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Four Characteristics of Purpose-Driven Companies

Thu, 29 Jun 2023 18:01:21 GMT

Moving from product-driven, to purpose driven

Rick Warren’s book The Purpose Driven Life has sold 50 million copies worldwide and has been translated into over 130 languages. That book, and others like it, have channeled the deeply felt desire to find and live out individual purpose.

But can com panies be purpose-driven too?

Framing the purpose of a com pany as beyond making profits for shareholders alone is age-old, but the move to state corporate purpose explicitly is newer. Stating purpose is part of a deeper transformation of a growing number of companies–from being product-driven to becoming purpose-driven.

Being explicit about purpose is part of an emerging approach to corporate sustainability which is being promoted by investors and, in some cases, even required by regulators. But being purpose-driven is not simply compliance (though it includes that), nor vague good intention expressed in a purpose statement. Being purpose-driven means aligning governance, strategy, and organizational culture; and setting metrics to measure success. This takes an intentional investment of time and resources.

But the return on that investment can and should be measured; and there are good reasons to believe that it will be positive. This is because the benefits of being purpose-driven flow through two channels:

A finance channel where investors and increasingly also lenders will assess the extent to which clarity of purpose promotes sustainability; and
An employee channel where purpose-driven companies are better able to retain staff and attract new talent, while potentially improving general productivity.

But what does it mean to be purpose-driven in practice? Let’s explore a few key characteristics of purpose-driven companies.

1) Purpose-driven companies have a clear answer why they do what they do

According to sports company Under Armour, Purpose “sits at the intersection of ‘Who we are’ and ‘The Need in the World’ we can fulfill”. Purpose is usually summarized in a clear, cogent purpose statement. While the statement itself is usually quite short, a lot of thought and engagement goes into developing and testing it. It is distinct from a mission statement, which summarizes what a company does, or a vision statement, which sets out what it wants things to look like at a future point when it is successful.

A good purpose statement provides a foundation on which those other aspects of corporate identity can be built.

A purpose statement is not forever, because purpose can shift over time. But to serve as a north star pointing beyond the typical three to five year planning horizon, it should normally be designed with a ten year life in mind.

UPS is a large and venerable company with a 100 year history behind it. However, when CEO Carol Tome took over in 2020, she soon saw that while UPS had a well defined sense of what it did, it needed to reconsider why it did it. The result was its first corporate purpose statement: “Moving our world forward by delivering what matters.” As Tome describes in a 2022 podcast with Andy Stanley, a key test of the relevance of this new statement came when they had to decide whether delivering ‘vape’ products was part of ‘what matters for moving the world forward’.

Although UPS had derived hundreds of millions of dollars of revenue from this line of business, one result of clarity of purpose was that the company decided not to carry these anymore because of the mounting evidence of causing health risks. Instead, they took pride in the crucial role the company had played in the logistics of Covid vaccine distribution in 2021-22: a good example indeed of what mattered to the battered world back then. Although most companies may not face quite that sharp a choice arising from defining their purpose, Tome’s view is that you don’t know that you are on purpose until it costs you something.

Learn how to define your company's purpose with the FREE Corporate Purpose Guide.

Sent straight to your inbox as a PDF document.

2) Purpose-driven companies align their values with their purpose

While discovering and defining the “why” of your company’s existence is the first step to becoming purpose-driven, it’s not enough. There also needs to be an answer to HOW this is lived out in day-to-day behavior, especially among the employees who represent the company in day-to-day interactions. Answering the ‘how,’ of course, is the role of the value statement.

Like purpose statements, value statements can be vague and boring. Many companies have lists with words in common, such as “integrity,” “communication” or “innovation”.

Netflix is a company known for its distinct corporate culture. Its list of 9 valued behaviors (link added in the comments) actually includes those very three words, adding a few others such as courage, selflessness and judgment. But values like these mean nothing if they’re left as vague, abstract words. We must translate them into desired behaviors.

Netflix, for example, defines each value in terms of specific behavior patterns. “Innovation” at Netflix looks like this:

You develop new ideas that prove impactful
You look for every opportunity to reduce complexity and keep things simple
You challenge prevailing assumptions, and suggest better approaches
You are flexible and thrive in a constantly evolving organization

Not only does that list make the value clearer, it also makes it more measurable and accountable: it is possible to ask questions like “In the past 3 months, when did you challenge prevailing assumptions and suggest a better approach?” And then “What happened when you exhibited this behavior?”

For a purpose-driven company, values should enable the achievement of the overall purpose. Netflix exists “to entertain the world.” Achieving and maintaining global scale clearly requires innovation in the ways described.

While corporate purpose is something that the board of a company must ultimately decide, values need to be co-decided between boards and employees. Unless employees have strong agency in creating the values and giving content to them, there is little chance that they will actually shape culture; instead, they will just decorate a few office walls. The board should also be guided by these values, but since non-executive directors aren't involved in the day-to-day operations, their main role is to check if the values actually reflect the company's real culture. And if not, to ask why.

3) Purpose-driven companies look for a long-term ROI on purpose

Having purpose reinforced by aligned values should result in much more than just a fuzzy, warm feeling of satisfaction. The effects of positive purpose are measurable and should be measured. There should be a clear business case to invest the time and resources into defining and reinforcing purpose. But how to make this case?

First, the easier part–calibrating the investment. Defining and reinforcing purpose takes time, typically 3-6 months for a mid-sized company to engage stakeholders and understand their perceptions. Employee engagement through workshops requires planning and time away from work. These "shadow" costs can be estimated using the average time spent and the cost of employment. External support from a trusted advisor adds "real" costs, varying based on scope. For a mid-sized company with 340 employees, identifying purpose may cost around $250,000.

And defining purpose is only the end of the beginning of the purpose journey: to derive any value from the initial investment, it will have to be reinforced through spending ongoing time and attention on it, which may involve an ongoing time equivalent to $200,000.

In our example, is the upfront investment of around $90k in ‘hard’ costs and $160k in staff time, with an ongoing commitment of $200k a lot or a little? To answer this means measuring the return. Calculating return on purpose is challenging but feasible.

Defining purpose benefits employees, reducing attrition by increasing their sense of connection and alignment to what the company is doing. Attrition costs can be measured in terms of the cost of hire and the time taken for new hires to be as productive as the persons whom they replace. In our example, this amounts to $30,000 to fill an average vacancy–a conservative number considering Gallup has estimated the total cost to fill a vacancy ranges between 50% to 200% of salary.

Most companies already track staff attrition rates so your company may already have a baseline. Assuming an attrition rate of 20% (below 2021 US average), in our example, 68 replacements occur yearly. If attrition decreases by one-eighth to under 18%, the net present value (NPV) of the purpose investment over five years would be positive, with a 19% Internal Rate of Return. That sounds like a strong business case!

And that’s only one benefit; others like increased productivity and attracting younger talent may be even stronger.

It is true that other factors can affect attrition rates, like market conditions and pay scales. However, to get a closer handle on the extent to which a change in attrition is attributable to clearer purpose, you could monitor the average employee purpose Net Promoter Score (epNPS) by asking employees on a regular basis a question like: on a scale of 0 to 10, would you recommend this company to potential employees based on its sense of purpose? If you baseline this measure and track it over time, it will give a good sense of how employees are responding.

4) Purpose-driven companies intentionally narrow the purpose gap.

As you track the epNPS indicator by staff level within the organization, decomposing by level reveals the extent of the purpose gap within your company. The purpose gap can take two different forms. A vertical purpose gap exists when senior staff on average are much more likely to derive a sense of purpose from their work than are frontline employees or junior staff. McKinsey research suggests that this gap is common in many companies in the US today.

A horizontal purpose gap exists when an individual reports a low degree of alignment between personal purpose and corporate purpose. This gap can exist at any level of the organization, and may serve as a predictor of potential for attrition.

Both purpose gaps can be closed through intentional action. Closing the vertical gap requires intentional effort to listen to how frontline staff perceive purpose. This may mean taking more time to engage these staff members to reduce the risk of ‘head office’ confirmation bias in identifying and shaping purpose. Closing the horizontal gap may mean helping employees define their personal sense of purpose through training or even coaching support. If they don’t have a sense of their own purpose, it will likely be harder for them to connect truly with the company purpose. However, there is a risk that helping staff define personal purpose may result in increased attrition in the short run as they discover that their purpose lies elsewhere. But filling those gaps with new hires who are aware of and aligned to the corporate purpose is likely to pay off substantially over time through higher productivity.

Now what?

By now, you should be aware that defining your company’s purpose is incredibly important for becoming a company with a thriving future. The Corporate Purpose Lab has produced a free Corporate Purpose Guide to assist you to understand better what the journey entails. You can access your download of the guide here as your next step towards becoming purpose-driven.

Lead your company into a thriving future with the FREE Corporate Purpose Guide

Sent straight to your inbox as a PDF document.

Data Governance and DPI: what’s the link?

Thu, 25 May 2023 12:40:52 GMT

Data governance is now a well-established domain of knowledge systemizing the rules on how data flows over a data life cycle within organizations. In essence, the DPI approach is all about managing digital data in a safe, effective and principled way for public good. Therefore the governance of DPI is essentially the same as data governance, right?

Wrong.

The relationship between data governance and governance of DPI can be likened to that between hygiene practices and a hospital. The hospital needs to have hygiene practices in place at a very exacting level to function effectively and safely; but a hospital is much more than its hygiene practices alone. A hospital has to serve patients, manage billing, procure supplies, operate secure buildings–all sorts of functions which are part of operating essential social infrastructure. Governing DPI is similarly complex.

It is true that governing DPI will include governing data , and as I have sought to understand the older domain of data governance, I have been struck by some parallels for DPI. Here’s one: just as hygiene practices and protocols have evolved over the decades, so too has data governance. We can only hope that governance of DPI will also evolve from today’s rudimentary understanding.

If you read recent books like “Disrupting Data Governance” by Laura Madsen (2019), several more echos emerge:

“Data governance is one of the keys to effective data management, yet there’s a lack of shared definition”—I have been on record arguing that it is unnecessary, and maybe even futile, at this early stage to have too precise a definition of DPI, yet some boundaries are needed if DPI is to avoid this same judgment as data governance in twenty years’ time.
“Data governance is about trust”—so too, ultimately, is DPI even when citizens are required to use one.
“Balancing the forces of protection and promotion (of the use of data) will take some effort, each needs to be well defined and managed to avoid losing focus on their respective needs”—indeed, balancing these forces in the operation of a DPI is a critical function, maybe the critical function, of DPI governance.

All those similarities should not conceal one big difference between these two fields: data governance is about the usage of data as a valuable asset within an organization , while DPI is all about supporting flows of valuable data across organizations . This is obvious for payment systems, but even digital ID systems exist to provide forms of secure authentication or verification to relying parties. Optimizing the interoperability of data for public purposes is at the heart of the DPI approach.

DPI governance can therefore be framed as a form of ‘meta-data governance’, where the DPIs are themselves stewards of sorts of types of data within digital data ecosystems. That makes the task of DPI governance more challenging, but also potentially more interesting and rewarding.

How long will it be before we have textbooks for DPIs with sub-titles like the standard Data Governance text by doyen John Ladley: “How to design, deploy and sustain an effective [data] governance program.” ? I hope we can accelerate the learning cycle with DPI.

