that may affect the company’s mission). The clothing manufacturer and retailer Patagonia is now controlled by a PPT, while Newman’s Own is foundation-owned.

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A lot of very interesting innovations are currently happening in that space. We see the emergence of many hybrids and model variations?that take these base models and adapt them to different goals. Such variations include but are not limited to: ESOPeratives, which combine ESOP ownership with cooperative governance; employee ownership trusts (EOTs), which use the PPT model to make employee well-being the company’s purpose; and cooperative holding companies, which acquire several companies that are cooperatively owned and governed by an umbrella organization. For example, the open-source software development company CodeWeavers recently set up an EOT, while Evergreen Cooperatives is a cooperative holding company in Cleveland.

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Conclusion:

The Era of Governance innovation is coming, and we collectively have a great window of opportunity to positively redefine a fairer balance of power between companies’ stakeholders.

The variety and flexibility of Alternative Enterprise Ownership (AEO) models may allow any business owner, stakeholder, or investor to find one that best matches their Stakeholders needs while shifting a meaningful percentage of economic and governance rights.?

While engaging in the Governance Innovation field, it is important to keep in mind that Governance is anything but an abstract and theoretical question. Governance is intrinsically about power. It is highly political, and as often reminded:” If you do not take care about politics, politics will take care of you”.

Directing our attention toward the Enterprise Ownership structures will generate some tense conversations. This is absolutely normal, as we talk about addressing the shift of power between “Investors” and “Investees” core issue. These tense debates, however, are necessary and the only manner to agree and align collectively on the culture, the economy and the world we want to build and live in.

Today, it remains difficult to predict when it will become mainstream to see, one the one hand, financial returns to the investors that do not exceed the wealth created by the investee using the capital. And on the other hand, ownership governance rights that allow the core stakeholders (e.g., workers, community members, and suppliers) to actively participate in major corporate decisions. ?But we will never underscore enough the importance of individually and collectively taking an active role in bringing the debate on every table to contribute to shape a better future relying on fair processes guarantying that policies and decisions reflect the will and needs of (all) the people.