Connecting Frameworks: Privacy by Design and Governance by Design for DPI

Fri, 19 May 2023 13:15:17 GMT

There is general agreement that good governance matters for Digital Public Infrastructure (DPI). There is much less agreement at this stage about what governance means in a DPI context. One way to explore building consensus is to explore whether existing widely accepted frameworks could be adapted to the DPI context.

Since DPI at its heart is all about exchanging digital data for different purposes–from payment to identification– it seems appropriate to consider the original ‘by design’ framework which was developed for data privacy. This framework was built around the concept of Privacy by design.

Since its first use in 1995, privacy commissioners and data protection authorities around the world have recognized privacy by design as an international standard which they intended to promote and incorporate in policy and law. It was originally articulated as seven principles which together signaled an intention to embed privacy considerations proactively throughout the data use cycle.

While the privacy by design framework is agnostic about the organization handling the data, the operators of DPIs are types of institutions with a particular purpose which demands specific governance features. The comparison of data to DPI is somewhat akin to that between blood and the heart in the human body–blood, like data, is widely distributed but the heart is the ‘essential infrastructure’ responsible for pumping it. Privacy by design is about protecting the ‘blood chemistry’; governance by design for DPIs is about ensuring that the ‘heart’ functions well, including but not only protecting the unique blood chemistry. So, governance is really the means which connects to ends like this.

With that contrast in mind, how well might the principles of privacy by design inform governance by design?

The table below maps privacy by design principles in the first column to my suggestions of counterpart principles for governance of DPI in the second column. You will see that the majority of principles (those numbered 1,3,5 and 6) map across pretty easily to governance of DPI. This isn’t surprising, considering a concern for ways of using data is at the heart of both.

However, some principles need adjustment for the DPI context. For example, #2 (privacy as default) probably needs more emphasis on interoperability by default for DPI; and #4 (privacy is not zero-sum) recognizes that the job of governance is in fact to identify and manage trade-offs of various types (although not necessarily with user privacy).

Finally, principle #7 (respect for user privacy) could be carried across to DPI but I think the respect in question for DPI is something broader: I would propose that it is respect for the public purpose for which a DPI is provided. This means that, whether or not DPI is formally regulated, it needs to be accountable for the achievement of a recognized public purpose. If accountability for purpose cannot be achieved through regulatory oversight for some reason, then this principle suggests that individual DPIs would nonetheless respect the need to articulate clear purpose, to report against it and to have mechanisms to keep them ‘on purpose’.

Navigating complexity through scenario thinking: imagining a future for DPI

Thu, 04 May 2023 13:19:32 GMT

“How can we stop going faster while our ability to see further ahead is decreasing?”

In today’s world of fast-evolving digital technology, it can be challenging to make informed decisions in complex fields like Digital Public Infrastructure (DPI). With the increasing speed of change, this question posed by Peter Senge and his co-authors in their 2008 book, Presence , remains relevant.

The question is applicable in any complex field in which information is limited and the interaction of feedback loops unknown. But DPI has complexity associated with fast-evolving digital technology compounded by public and private sector decisions about its deployment. No wonder the discussion surrounding DPI is filled with both optimistic expectations and valid concerns, from the potential to reduce inequality to the potential to enable dystopian surveillance and state control. The air of recent G20 meetings and World Bank spring meetings was saturated with claims about the promise of DPI and its perils.

How then are we to make sensible decisions in the midst of this complexity?

The most useful approach I’ve found for navigating complexity is scenario thinking. Scenario thinking is a disciplined approach to building plausible stories of potential futures (note the use of the plural, because there are always multiple paths to the future). A large part of distilling complexity down to more manageable levels is isolating the swing factors, or ‘key uncertainties’ in scenario language. The different possible outcomes of these will interweave to create rich stories, which, like good fiction, will likely have some unexpected twists and turns. These stories, or scenarios, are the backdrop against which to test how different choices may turn out. A robust strategy is one which yields the best outcomes across the widest range of scenarios but also identifies early warning indicators of major scenario shifts so that, where needed, the strategy can shift too. An important aspect of the scenario process is the way in which it helps participants build shared language and understanding, leading to new collaborations and actions to prevent unwanted outcomes.

The scenario-building process has now been applied in thousands of cases at the level of country and company strategies around the world. In many, it has led to remarkable shifts in perspective. For example, the complexity of climate change has launched a whole new range of scenario tools which unpack the possible range of implications for public and private strategists to build into their risk disclosures.

So how might scenario building apply to the nascent field of DPI?

Here’s one way. As I have discussed in other posts, DPI lacks a single accepted definition right now. I point out in the white paper, “Is DPI a useful category or a shiny new distraction?”, that the absence of a single monolithic definition may even be a good thing in the early stages of a field, as witnessed with the older acronym ‘ESG’. However, definitional choices carry consequences. Scenarios could help to answer a driving question like: “Which definitional parameters of DPI will most affect its developmental outcomes?” Layering the different choices about what type of DPI, and therefore whether to promote or protect or regulate it, on top of the fundamental forces driving digital and societal change would be a complex exercise to do well, to be sure. But, I believe, one worth doing. Because as Peter Senge reminds us, reaching actionable clarity is a worthwhile goal–but to get there, you need first to walk through the pit of complexity. Scenarios offer a path through the pit.

Why Digital Infrastructure Needs Public-Private Partnerships: Lessons from Physical Infrastructure

Thu, 20 Apr 2023 13:42:17 GMT

In a recent Devex post, Achim Steiner, head of UNDP, and Amitabh Kant, India’s G20 Presidency sherpa, join the growing calls for more investment in DPI as a means of driving growth, reducing poverty and increasing resilience in the face of crises. However, with government budgets already stretched, where will the additional funding come from? While donor funding may help, it cannot fill the gap alone.

The field of physical infrastructure offers another way for cash-strapped governments to fund infrastructure projects: public-private partnerships (PPPs). Governments have long used various methods to raise funding or move the risk of providing essential services to the private sector. However, the modern push for infrastructure PPPs gathered momentum in the 1990s as countries like the UK and Australia explored new ways of financing essential infrastructure. Multilateral financiers became major promoters of PPPs, offering technical assistance to governments through specialist agencies like PPIAF , and co-funding designed to entice private funding to defined PPP projects. They even documented their approach in a comprehensive PPP guide directed at governments, together with associated training and certification .

Could a PPP-like approach work for digital infrastructure as well?

In principle, the answer has to be yes. Like physical infrastructure, digital infrastructure involves an upfront design and build process and requires subsequent operation and maintenance. Private sector providers can play a combination of different roles in PPPs at different stages, but the key difference from a pure service contract is whether in fact the main private partner assumes significant financial risk.

One of the big arguments in favor of PPPs was that having private partners assume risk was the best way of managing it, rather than simply passing it over to governments who were often ill equipped to do so. However, ensuring delivery as specified and without unfair exploitation of either party over a long period required a complex web of contracts. Both parties needed the capacity and willingness to work within clear and fair contractual frameworks. But when they did, the state had clear oversight and control of infrastructure without having to build and manage it. The state often assumed full ownership of the underlying asset after the PPP contract period ended.

Even if states have the financial capacity, most are highly unlikely to be able to build their own digital infrastructure in-house. They will rely on technology partners for this, even if their role is to deploy and modify open source applications in a specific context. Even when a government agency chooses to maintain a DPI once built, it will likely rely at least in part on external service providers to support it. In other words, the digital services environment is already rife with complex contracting and inter-dependencies between contractors and clients. Taking an explicit PPP approach may not reduce complexity, but it may enable it to be addressed in a more explicit and effective manner.

A final question for now: was “the juice (of setting up PPPs for physical infrastructure) worth the squeeze”, particularly with regards to the end outcomes for the state? After all, PPPs in some places have generated controversies over the manner of their procurement, failed standards of service delivery, or the high price of their services. But the alternative—direct government procurement and delivery—has hardly been immune from criticism either.

In 2015, the Independent Evaluation Group at the World Bank published its judgment based on evidence from the sizable number of PPPs supported by the World Bank Group. It concluded: “PPPs are largely successful in achieving their development outcomes.” There is ground to believe that PPPs can be successful in delivering public services.

While the visibility of PPPs has faded slightly in recent years, in part because of association with privatization as a politically unpopular approach in many places, the call for blended finance options has risen. PPPs of course offer just that: a structured way to blend different types of finance, including donor and concessional funding.

With eyes wide open from the past 30 years of experience of PPPs, I believe there is therefore a case to consider explicitly the circumstances in which digital infrastructure PPPs may work best for delivery and operation. It won’t be all cases, maybe not even a majority. But it may well be enough to make a substantial difference in the delivery of essential digital services.

Read the Devex Post: Why digital public infrastructure matters more than you think

Is DPI a useful category or a shiny new distraction? (Working Paper)

Wed, 29 Mar 2023 13:05:27 GMT

This paper explores the usefulness of the term Digital Public Infrastructure (DPI) as a new category descriptor. In order to reach any conclusion, I first reflect on whether there is yet sufficient clarity about its meaning. This question leads to an exploration of the space in which to locate the existing definitions of DPI; and then to the wider question of what is the appropriate combination of definitional openness and certainty at this early stage of the field’s development? The answer is linked to the purpose for which a definition is needed: such as championing a field or investing in it or regulating it. The relatively rapid take-off of the term DPI reflects in part deeply felt but diverse hopes and fears about the emerging digital future, such that reconciling all these will not be easy; DPI alone is no magical fix. However, it is possible to pursue an emergent definitional path which starts broad and over time, rules out certain options as evidence gathers.

Definitional questions aside, there is already evidence of convergence in substance across different sectors that can make DPI a useful lens beyond the existing sectoral lenses alone. In addition, the DPI lens allows new questions to be asked, for example about whether the fragmented approach to regulatory architecture for data is adequate. The term DPI seems potentially useful therefore, but it will require some careful shepherding to avoid either the confinement of premature narrowness or the vacuousness of prolonged vagueness,

Download the Working Paper

This paper was written in January 2023 and has already evolved through several drafts with the benefit of helpful comments. You can download it here; and feel free to send us add your comments at info@integralsolutionists.com —we will be sure to respond.

Could the FTX Failure Have Been Avoided?

Tue, 07 Mar 2023 17:02:36 GMT

Could the dramatic failure of FTX have been avoided? What went wrong, and how can startups avoid making the same mistakes? Here a few of my thoughts:

FTX's spectacular implosion has provided yet another demonstration of the tech law of amplification: namely, technology takes what works well and scales it; but it takes what works badly, and scales that too. Many circles of venture capital operate with the idea that a concern for governance should come later on in the life of a company. According to this view, governance at the early stage is restrictive and bureaucratic, and therefore antithetical to the capacity to move fast. FTX scaled superfast on this premise.

At least Mark Zuckerberg recognized in Facebook's early motto that this could lead to breaking things. In the case of FTX, those things total $8 billion in claims to potentially up to a million creditors, apart from collateral reputational damage to the crypto sector as a whole.

John Ray, the CEO appointed earlier this year, remarked of the FTX situation: "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here." Taking an even wider lens beyond controls and reporting, many commentators (like George Calhoun in Forbes) are now attributing FTX's collapse to the failure of almost any form of effective governance.

Based on the news seeping out, it's hard to disagree with that.

However, my hope is that egregious failures like FTX don't lead to an overreaction in the opposite direction. Yes, governance is designed to reduce the risk that people will break or lose certain things, specifically other people's money; but good governance at the early stage should be more than that. Good governance is about creating a platform which nurtures and supports sound evolutionary decision-making.

It took the high-profile failures of several UK-listed companies in the late 1980s to trigger the emergence of the modern corporate governance movement. Following the first Cadbury Code thirty years ago, many countries have now adopted similar measures, although those Governance Codes are designed mainly for large listed companies, not startups.

FTX is the latest this year in a series of stories of major governance lapses in VC-funded businesses at the early stage (you may also have read about Flutterwave in Africa and #Sequoia India's mea culpa). It is also the largest yet. Could this 'FTX moment' trigger convergence among early-stage funders about what good governance looks like at the early stage?

I hope so.

The Difference Between Power and Authority in Governance

Fri, 24 Feb 2023 15:48:37 GMT

What can “Tank Man” teach us about governance?

A few weeks back, I wrote about the distinction between authority and power, and how this plays out in the context of startup governance. But for many people, the distinction between authority and power is not very clear.

So, here’s a very visual way of representing the difference.

In this iconic picture taken 1989, we see an unidentified man standing in front of a line of tanks in front of Tiananmen Square, standing against the government's violent crackdown on the Tiananmen protests. It’s obvious at a glance that all the power sits with the column of large tanks, and some authority too–after all, the tanks were called in by the government to crush the student protests. By contrast, the lonely protestor has no power; he is physically small compared to the tanks, seemingly outmatched by the state's might.

Despite this clear imbalance, the man holds a certain authority. He has the authority to bring a column of tanks to halt. Where does his authority come from? Remember the definition from Victor Lee Austen: “Authority is held by a person/s who lead humans to a fuller exercise of their freedom to accomplish human tasks.” Tank Man’s courage gave him a moral authority which both tank captains and their commanders recognized–for a while at least.

This concept of authority is not limited to the realm of politics. Even though they have no tanks to command, leaders of companies may also accrue wider authority inside and even outside their organizations. Inside, authority will grow to the extent that leaders build the capacity of their employees to flourish. Outside, a company’s products and services, together with the way in which they are provided, can enable even customers and citizens to grow also in their relative freedom to accomplish tasks. This type of authority creates the capability to influence without coercion. It’s the power of demonstration and that’s why we have celebrated examples of companies which have had influence, like Ricardo Semler’s Semco Partners or those others mentioned in Good to Great .

Governance in a Post-Authority Era

Fri, 10 Feb 2023 16:28:09 GMT

Governance in a Post-Authority Era

In my many years of observing private and public organizations of all sizes, I’ve made one very critical observation: governance often lies behind their failure to achieve their purpose. But governance failure itself is only a symptom of what I feel is a bigger issue that organizations are facing globally.

In today's "post-authority" era—alongside all the other “posts” which characterize it, like post-modern, and post-truth—there is a growing mistrust of institutions and leaders that hold authority. The notion that there can be rightful authority is not accepted. Authority is seen as a potential or actual violation of the freedom of the “sovereign individual.” There is a pervasive sense that our institutions which should have authority—in government, religion, civil society—are all failing us.

The result of the decay of authority is that other forms of power, like the coercive power of authoritarian regimes and the persuasive power of digital media, are on the rise. And they don’t usually provide a path to human flourishing.

But what if the problem is less with specific authorities and more with our understanding of authority? I like how Victor Lee Austen defines authority: “Authority is held by a person/s who lead humans to a fuller exercise of their freedom to accomplish human tasks.” The word ‘authority’, a close cousin in English to the generative word ‘author’, comes from the Latin word meaning to increase.

Rightful authority leads to flourishing for both those wielding it and those under it. Most of us are in both situations: under some form of authority but also wielding it in some way—as a parent, for example. Rightful authority brings with it the power to change circumstances, but power does not necessarily lead to authority.

Consider the example of a #startup founder. She has the authority of the one who originated the idea for the company and who guards it jealously; but she lacks the power to bring that vision to fruition alone. As a result, she likely turns to those who have one form of power (money), but who don’t necessarily carry authority over her company: venture capital funders. When these funders provide the necessary financial resources, they also gain a level of influence and decision-making power in the form of shareholder votes. The founder/CEO’s authority is no longer absolute, even if it remains paramount.

As the startup raises more funding, and grows to become profitable, alongside authority, the founder/CEO acquires more power: that is, she has more control over more resources and people and more effect on the marketplace. However, if the #CEO acquires too much power without being accountable to some form of authority outside of herself, the risk of abuse and failure grows. A rebalancing of authority and power needs to take place over time so that power and authority are appropriately distributed across the organization. Not only will the nature of this rebalancing change over time, but it will look different in different organizations.

I see this as the basic task of #governance : optimizing the distribution of authority and power in organizations. When this is done well, it should result in conditions for everyone involved—employees, shareholders, customers and the communities in which they live—to flourish. In a post-authority age, it may be harder to do well, but that does not make it any less important.

Do you have any thoughts on how organizations can effectively balance and distribute authority and power in this 'post-authority' era?

How to Build Effective Digital Public Infrastructures

Wed, 02 Nov 2022 18:21:00 GMT

Reducing the Risk of Ineffective Digital Public Infrastructures

There are many risks associated with the rollout of Digital Public Infrastructures (DPIs). They can open the backdoor for governments to surveil and control their citizens. They can even fall into the hands of malicious actors and be used against the people they were designed to serve. Understandably, in the growing movement propagating DPIs, many people wish to reduce risks like these. However, in my view, a risk with less severity but perhaps higher probability is that many DPIs are simply not effective–meaning that they fail to fulfill the purpose set out by their creators or funders. As a result, they may become expensive ‘white elephant’ projects, like their counterparts in the world of physical infrastructure: “bridges to nowhere” or roads and dams built without real consideration of their use, but which are expensive to maintain. A world full of ‘white elephant’ DPIs may not seem as dark as other digital dystopias, but if the DPIs are indeed that important, the absence of well functioning DPIs carries costs. Of course, effective DPIs do not guarantee utopia either; but having more effective DPIs which achieve their purpose seems like a reasonable and attainable goal.

Governance challenges for DPIs

To achieve this goal, the question then becomes: how best to design, build and operate effective DPIs? I am convinced that a large part of the answer is by building sound governance structures which take into account both the specific and generic challenges faced by new DPIs.

First, the specific challenges of DPIs . The envisaged large scale of deployment of most DPIs leads to heightened degrees of caution and oversight from the start in ways which typically do not constrain private startups. At the same time, DPIs often need the nimbleness to compete for take up against indirect competitors at least–for example, instant retail payment systems are a fast-growing category of DPI which rely on customers choosing to use them, rather than other available means of payment. In addition, many DPIs are built and managed as public-private partnerships. The ‘partnerships’ may take different forms: from build-own-operate contracts to service agreements; or indeed, using software provided by private open-source foundations. This aspect adds an additional layer of complexity on top of standard corporate governance.

Underlying these distinctive challenges are more generic challenges. New DPIs are in many respects more like private tech startups facing similar challenges of achieving ‘product-solution-fit’ and then managing scaleup. These types of challenges need also to be recognized in designing DPI governance arrangements because DPIs are not ‘born adult’: they often have to walk a long path before they can achieve and also handle significant scale of usage. The design of DPI governance must recognize not only this need for evolution but also support it. This recognition carries several implications. One is that governing early-stage companies requires different skills and experience sets from governing mature entities: in fact, our research among funders and founders of tech companies suggests that it can be counterproductive to appoint non-executive directors with experience in large, established public companies to the boards of startups. Instead, people who may have less board experience but who understand startup challenges may be more valuable to support a startup to the next stage. So too, then, with DPIs: a board weighted towards too much formality from the start may bog down the agility required in the early stages.

Balancing agility with accountability

Of course, too little formality may carry costs too . In a previous Integral article , I have described the situation which developed at the Open Banking Implementation Entity (OBIE), the operator of the open banking infrastructure in the UK. The OBIE was established as a company under a regulatory order which required major British banks to fund its establishment and to participate in it. In line with startup logic, the OBIE operated under a lean governance structure with a dominant single independent Trustee on its small board. Five years after its establishment, an independent investigation in response to whistleblower complaints found that the OBIE had been effective in its core task of promoting open banking, yet had failed in some basic elements of corporate governance relating to its treatment of staff and contractors; and failure to remedy what was described as a ‘toxic working culture’. So, a delicate balancing act is required to achieve success without ‘breaking things’; and maintaining this balance is the core task of governance.

Two forms of DPI governance

In the case of many DPIs, as indeed with the OBIE, there will usually be two forms of governance:

External governance from a regulatory authority which oversees and may license a DPI: this may include powers to appoint directors and to intervene in defined circumstances; these powers may derive from a general regulation or from a specific order issued under general authority, as in the case of OBIE.

Internal governance which takes the form of a decision making body established directly to oversee the work of the DPI; this body may take the form of a board of directors if the entity is a company, in which case the nature of governance is shaped not only by domestic corporate law but also by codes and guidance which pertain to corporate directors. These codes are typically designed to apply to public companies, usually meaning those listed on a stock exchange. While most DPIs are unlikely ever to list equity, they nonetheless function as public companies in terms of the levels of scrutiny and accountability expected of them. While small and unlisted, OBIE faced expectations that conventional norms and standards would apply to its activities.

Examples of blending both with payment systems

These two complementary forms of governance need to be carefully blended to provide the right mix for DPI success . To see how to do this, we can draw some insights from the world of payment systems. Payment systems are one of the earliest categories of DPI, dating back thirty or forty years in many places. Following the Covid pandemic, usage has soared in many places and new systems have been established. Payment systems vary in their ownership–many are privately owned or controlled by their participating members even though they may operate as not-for-profit companies, while some are owned and operated by central banks.

A recent World Bank research paper has looked in detail at the Governance of Retail Payment Systems . Several aspects stand out. First, most countries now have an external regulatory framework which gives oversight powers to a payment system supervisor, usually the central bank. The external oversight usually includes some consideration not only of risks, as is common in financial sector regulation, but also of the efficiency and effectiveness of the national payment system as a whole. However, many payment systems also have internal governance through board of directors; and the ways those boards are appointed and function has an important influence on their effectiveness. More successful payment systems have been able to build the agility to evolve over time, while ossified governance arrangements tends to lead to stagnation or even decline.

Payment system governance recognizes the key principle of proportionality : that is, that the intensity and scope of governance should be in proportion to the risks which it seeks to ameliorate. Proportionality is recognized even in international standards for payment systems: the Principles for Financial Market Infrastructures (PFMI) set by the international payments standard setting body housed at the BIS, defines standards for systemically important payment systems. Non-systemically important payment systems may fall into other categories, such as prominent retail payment systems which are widely used for low value transactions and ‘other’ systems. In the latter case, the need for external oversight may be quite limited as long as the internal governance is strong.

Application to DPIs

For the wider world of DPIs, the experiences of payment systems provide a few pointers to success: first, a blend of external and internal governance is required; second, proportionality must apply to both forms of governance; and third, some DPIs may be so significant that the equivalent of international standards like PFMI should apply to their governance and operations. Of course there is not yet a standard setting body for DPI in general equivalent to CPMI for payments. Finally, fourth, the mixed successes of new payment systems highlighted in a recent study of instant payment systems in twelve countries raise a range of internal governance questions and considerations. Establishing sound and evolving internal governance requires intentional effort. While there are many places offering training focused on corporate directors in public companies, where are the forms of training optimized for the specific challenges of DPIs highlighted earlier, such as their public-private nature?

Finally, even in its quite evolved form in payments systems, external governance has its limits. For one thing, it is often more focused on risks than on opportunities since the nature of financial regulators is to consider risk. Even internal governance can easily become preoccupied with risks, leading to the loss of the agility required to identify and take advantage of opportunities. To balance the consideration of risks and opportunities, DPIs need to keep up a focus on achieving their purpose, which involves both.

A role for Public Protectors of DPI

Especially if there is no sectoral regulator in place or if that regulator lacks capacity, then defining the role of a public protector of DPI may help. William Frater and I have previously proposed that a public protector role be identified for important DPIs. This role would be played by an individual with the necessary skills and experience, and may be implemented through the contractual arrangements of setting up a DPI without having to wait for new regulation. The protector, funded by a specific budget provided by the DPI, would be independent of internal governance. It would have the powers to investigate, and if a DPI is failing to achieve its stated public purpose, it could make recommendations to external governance or intervene directly in internal governance. To be clear, this role would not usurp the role of specific sectoral regulators, such as Data Commissioners or indeed payment system regulators. But for designated classes of DPI, it could help to improve the likelihood of DPI effectiveness by creating an empowered point of accountability focused on the question of purpose and effectiveness.

Think of DPI Protectors as game wardens, if you like, whose job is to ensure more working elephants than white elephants in the world of DPI. And of course, Protectors would also have powers to deal with ‘rogue elephants’ when they arise in dystopian scenarios of rampant abuse of privacy or other citizen rights.

Governance by Design for Digital Public Infrastructures

Tue, 30 Aug 2022 00:48:03 GMT

During the last six months, I have focused much of my time on governance in early-stage companies. Together with my colleagues in the new Agile Governance Platform , we have made the case why governance at the early stage needs to be different from that of large, listed companies. For example, in a recent Integral article , I argue that governance for firms at this stage of development should be redeveloped from the ground up, rather than imposed top-down by stripping down the bulging Governance Codes applicable to later stage entities. In the course of considering these issues, I have been reminded that digital public infrastructures (DPIs) begin their lives as startups too . DPIs may look a bit different from private tech startups: they may be less funding-constrained, and they may not have the pressures of commercial venture capital funding behind them. However, they too must pass through an early stage of experimentation before they can reach national scale and organizational maturity. In that early stage, they too have to wrestle with questions like how to make effective decisions in the face of complexity; and when to prioritize which policies and procedures to adopt. To assume that DPIs are ‘born adult’ is to miss out on addressing the complex, contested issues of early-stage governance which characterize the growth path of DPIs as they seek to achieve society-wide scale and influence.

So what might governance by design look like for new DPIs? And how does the answer differ, if at all, from early stage companies in general? To get to some answers, let’s first look through the lens of two recent publications which address the governance of DPIs more broadly.

Governance by deliberation

In 2021, a team of Harvard Kennedy School researchers led by Jeff Behrens reported on ethical considerations for the design and deployment of foundational DPIs in developing economies (although their analysis and findings seem hardly restricted to developing economies alone).

Their main proposal is that governance of DPI should be ‘deliberative by design’ --that is, the mechanisms for structured consultation with all stakeholders should be built in from the design phase onwards. They argue: “Because digital public infrastructure is both experimental and fundamental to the lives of residents, deliberative governance should be integrated as deeply as is possible at all stages of the design, deployment, and stewardship of DPGs. Deliberation should be a permanent, rather than temporary, feature of the design and deployment of all digital public infrastructure.”

Although the HKS researchers do not state this explicitly, the notion of deliberative governance can be juxtaposed with the seemingly hasty governance of the private startup world which ‘moves fast and breaks things.’ This is a key difference between DPIs and private startups: the latter are generally not required to consider broader public stakeholder needs; and most don’t in the focused rush to achieve product-market fit.

To be clear, speed alone is never a principle of good governance at any stage. But in my opinion agility in governance is also an important principle for DPIs in their early stages–at least as ‘agile’ has come to be understood in the world of software development. There, agile refers to the ability to break up a complex project into smaller tasks which can be developed, tested, and reassessed if need be, without impairing the overall outcome. Agile development was a response to long complex planning processes for software projects which often resulted in failure, notwithstanding all the consideration–either because the market had moved on, rendering the project obsolete or simply because the best planning struggles in the face of complexity. Similarly, deliberation alone will not actually deliver complex digital infrastructure–on its own, deliberation may risk bogging down in a quagmire of contestation and complexity, creating stranded digital assets. Deliberation needs to be linked with clear and effective decision-making protocols and leadership in cultures which consider risk. DPIs need

Lessons from governance of retail payments systems

To consider what effective DPI provision might look like, let us turn our attention to one of the most developed classes of DPI today–retail payment systems. From small beginnings, many have advanced well beyond startup stages to become indispensable infrastructure of the modern economy. In recent years, there have also been a number of startup payment systems. Ownership models for retail payment systems vary from wholly private (think Visa or Mastercard) to publicly owned and operated, with public-private options in between. There is no one size fits all for governance models, according to the team of World Bank Group authors who considered these issues in a recent report .

These authors don’t explicitly mention ‘governance by deliberation’ although some of their recommendations–about acknowledging, defining, and addressing public interests and stakeholder involvement is key, for example–align with the approach which HKS researchers propose. But what else can we learn from how payment systems are governed as an active, even booming, class of DPI?

There are at least two pointers in this report. First, the authors point to the distinction between external governance , that is, regulatory oversight, and internal governance –how internal bodies like boards make decisions on behalf of participants or members. Payment systems usually have both in some form. External governance can be helpful in creating external accountability where needed while allowing internal governance to wrestle with complex issues on a more hands-on basis.

Second, the World Bank authors stress the need to allow for evolution in governance. Evolution can be linked to good practices like undertaking regular board effectiveness reviews. While the HKS researchers would likely not dispute this, the World Bank authors are more explicit about the need for these infrastructures to recognize and respond to changing market conditions: even if some payment systems function as domestic monopoly infrastructures, technology innovations such as cryptocurrencies or central bank digital currencies may threaten their existence. Recognizing these threats may help to keep DPIs agile.

Proportionality in governance

While proportionality has already become a widely accepted principle undergirding financial regulation, the World Bank authors include proportionality among areas for further research in governance of payment systems. According to Fernando Restoy of BIS , regulatory proportionality means that the regulatory approach should be tailored to a firm’s size, systemic importance, complexity, and risk profile. How to apply this principle to DPI? By definition, DPI has from the outset the potential to be systemically important; indeed that potential scale motivates the argument for governance by deliberation to take into account the possible effects on stakeholder groups. However, to paraphrase the title of the famous book by philosopher Alaisdair McIntyre, ‘Whose proportionality? Which deliberations?’

Proportionality involves balancing tradeoffs. Someone, or more specifically, some group of people needs to make those calls. Deliberation alone does not resolve tradeoffs or conflicts, though it may highlight them. Deliberation needs to be proportional too since it is not cost-free in time or resources. To apply this, I would argue that there is a pressing need to come up with playbooks for new DPIs written after considering cases with too much or too little deliberation. As one example of too little deliberation, I described in an earlier Article the case of the UK’s Open Banking Implementation Entity as a type of new DPI which arguably moved too fast to achieve remarkable outcomes but with too little deliberation about its internal structures, resulting in an external investigation and changes in governance announced in 2021. But my hunch is that too much deliberation may be as problematic for advancing societal goals, even though the consequences may be different.

Alongside deliberation, proportionality should therefore be a foundational principle of governance by design for DPIs . Rather than simply accepting that everything to do with a new DPI may be systemically important, the application of proportionality should enable internal and external governance structures of DPIs to parse a DPI project into dimensions requiring different levels of intensity of deliberation. This approach can allow for greater agility in early-stage DPIs which will reduce the risk of a future landscape cluttered with digital white elephants.

Cracking the Governance Code..or are the Codes Cracking?

Tue, 02 Aug 2022 18:05:32 GMT

A case for moving beyond governance codes for early stage companies

The genesis corporate code

In 1992, a committee headed by Sir Adrian Cadbury fired the ‘shot heard around the world’ of corporate governance. Coming in the wake of a series of UK corporate fiascos, the Cadbury Committee ‘salvo’ included a set of good practices for large listed companies to follow. The Cadbury Code , as these practices came to be called, inspired a series of similar developments in other parts of the world. South Africa, for example, published its own King Code of Corporate Governance shortly afterwards in 1994.

The EGCI database now lists governance codes in dozens of countries, ranging from Brazil through Kenya to Vietnam. For public companies, cracking this type of code has increasingly meant adopting an approach of ‘apply and explain’, an evolution of the original ‘comply or explain’ which is technically only required by a few codes such as King. However, institutional investors increasingly require compliance in an age of escalating pressures on them to integrate ESG factors.

Time to ditch codes?

But could these governance codes themselves now be cracking under their own weight? A recent blog post by Cambridge law professors Bobby Reddy and Brian Cheffins makes that case in a stimulating short read. Under the title, “The 30 year itch: time to ditch the UK Corporate Governance Code”, Reddy and Cheffin make a compelling argument that, 30 years after the publication of the Cadbury Code in the UK, such codes have outlived their usefulness in the UK at least. They are now overarching in scope and effectiveness, as policy makers have broadened them to cover a wide range of issues not foreseen at the outset.

I find this argument compelling–especially as I observe the proliferation of well meaning ESG frameworks; and the process of weaving these frameworks into quite narrow, restrictive checklists. The outcome risks ‘straining out gnats and swallowing camels’. The risk is not only that ‘over governance’ will deter companies from listing on public exchanges, which is one of the main concerns of the Cambridge dons in respect of the London Stock Exchange. It is also that the proliferating codes send signals which can chill innovation even in segments of the corporate space to which they don’t (yet) apply–such as startups. Compliance with inappropriate rules or codes of any sort carries two types of costs: the direct costs of compliance which mount as codes become more sophisticated and require more time and resource to comply with; and the indirect costs including opportunity costs which come from over-conservative decision making or failure to take enough risk. The latter category may well become the largest over time, but unlike compliance costs, is harder to measure.

What does this mean for early stage entities?

The early stage investment space has been on my mind a lot this year. In a recent blog I wrote with co-authors Marc Herson and Sam Parker, we summarize the findings of a series of interviews conducted with funders and founders of early stage entities earlier this year. Clearly, fund managers are feeling the increasing pressure from investors to apply ESG analysis; and one logical way to satisfy them is to adopt a what I would call a ‘Code downwards’ approach . That is, taking the existing governance codes as the ‘Himalayas’ of corporate governance which all mature companies must ascend at some stage, but accepting that starting in the foothills is adequate, providing the path leads onwards and upwards. To be fair, the better codes explicitly encourage a proportionate approach to adoption which they claim allows even small and medium enterprises to apply stripped down versions.

At one level, ‘ Code downwards’ approaches are intuitively appealing : after all, to climb Mount Everest, you must start in the foothills….mustn’t you? Certainly; but deciding which path to take depends very much on your desired angle of approach to the mountain. That choice may be affected by weather, skills, time available and so on. At one level, this states the obvious that there is seldom only one path up any mountain. But more importantly, there may not be only one mountain or range worthy of the climb.

So what are the alternatives to codes?

The Cambridge authors advocate abolishing the UK Corporate Governance Code, the offspring of Cadbury, but they are clear in their blog that they don’t advocate full scale deregulation. For the UK at least, they prefer limited and specific mandatory disclosure, rather than sprawling code-based disclosure. This alternative assumes that the regulatory making process can result in an appropriate set of disclosures.

Another alternative for early stage companies is to focus on the substance which good governance aspires to achieve and ask a different question i.e. not “how can I comply with these Codes when I grow up?” but rather “what does smart, agile and ethical decision making look like in the presence of multiple stakeholders?”

The answer will have to draw on a much wider range of inputs than accumulated legal or regulatory thinking alone. It is likely to include insights from behavioral science–such as those contained in Daniel Kahneman’s striking recent book with Cass Sunstein and Olivier Sibony called Noise . It is also likely to take into account how technology is redrawing the lines of where human judgment can be, and/or needs to be, deployed. It may well change today’s paradigm of meeting as a board of directors at punctuated intervals to collectively act out the set piece theater today called a ‘board meeting’ into a more fluid flow of information and decisions across time and space. It will probably also involve learning from all the current upheavals in crypto-governance, which is going through its own crises perhaps akin in scale to those which launched the Cadbury Code thirty years ago. I have argued elsewhere that we can and should learn from these efforts which start from a different and more fundamental position than merely asking how to comply with corporate codes in future.

To be sure, there are many challenges to be addressed in finding the answer to what better organizational decision making looks like. But I would argue that this bottom up approach towards designing appropriate governance for early stage entities at least is more likely to result over time in discovering those mountains worth climbing other than the ‘Himalayas’ of today’s governance Codes. Embarking on this journey is one of the main purposes of the new Agile Governance Platform which my colleagues Sam Parker, Marc Herson and I have recently launched.

Developing Accountability for Organizations Driven by Purpose

Thu, 26 May 2022 13:09:42 GMT

by William Frater, Lea Esterhuizen and David Porteous

Understanding stakeholder expectations is central to the formation of an organization’s purpose. It is also central to remaining true to that purpose over time, and being accountable to stakeholders for doing so. But in practice, how can companies understand the expectations of large diverse groups such as consumers or suppliers, or indeed, employees? Large listed companies often find it hard enough to track and manage the expectations of diverse shareholder groups, activist and passive, without adding even more complexity to the picture. In this blog, we cite an example already in use for monitoring working conditions, which was started by one of us, in order to make a wider point: it is now both feasible and desirable that organizations intentionally monitor the expectations of their stakeholder groups on an ongoing basis, particularly for organizations with large scale interfaces across the society, as in the emerging category known as digital public infrastructure.

Who are stakeholders? The ISO37000 context

Within the broad category of stakeholders affected by an organization’s actions, the new ISO37000 standard on organizational governance identifies two groups. First, member stakeholders who have a legal obligation or defined right to make decisions in relation to the governing body and to whom the governing body is required to account for both its performance and the organization’s outcomes. And second, reference stakeholders to whom the governing body has decided to account when making decisions relating to the organization’s purpose.

The treatment of stakeholders is at the center of an organization’s culture. A positive culture grows from ethical and effective engagement behaviors and practices which respect stakeholder rights. This is core to the organization’s public reputation and brand. The trust earned from stakeholders is fundamental to long term success and even to maintaining a license to operate in society.

The governing body takes a central role in identifying relevant stakeholder groups and defining the organization’s relationships with them. The governing body has to ensure that the expectations of stakeholders are understood through continually engaging with them and being accountable for the organization’s intentions, performance and impacts. This requires an engagement strategy beyond any mandated in the law or in the founding documents of the #5174f0organization.

One route: board representation

A typical way of incorporating stakeholders explicitly is to appoint stakeholder representatives to the governing body. In the European system of corporate governance, supervisory boards must comprise representatives of workers, creditors and other defined stakeholder groups. However, in most other jurisdictions, shareholders elect board directors in private companies and they may choose to elect directors who represent specific constituencies. In many public bodies, there may be a requirement that appointees are drawn from specific constituencies.

But is this sufficient? And can it work in practice? Once appointed and when fulfilling their fiduciary duties, all directors are required to have loyalty to the organization rather than the constituency that they may represent, overruling any explicit representative function. Anyway, who resolves conflicts which may arise among stakeholder needs or interests? There is a risk that a governing body may be split by constituency-based intransigence that may have a destructive impact on the entity and on its ability to serve all its stakeholders. This is a failure in the governance system, for which the governing body members would be liable.

Diversity of membership helps to bring a wide range of perspectives to a governing body: the understanding of its context, the articulation of purpose, devising a strategy that will generate value, embracing opportunities, careful oversight and risk management, and interpreting outcomes. In fulfilling these functions, the governing body should take stakeholder expectations into account on a continuous basis. In order to do this, the governing body needs to commit to a credible and informed process of engagement to ensure that they can get the most accurate understanding of stakeholder expectations as possible. The best role that a constituency-appointed member of a governing body can play is to ensure the integrity and relevance of the engagement, rather than being the lone voice of the constituency.

The alternative: tech-enabled stakeholder engagement

Even when stakeholders constitute a large, diverse and dispersed population, stakeholder engagement is now not only feasible but actively being practiced. Thanks to the new generation of tech-enabled solutions now available, organizations such as those delivering digital public infrastructure have a relatively simple, cost-effective means of remaining up-to-date with changing stakeholder expectations and needs.

How do such systems work? Mobile penetration is now an assumption rather than aspiration, even in the most resource-poor environments. Stakeholder engagement systems powered by mobile engagement simply use existing mobile communication channels, often piggy-backing on well-used social media channels to inform the stakeholder population on the engagement opportunity, benefits and incentives to reach, recruit and engage with stakeholders. Once stakeholders have accepted the invitation to engage, further encouraged by incentives designed to attract interest, the system essentially surveys the sample of stakeholders that have opted in or consented to engage and provide feedback at regular intervals.

This survey process generates insights that drop onto easy-to-read digital dashboards. Management and boards can view stakeholders’ current priorities and expectations, get feedback on existing services, and provide information to stakeholders on proposed changes/new services, future strategies, how the organization has met expectations and its impacts. The case study from a program in the retail sector shows how this is already being done for private providers.

Case study: stakeholder engagement via mobile for a UK retailer monitoring working conditions across cleaning providers

Since 2014, &Wider has been supporting multinational brands and retailers to monitor working conditions along global supply chains. Thanks to the mobile engagement channels and actionable traffic light dashboards used in Direct Worker Reporting (DWR), &Wider has been able to offer visibility and a wider perspective on worker wellbeing. In the context of retailers of Fast Moving Consumer Goods (FMCG), DWR has been used for generating insights to assess and manage ethical risks, to inform improvement programmes focused on working conditions in higher risk sectors and geographies, and for enhancing lighter assessment systems such as social audits. Retailers use DWR for handling the more invisible parts of their supply chain, and the higher risk parts of their supply chain.

One such retailer used DWR in 2020 and 2021 to monitor working conditions and human rights impacts across cleaning service providers. Monitoring conducted across 41 sites in the UK and engagement with around 600 cleaning professionals during this period generated clear priorities for both the cleaning businesses themselves and for the retailer. The exercise generated a live picture of working conditions on the ground, enabling all stakeholders to trial different interventions to address different priorities flagged by cleaning professionals, and to use the results that followed to measure the effectiveness of these interventions and the extent to which they had addressed the challenge flagged. Cleaners indicated that they were under additional financial strain due to the pandemic, and that they were unclear or doubtful about whether their employer could offer medical attention if and when it was needed. One of the providers was exemplary in addressing both priorities promptly. The provider engaged a platform that provided free online doctor consults, and initiated a financial relief facility. Both offerings enjoyed rapid uptake amongst cleaners. The next two sets of survey results clearly showed that these issues had been addressed and workers experienced relief.

The data set also indicated clear seasonal fluctuations in the issues affecting cleaners, thereby equipping the providers with insight into when cleaners were under additional strain. As a result, the providers could programme interventions to address specific strains at the times when such were needed. Purchasing practices and the practice of retailers receiving two quotes for cleaning contracts, one of which would factor in better conditions for cleaners, also meant that retailers were alerted to the impact pricing and purchasing practices have on the wellbeing and working conditions of cleaners in their stores and warehouses. The communications strategy used by both retailer and provider also meant that stakeholders were well informed about the challenges identified, interventions proposed and deployed, and where improvements had been made.

In short, the stakeholder engagement data generated a feedback loop and an invitation for all the stakeholders in this situation to recognize changing needs and then to act, collaborate, and evaluate gaps and improvements over time. The data enabled joint listening, which in turn enabled an open discussion and supported a dynamic of continuous improvement.

Engagement powered by mobile technology is entirely anonymous for all participating stakeholders, and is easily scalable. There is however one precondition for such systems to deliver a continuous stream of reliable stakeholder feedback or insight: the organization needs to be ready and willing to act on what stakeholders report, otherwise the appetite for stakeholders to continue to engage and the ability of the system to continue to recruit new stakeholders for engagement will be impaired. The integration of such stakeholder engagement systems into organizations delivering digital services offers unique opportunities to integrate the incoming insight from such engagement solutions such that organizational listening is hardwired into the organization’s operations.

Particular relevance to Digital Public Infrastructure

The planning of hard infrastructure like roads or dams usually requires other forms of impact assessment than engineering alone: environmental and social impact assessments are usually required because of the irreversible consequences they may cause. We would argue that the same principle applies for Digital Public Infrastructures (DPIs). DPIs are “systems which allow data to flow seamlessly while accomplishing basic but widely useful functions at a societal scale”, as one of us has pointed out in a previous blog. Examples of DPIs include widely used digital platforms which are at the core of the modern economy and society, including payment systems, digital identity systems and healthcare information systems. Arguably, because of their scale and function, Google and Facebook are forms of (privately-owned) DPI in the areas of online search and social media respectively. The mounting controversies over how to hold these two giants accountable as private companies for their wider impact on society illustrates how important the issue of practical accountability is.

While as virtual forms of infrastructure, DPIs may seem to be easier to reverse than hard infrastructure, they potentially have a much wider impact since they are not limited in their geographic reach as hard infrastructure is. To perform effective ex ante assessments for DPI requires the use of digital tools such as those we have described in this blog. Social media and online surveys can be used during the design phase to understand stakeholder expectations; and then they can be deployed on an ongoing basis to keep a pulse on reactions as they roll out and reach scale.

Conclusion

Effective purpose-driven organizations are fundamental to mitigating and resolving many of the challenges facing global society and the biophysical environment. They are crucial in the allocation of resources in a manner that enables current and future generations to meet their needs and thrive. But to do this allocation requires that their governing bodies are constantly and accurately informed of stakeholder expectations. Technology now enables them to do this inclusively, accurately and on a continuous basis. It also enables governing bodies to communicate back to diverse stakeholder groups, resulting in continuous feedback. A reliable stream of high quality data like this is going to become essential to the effective and accountable governance of all purpose-driven organizations; and should especially be required for organizations managing digital public infrastructure. The active use of these channels should also shift the emphasis of boards from attempting to recruit representative voices rather to overseeing a credible stakeholder feedback system. This shift will deepen their understanding of organizational stakeholders and should enable better decisions supported by stronger relationships built on listening and trust.

This is a revolution in the making that could galvanize and equip organizations better to resolve pressing global challenges.

AUTHORS

William Frater, Lea Esterhuizen and David Porteous are founders of Kutumikia , &Wider and Integral: Governance Solutions respectively

What Can the Rise of Cryptoeconomics Tell Us About Governance by Design?

Tue, 15 Mar 2022 13:04:14 GMT

Governance for innovation Part 2: what can we learn from the rise of cryptoeconomics?

This is the second article in a series exploring ‘ governance by design’ , specifically when the design or purpose is to enable and sustain innovation. In the first article , I considered how, starting in the 1960s, venture capitalists (VCs) brought a distinctive approach to the classic form of hierarchical corporate governance of the early-stage firm. Observing the distinctives of the VC approach, I proposed the first two principles for governance by design: achieving risk alignment among key stakeholders; and proportionality in risk management.

In this second article, I want to focus the spotlight on a much more recent trend: the rise of cryptoeconomics . I use that term rather than say, ‘Web3.0’ or ‘blockchain’, because those terms tend to place a focus on the technology itself rather than the organizational forms it enables. Rather, I follow Nathan Schneider of the University of Colorado Boulder who in a recent blog available here defines cryptoeconomics as “an area of applied cryptography that takes economic incentives and economic theory into account.” It is exactly because my interest here is in exploring how applied cryptography is shaping human incentives and therefore the governance of entities old and new that I also don’t use here the more generic terms distributed or decentralized governance. I have used those terms before in a previous article contrasting modern corporate governance (‘mGov’) with the rise of decentralized governance (‘dGov’). Of course, decentralized governance long predates the advent of cryptoeconomics, but the widespread application of cryptoeconomic tools has enabled and empowered new thinking about applications beyond the world of Web3.0 only.

Over the past ten years, the cyptoeconomic applications of blockchain technology and smart contracts have increasingly broken out well beyond their initial domain, namely software development, to define the governance of increasingly large pools of capital in the DeFi (decentralized finance) world. Even at this relatively early stage, legal scholars are already hailing the potentially wider significance for governance. Nathan Schneider calls for more admiration of what cryptoeconomics has already accomplished in a short while, while also cautioning about a blindness to its limitations. Professor Aaron Wright of Cardozo School of Law wrote in a 2021 Stanford law journal article : “.. there is early-stage indication that blockchain-based governance will have a significant impact on the way firms are governed—both by digitizing traditional governance mechanisms and by offering fundamentally new ways of organizing business enterprises .”

My interest in this article is to assess what cryptoeconomics has to teach us about governance for innovation , as a specific instance of governance by design.

Governance by design vs design-based governance

First, a quick excursion is necessary to distinguish what I have called ‘governance by design’ from the narrower technical concept of ‘ design-based governance .’ In a 2020 paper , researchers Gritsenko and Wood present their schema for distinguishing classic modes of governance such as self-governance and hierarchical governance based on two main dimensions:

(i) whether the rules are developed and imposed ex-ante or emerge ex-post; and

(ii) the degree of commitment to the arrangement.

For them, design-based governance is a distinct mode in which the rules are imposed ex-ante, like in hierarchical governance; but with relatively low commitment, more similar to self-governance. Through considering three examples in which algorithms are increasingly used to make decisions, they propose that the rise of algorithmic governance through blockchain and smart contracts is becoming an important form of design-based governance.

Why does all this context matter for our discussion here? For one thing, we need greater definitional clarity: in a new and fast-emerging field, we are all groping towards more precision with which to describe these emerging phenomena. However, even terms like algorithmic governance don’t quite fit all the proliferating types of decentralized autonomous entities (DAOs): for example, some entities are indeed fully algorithmically governed, without the ability of any party to upgrade protocols but only to ‘fork’ or ‘exit’; while others do allow for contracts to be upgraded by following governance processes. At this early stage, the wider world of cryptoeconomic governance remains sprawling and increasingly diverse. But one could say the same about the wider open-source movement itself from which many cryptoeconomic pioneers originate: open-source has become a major force in the world of software development but the modes of open-source governance differ widely–as shown in the nine different archetypes set out in Mozilla’s useful report, A Framework For Purposeful Open Source .

Against this background, I have chosen here rather to use Schneider’s term cryptoeconomic governance since, to me, it signals better that the human element in all these new schemes is not forgotten or underplayed. Indeed, Schneider and others like Primavera De Filippi have called out the ‘invisible politics’ at work in many decentralized schemes like bitcoin, leading even to the emergence of ‘crypto-politicians.’ Crypto pioneers like Vitalik Buterin have decried the emergence of ‘crypto plutocracies’ in which a few large token holders exercise effective control over apparently decentralized schemes.

But that choice of language simply reflects my preference. More importantly, however, the concept of ‘ governance by design’ is not one specific mode of governance , as design-based governance is. It is rather the meta-set of intentional choices made to shape the decision making architecture within which organizations function best. Hence, governance by design would include the consideration of whether, and if so, when, design-based governance is appropriate in a particular setting; but also of when hierarchical forms of governance are needed to achieve organizational purpose. Because I have framed the purpose here as sustaining innovation, and because design-based governance has been such a fertile source of innovation in recent years, my inquiry here is therefore to ask what principles we may see at work in cryptoeconomics which may inform the wider principles of how to optimize governance for innovation.

Three distinctive features for innovating governance

There are three main features through which cryptoeconomic governance will shape the wider landscape of governance for innovation over the next decade.

First, the greater transparency and security of decision-making in cryptoeconomic schemes may help to build trust across diverse parties who need to collaborate to support an innovation process or system. Cryptoeconomics places an intentional focus on defining the decision-making rules from the outset of a project or organization. This focus may be more likely to create initial conditions for collaboration for innovation across diverse groups of parties–whether that innovation is embodied in a startup firm with diverse owners and workers or in a project.

Second, the leading organizational form of cryptoeconomics, the Decentralized Autonomous Organization (DAO), offers a way of reducing the transaction costs of organizing new forms of economic activity , especially across borders. I have for example been approached by promoters who operate conventional services (meaning outside of Web3.0 world) who now want to explore whether the establishment of a DAO would help them scale their business offering by collaborating with others in new ways. DAOs fit the lean startup frame quite well as organizing vehicles. However, until quite recently, DAOs have lacked one crucial feature provided by the traditional corporate legal form, namely the concept of limited liability. In many jurisdictions, they may be deemed to be forms of general partnership for liability and tax purposes. However, jurisdictions from Wyoming in the US to Malta in the EU are now making provision for DAOs to achieve legal shielding through amending company laws to accommodate them.

Third, the concept of secure token issuance at the heart of cryptoeconomic schemes allows for a more differentiated way of allocating rights within an organization or innovation ecosystem. Tokens can allow for the separation of economic rights (the right to future revenue flow) from governance rights (the right to indicate choice around certain types of decisions) and from participation rights (the ability to contribute and be recognized for a contribution). Token systems make the concept of shares in a company seem like a primitive evolutionary way of staking claims, bundling a limited set of active governance and passive economic rights in ways which most small shareholders don’t understand and fewer still actually exercise in practice.

To call out these powerful positive features is not to deny the darker side of cryptoeconomic governance. Even pioneering enthusiasts like Buterin or sympathetic observers like Schneider acknowledge these: for example, the lack of proofs of personhood or of integrity in Web3.0 environments act as limitations on the robustness and value of ‘pure’ cryptoeconomic design; and suggest the need to pay more attention to the incentives involved to reveal, authenticate and monitor these.

Proposing further candidate principles of governance by design

What lessons might we draw from this burgeoning cryptoeconomic world to add to our understanding of governance by design, even outside of that world alone? I would propose they may be summarized at least in these three principles which I propose to add to the ‘canon’.

1) The design of decision-making mechanisms should be intentional from the start, and then allow for forms of evolution

Cryptoeconomic schemes are remarkable for their explicit designs of voting mechanisms for dynamic decision-making–this clarity is needed in order to code them. Reaching clarity on how different types of decisions are made is a useful feature for any governance process but is often vague in traditional companies where certain powers are usually reserved to shareholders but the rest are left vague, sometimes causing friction between boards and managers especially in early stage firms. Of course, not all decision categories can be foreseen in advance, but even to define a process by which a new type of decision would be handled may be a sign of progress in governance over vague and confusing norms or protocols. Intentionality from the start does not need to imply lock-in as it is in rigid algorithmic schemes; rather, it may provide a better basis for evolution over time.

2) Clarify the boundaries between rules and discretion as they shift over time

This is in many ways a corollary of #1: judgment-based schemes may clog up by overloading their decision-making with issues which can be decided more efficiently using other automated approaches: these could include voting schemes which can be much more sophisticated than majority voting alone. Not all decisions require the same amount of judgment, and distinguishing more clearly where there is value-add from the application of human discretion would be helpful. This can only happen through intentional learning around governance processes which again is rare in early stage entities.

3) Identify wider stakeholder voices and consider new ways to engage them

The hierarchical form of modern corporate governance is under pressure to include new classes of stakeholders as equals with providers of capital who were previously privileged in their status. This is not easy to do, especially if stakeholder groups are diverse and widespread. The emerging world of cryptoeconomic governance provides some interesting examples of how the assigning of differential rights–for example, to be heard–can be made to work more effectively. Corporate token schemes could be a way to incorporate more voices, assigning rewards and recognizing voice in new ways, which go beyond surveys only.

Conclusions

It was observing the key governance features of the world of venture capital which led to my previous suggestion that the principles of proportionality and risk alignment were foundational for governance for innovation, regardless of the organizational form: that is, they would apply in the world of DAOs as well as in early stage companies. This article’s brief excursion into the burgeoning world of cryptoeconomics has now added some further principles to the growing governance by design playbook: intentional design from the start; reset rules-discretion boundaries and harness stakeholder voice.

Some commentators have queried whether the rise of cryptoeconomics may not create something new in organizational form, as much as turbocharge older forms of organizational governance: for example, cooperatives, the history of which goes back at least as long as limited liability companies. Jesse Walden of venture capital firm a16z has proposed here that the application of cryptoeconomic tools could enable the re-emergence of new generation cooperatives by balancing better the efficiency considerations which have long favored the emergence of companies with the greater participation benefits offered by cooperatives to their members. I think that cryptoeconomic tools may well enable that re-emergence; and more beside. Seeing them as tools, rather than as artefacts from a parallel universe, may better equip innovative organizations which pursue governance by design.

What Can Venture Capital Tell Us About Governance by Design?

Thu, 17 Feb 2022 11:55:28 GMT

Governance for innovation Part 1: the rise of Venture Capital

How can organizational governance best support innovation ? This is an important question because it is by no means self-evident that conventional approaches to governance work for innovation–they are more likely optimized for compliance or accountability, but not to support the process of innovation. However, to test and scale an innovative idea in the market is a legitimate purpose for an organization; and ongoing innovation may also be an integral part of its long-term sustainability. Governance for innovation is therefore about how, in the words of the ISO 37000 definition of governance, to ‘direct, oversee and hold accountable’ an organization so that it has the best chance of success at innovating.

Optimizing governance for innovation is clearly only one aspect of what I will call governance by design. Readers will recognize in the phrase ‘governance by design’ echoes of its established and better-known cousin, privacy by design . Privacy by design was first introduced in the 1990s as a way of embedding privacy in a much wider, deeper foundation than a focus on compliance alone. Similarly, governance by design aims to optimize governance for purpose; and my focus in this article is on how governance can promote and sustain innovation.

In this article, I want to trace one approach to governance which has enabled innovation at large scale in the past fifty years. The rise of venture capital as an early stage financing source has consciously experimented with different ways of optimizing governance of companies to manage higher risk, not always successfully. This an offshoot from the modern corporate governance movement. In a next article, I will look at a different approach altogether: the open source movement has taken a different approach to mobilizing talent, and now also capital, for innovation which is breaking out beyond software alone. I have pointed out in a previous article how these two distinct streams may have more similarities than first meets the eye.

‘How venture capital made the modern world’

This title from a recent podcast suggests the importance of venture capital as a force shaping the world in which we live through financing companies which have introduced major innovations touching most aspects of modern life. But venture capital has always been about more than the capital alone. It also comes with a distinct approach to governance: in particular, it has sought to align interests of founders, funders and employees so that startup companies could be active vehicles for experimentation outside of the ‘walls’ created by large company governance.

The podcast in question was in fact an interview with journalist Sebastian Mallaby who traces the history of venture capital from its early roots in the US in the second half of the twentieth century in his recently published book, The Power Law: Venture Capital and the Making of the New Future . Mallaby identifies Arthur Rock, a New York broker, as the founding father of modern VC. Rock developed his innovative approach in the 1960s, anchored on the principle that all parties–himself and his partners in the firm he established called Davis & Rock, as well as the limited partners who provided capital, and the company founders and senior employees–would share a clear common purpose: to give the startups the best chance of success. There were three key features of this emerging VC approach which affected governance.

1) VC investor occupying a board seat

First, the VC investor expected to assume a board seat in an investee. In this way, the VC’s voice would be heard directly in decision making as well as indirectly as coach and advisor. This voice was to encourage taking risk in the clear knowledge that failure would mean financial loss for the VC. Equally, not to try hard enough to create a superstar firm would also likely result in failure for a VC fund which relied on the power law of 80/20 returns.

2) Aligning of incentives

Second, alignment of incentives to grow the value of the firm was achieved by assigning equity to all material parties –the founders, as well as key employees who received share options. In this way, the distinction between owners and ‘hired hands’ which often characterized managers and employees in larger corporations was reduced.

3) Using the lean startup approach

Third, financing followed a stepped approach in which experimentation happens in a tightly phased manner with the financing provided only for the next stage. This has more recently evolved to become the lean startup approach , which aims to reduce risk and also increase focus at each stage of startup life. VC’s were very willing to double down financially on their exposure to experiments showing likelihood of success while limiting loss at those which fail to get traction. Of course, the staging also provided a sense of direction: at later stages, when investees prepared for IPOs to list on public markets, their governance would have to step up to meet the level of the codes and requirements of that market.

With a rich eye for detail, Mallaby traces how these initial concepts took root and flourished starting in Silicon Valley and then spreading globally; and also how they mutated over the years. As the VC industry developed, so the supply of risk taking capital became more plentiful, changing the balance of power between those with the money and founders with the ideas. This also changed the governance approach of some VCs. For example, Peter Thiel and partners established Founders Fund in 2005 with an emphasis on its ‘founder friendliness.’ This manifested in a commitment not to vote its interests against a founder ever, and by being generally content not to have a seat on the board. Not all the newer generation of VCs followed this more hands-off approach; but it did diversify the range of options available to founders and created something of a natural laboratory in optimal forms of governance for early-stage and scaling entities. As in a laboratory, not everything worked as intended or hoped: Mallaby also recounts at length some of the highly publicized more recent controversies around VC funded investments like Uber and WeWork, and even the outright failures like Theranos, all of which can be attributed in large part to poor governance.

What does VC tell us about governance by design?

In my view, the VC approach to governance best illustrates two principles of governance by design.

First, the principle of risk alignment among stakeholders. In the case of VC, this was achieved at least in part through the allocation of equity to founders, stock options to employees and the risk of financial loss to funders geared to absorb losses. Clearly, however, risk alignment is not a once for all process: part of the role of governance is to keep risks aligned with the evolving expectations and appetites of stakeholders. Not all VCs could achieve that before exiting.

Second, the principle of proportionality as applied to governance : this is the concept of striking a balance between risks and controls. Financial regulators have in recent years adopted the principle of proportionality, acknowledging that it is needed to guide the application of increasingly complex new financial regulation which has come out in recent years. VC’s apply proportionality when they calibrate their engagement with an investee to its size or stage, level of risks and also to their own capabilities. They neglect it, however, when they effectively opt out of governance in favor of trusting the CEO/ founder in all things. Regulators recognize that while proportionality means tailoring regimes to circumstances, it does not mean undermining essential safeguards. In the context of corporate governance, one of those safeguards is a functional board of directors. The question of how early a startup should establish a board of directors beyond the founders alone is much debated. In their book, Startup boards , Brad Feld and Mahendra Ramsinghani make the strong case for establishing a board of directors early in the life cycle of a company; and optimizing its composition, structure and practices to accommodate the rhythms and risks of early-stage life.

The VC approach to governance will no doubt continue to evolve. My hope is that even as VCs seek to support successful innovation, they will also pay attention to innovations in governance which can support that purpose.

A subsequent article will explore the open-source approach to innovation and how it differs, as part of the exploration of what governance by design means.

Modern Corporate Governance vs. Decentralized Governance: Do Opposites Attract?

Thu, 03 Feb 2022 13:30:10 GMT

Governance by code or by coding?

Sometimes, two forces which appear to be pulling in opposite directions may actually show some signs of convergence on closer examination; and the result can be more powerful than either force. The two forces I am thinking of here are modern corporate governance , the movement which started some thirty years ago to improve the governance of large companies; and decentralized governance, or DeGov, which in its manifestation in Decentralized Autonomous Organizations is barely eight years old.

The Rise of modern corporate governance, or mGov

Of course, corporate governance itself has a far longer history than the modern movement alone–right back to the limited liability legislation in the 19th century–but I am specifically interested here in the movement which started in the 1990s in several places to restore and refresh good practices in governance. Let’s call this movement ‘ mGov’. mGov first manifested in a series of Governance Codes in the 1990s, starting with the Cadbury Code in the UK (1992) and the King Code I in South Africa (1994). These Codes were initially written to be guidance on good practices, but have since become legal requirements for listed entities and state-owned enterprises. Codes similar to these two pioneering ones have rippled around the world since then. The original versions have been refreshed too–King IV, the fourth incarnation of the King Code, was released in South Africa in 2016.

On top of the various codes have come extended reporting requirements which require disclosure of governance practices to levels not dreamed of thirty years ago. As an example, the WEF/ IBC Indicator set (available via here) lists four theme areas for governance in each of which detailed indicators are specified. And governance has of course been absorbed into the broader ESG movement to create greater accountability; and it is now scored, ranked and assessed as part of numerous ESG investment scorecards. The mGov movement has become a powerful force reshaping the corporate terrain for listed companies almost everywhere; by demonstration, it has affected even unlisted and smaller entities. Under the warcry of “comply or explain”, this movement has set standards for governing body composition, structure and processes which have largely converged internationally, even across differences in legal regimes.

The tanker and the speedboat

Contrasting modern corporate governance with the fledgling decentralized governance movement is somewhat like comparing a supertanker with a speed boat in many ways–size and speed among them. There are many other clear differences. DeGov is in part a reaction to the perceived and actual abuses in the centralized corporate realm , leading its proponents to want to construct digital spaces where cooperation could be fostered, rather than the destructive competition of late capitalism. The Decentralized Autonomous Organization or DAO is the umbrella term for the organizational manifestation of this movement. The term covers an increasingly wide range of entities, from internet-native ‘companies’ which have commercial intent and function even though they lack a legally enforceable form, to investment clubs and even affinity or social clubs of all forms and scales. My purpose in this article is not to add to the increasingly long list of reports on what a DAO is and how smart contracts built on crypto foundations function–if you want more background, rather read this very helpful description. My purpose is rather to consider how the ‘speedboat’ and the ‘tanker’ may have more similarities in their trajectories than either would typically acknowledge.

The rise of DeGov

Over the past decade, the deGov movement has proliferated rapidly in the Web3.0 environment to the point where there are now thousands of DAOs with close to a million members according to some late 2021 estimates. The movement is led by ‘prophet-apostles’ like Vitalik Buterin, the creator and co-founder of Ethereum, the largest blockchain specifically engineered to host smart contracts. Smart contracts are nothing more than agreements encoded in ways which can only be changed through specific protocols– in extremis by imposing a ‘hard fork’ in which there is a permanent split in a blockchain.

To observers sitting in the ‘supertanker’ of mGov, the world of deGov looks like the cyber equivalent of the Wild West–with no sheriffs and lots of cattle rustlers. However, because the rules of DAOs are encoded in software making them deliberately hard or even impossible to change, the deGov movement has in fact a strong focus on governance , at least during the setup of the DAO when the voting rules must be explicitly designed. This upfront focus has not made the deGov world immune from failure: there have been very public incidents of hacks, including of the very first DAO in 2016 from which $60m of investor money was stolen. As recently as December 2021, the Badger DAO reported a $130m hack. However, lest the observers on the supertanker become too smug about these failures of deGov, the rise of mGov has not prevented corporate governance failure either, even if it has probably reduced the incidence: it is all too easy to list more and bigger losses accruing as a result of governance failures even in the era of mGov (remember Enron in the US? Wirecard in Germany? Steinhoff in South Africa?)

Representative democracy vs Athenian democracy

So, on the surface, we see a tanker (mGov) and a speedboat (deGov). We see governance by code (mGov) and governance by coding (deGov). We also see that mGov is founded on the notion of ‘representative democracy’ where shareholders elect directors to govern and largely leave them to do their job unless and until they fire them; while deGov is akin to Athenian democracy, where members vote directly on all defined issues of common interest, using a variety of protocols.

So far, so different. But look closer at deGov and you start to see signs of convergence in some respects.

Four signs of convergence in DeGov

First, legal structures are evolving to bring DAOs in from the cold of cyberspace where members have no legal protection from liability or the ability to enforce rights against other entities. In 2021, Wyoming became the first US state to incorporate provisions for DAOs into its LLC law, allowing DAOs to receive legal recognition. Malta in the EU already offers legal status for DAOs. Not all DAOs will want or need legal persona, but once they have it, the speedboat will at least be subject to the same laws of the high seas as the tanker

Second, just as services rating and ranking corporate governance have proliferated under mGov, we can see the beginning of similar services seeking to bring transparency to deGov . As one example, Boardroom started up in 2020 offering an API so that DAOs can connect to offer standardized governance interface for reporting to their members. Boardroom’s leaderboard ranks DAOs according to metrics of activity, engagement and participation: for example, the number of proposals submitted to members, the number of participants and the number of ballots cast for proposal. The Boardroom directory currently lists 81 DAOs and it is possible to view specific proposals, voters’ public keys and the treasury balances for each. Services like this are small steps towards greater consistent transparency in the deGov world ; after all, this is what accounting and disclosure standards seek to do in the mGov world.

Third, the governance of the larger DAO ecosystems is evolving by creating layers of more representative governance to enable more effective decision-making than community votes on every topic. Take Gitcoin as an example. Gitcoin is a community which claims 312,000 monthly active developers engaged on a range of Web3.0 projects writing open-source code and protocols to ‘create the digital public infrastructure of tomorrow’. Gitcoin became a DAO in 2021 and has adopted the concept of ‘stewards’ in its governance. Stewards are selected from and by community members because of their commitment to Gitcoin’s mission and their willingness to get involved. Members may delegate their votes to stewards. Doesn’t that sound like a combination of a proxy service and volunteer director in the mGov world?

Finally, the man whom I have described above as the prophet-apostle of the deGov movement, Vitalik Buterin, has himself weighed in on the emerging weaknesses of pure deGov coin-based voting in 2021. In this lengthy but fascinating article, he diagnoses the problems with it, and suggests a range of possible solutions. These include introducing skin the game where DAO members can be held liable for the costs of their actions on other members; and forms of non-coin driven governance such as ‘proof of personhood’–a Web3.0 term for applying rules like ‘one person one vote’ which are of course common in voting in cooperative associations. Many of these sound like solutions available in different mGov settings today.

Early signs of convergence from mGov

These signs of change in deGov suggest that it is the speedboat which needs to change; and indeed, that it is changing to become more like the tanker, albeit in a semi-chaotic way characteristic of early-stage sectors. What evidence is there that the tanker also is changing?

The evidence for this is harder to see yet–tankers take a long time to turn–and therefore my hypothesis is more speculative. First, let’s recognize that modern capitalism is a long way away from being a democracy of individual shareholders . In an era when most stockholdings are held not by individuals but by funds, most voting happens passively, via intermediaries like proxy services. In a 2019 Stanford Law paper, Ross Buckley and his colleagues Federico Panisi and Doug Arner have already proposed how the use of blockchain for voting in public companies has the potential to make shareholder democracy more direct, transparent and effective. Greater activism by civil society may push trends faster.

Second, I think that the emphasis on ‘stakeholderism’ in the latest version of mGov will lead the ‘tanker’ to turn in time towards introducing more decentralized elements of governance. Recognizing multiple stakeholders beyond shareholders inevitably adds governance complexity. The mGov situation today is arguably akin to when qualified franchises in early democracies allowed only one category of society such as landowners to vote for representatives. Broadening the franchise took decades of protest and struggle in many places. Traditional models of shareholder-based representative democracy will likely also struggle to incorporate wider expectations in a reasonably transparent way without conflict and turbulence. However, DAO-type structures may offer corporations safe digital spaces in which to engage with specified stakeholder groups such as customers or suppliers. Corporate DAOs could include reward systems via tokens which incentivize engaged consumers or suppliers and invite them to express views on relevant issues through voting. This could be complementary to shareholder elected representation. But it may make corporations slightly more like consumer or producer cooperatives over time, responsive to and influenced by the needs of these groups.

Towards synthesis

With respect to mGov and deGov, we are still a long way from a synthesis stage which inevitably follows the current antithesis stage in Hegel’s model of progress. But my argument is that already, the antithesis of the mGov and deGov movements may be less pronounced than it appears. And the combination of the strengths of each could be powerful indeed for better digital governance in the economy of the future.

What are Corporate Purpose Statements? And Why Your Company Should Have One.

Wed, 12 Jan 2022 00:17:20 GMT

Corporate mission statements have been around for a long time. Management guru Peter Drucker was an early advocate for every organization to have one, in order to anchor its reason for existence by having a clear answer to the question: What is our mission? Indeed, that question headed Drucker’s list of ‘The Five Most Important Questions which You Can Ask your Organization”, the title of his widely quoted book published in 1973. That book proved so influential that, more than forty years later, an edited sequel subtitled ‘Enduring Wisdom for Today’s Leaders’ brought together a set of responses to each of Drucker’s questions from contemporary researchers and leaders. In his commentary on the importance of the first question, Jim Collins, who is himself the acclaimed author of books like Good to Great, states that “mission as Drucker thought of it provides the glue that holds an organization together as it expands, decentralizes, globalizes, and attains diversity.”

The emphasis of mission statements has evolved over time. A recent study (available here ) compared the wording of the mission statements of companies on the 2016 Fortune 100 list to those of 2001. The most notable change over time was more frequent mentions of customers and especially of communities , a category which did not feature much at all in 2001. By contrast, explicit references to shareholders in the mission had declined. This is hardly surprising in an age in which the term ‘stakeholder capitalism’ has emerged to capture the zeitgeist that value creation for shareholders is no longer the exclusive or even primary aim of business. Linked to the rise of stakeholderism, there has been an emphasis on defining corporate purpose statements, rather than mission statements . Mission statements have not yet been supplanted: according to Google Trends, the term ‘mission statement’ is still used more commonly by a factor of 10 than ‘purpose statement’, but the trend in its usage has been generally downward over the past seventeen years.

What’s the difference between mission statements and purpose statements?

If mission statements are about the reason for an organization’s existence, how are purpose statements different, if at all? Some commentators point to a difference in focus: mission statements are meant to define ‘what’ an organization does while purpose statements answer ‘why’ it does it. Some distinguish the time frames–a mission statement is what a company does now while purpose is an expression of what it wants to do in future. But others may quibble at that distinction, instead calling the future-oriented statement a vision statement. Vision statements are commonly found in the trifecta with mission statements and values statements. Some commentators emphasize the distinctiveness of purpose statements in that they should define more clearly who benefits from the activities of an organization, that is, for whom it creates value; and how it does so, linked to some identified distinctive ‘superpower’. But that description still sounds pretty close to the way many mission statements are structured.

My own view is that the purpose statement is mainly a ‘facelift’ of the mission statement , which doesn’t change the substance much. However, using the updated language of purpose probably reflects the fact that mission statements have often been ignored or even discredited in the practices of many organizations whose stakeholders would not be able to cite what the mission is. Restating purpose now is a way of recognizing and even re-calibrating the balance among stakeholder groups in ways which should support sustainability. Certainly, the understanding and achievement of purpose is at the center of the new ISO 37000 framework on governance on which I have written before here . The relevant question is therefore less about how the two terms are different but rather whether purpose statements can do any better at the task of providing foundational alignment than mission statements have done in the past.

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What makes a good purpose statement?

There are two factors which may enable purpose statements to fulfill their purpose as organizational focusing devices, if not forcing devices. The first is a general trend: the rising demands for greater accountability by public companies for their societal impact means that a purpose statement is more likely to be taken seriously by civil society groups and activist shareholders than mission statements were fifty years ago.

Secondly, the clarity and resonance of the statements themselves can make them more effective. Management journals are full of advice about what makes for a good purpose statement. For example, a 2020 Forbes article by Afdhel Aziz on the ‘power of purpose’ lists a number of attributes of good statements with accompanying examples. Good statements should be both short and sweet, empowering and personal. In this respect, Lego’s crisp and clear statement “To inspire and develop the builders of tomorrow” is often favorably cited. It can also be helpful to demonstrate an emotional connection, as in the example of Whole Foods: “Our deepest purpose as an organization is helping support the health, well-being, and healing of both people—customers, Team Members, and business organizations in general—and the planet.” Embedding a tension in the statement–between quality and wider access–may help energize a company to deliver on a challenging mission. The example cited for this is Chobani’s: “To make better food for more people.”

However, the way in which purpose is framed is not uncontroversial. Take Starbucks’ current statement: “to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.” Now that sounds short and sweet to me, with a ‘spoonful’ of emotional resonance stirred in! But the Strategic Management Insight blog gives this its lowest score among the statements evaluated for not being clear or comprehensive enough, and specifically for not covering the 9 categories of issues, such as clarity of stakeholders, which its authors believe are needed in a purpose statement.

Process speaks purpose

The wording of purpose statements clearly matters but it may matter less than the process by which a statement is developed, or redeveloped. Ultimately, a good purpose statement can be recognized by its effect on those who matter to the organization. One desired outcome is awareness and identification : the extent to which all key stakeholders–staff, customers, suppliers and yes, shareholders–are aware of the purpose; and the extent to which they identify or align with it. In this sense, the purpose statement is the ‘DNA’ of organizational brand identity–clarifying what the organization stands for, works for, even fights for. Another desired outcome is relevance : the degree to which the statement actually guides organizational decision-making. If management, board or employees seldom if ever make reference to purpose in the context of decisions to be made, that is a sure sign that the statement is more wallpaper than cornerstone . But making a purpose statement relevant involves an ongoing process to create traction.

A purpose statement is not only a ‘north star’ for an organization: that is, a distant point of occasional orientation which is not visible to the eye for much of the day. It is also about the journey. In this sense, clarifying the purpose can be like installing a ‘compass’: a simple but enduring device which can reliably guide a journey on an ongoing basis, rather than occasionally.

Just as famously ‘culture eats strategy for breakfast’, culture snacks on purpose . But instead of getting the occasional sugar hit, organizations can choose instead to make purpose the foundation of a nutritious culture–that is, one which energizes a resilient sustainable value-creating organization. This requires a conscious commitment to a comprehensive process of defining purpose initially, and then of reinforcing it in the life of the organization.

While the purpose statement may simply be a reincarnation of the mission statement in the Twenty-first century, the move to define purpose offers organizations an opportunity to navigate tensions and tradeoffs in the age of stakeholder capitalism. That may be their true value add; but to extract that value will require effort and focus.

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Three Ways to Reduce the Risk of Digital Public Infrastructures (DPIs)

Wed, 08 Dec 2021 14:17:58 GMT

David Porteous and William Frater

In a previous article , one of us drew lessons from the recent story of Open Banking in the UK about how to govern digital public infrastructure (DPI). In essence, the case showed how the governance of Open Banking Ltd, the not-for-profit company established to set up the scheme, largely achieved its purpose—namely, enhancing the wellbeing of UK consumers and small businesses--while failing in its oversight role. This latter failure triggered a whistle-blower complaint to the responsible regulator in 2020 and then an independent investigation, which has resulted in resignations and in the appointment of new directors in late 2021.

The investigation showed that members of one stakeholder group, people working for Open Banking, suffered in various ways, even if another, UK consumers, benefited from the scheme gaining traction overall. Failure in oversight usually results in a particular group of stakeholders being negatively impacted like this. However, the opposite type of failure--where the purpose fails while oversight is upheld--is at least as great a risk for DPI . This type of failure results in ‘white elephant’ projects on which enormous amounts of resources are wasted without achieving the purpose set out. And of course, double failure--failure of purpose combined with failure of oversight resulting in corruption and loss--is all too common with large infrastructure projects.

As a wave of momentum and funding builds towards promoting DPI around the world, what can be done to reduce the risk of either type of failure? In this article, we outline three governance pathways which may help.

Organizational Purpose and DPI

Purpose has become the central feature of the new governance codes and in pronouncements from the largest global investors. For the sake of clarity, purpose is defined in the new ISO guidance on governance, ISO 37000, as being the reason for existence of an organization. An organization’s purpose embraces how it strategically contributes to the long-term wellbeing of all people and the planet. Purpose articulates the worth that the organization will generate for all its stakeholders, defining its activities and its values and guiding its performance objectives and providing a clear context for its day-to-day decisions. The governing body on the one hand is the custodian of an organization’s purpose, ensuring that it is defined, communicated and embedded. It is accountable to stakeholders for its fulfillment. On the other hand, the governing body has the role of providing oversight, which is the duty of care and skill that ensures that the organization is operated in an ethical and prudent manner such that the governing body’s stewardship responsibilities are met.

How does this understanding affect the governance of DPI? Compared with standard tech products, the building of DPI carries risks and opportunities which mean that the needs of stakeholders matter even more. These include the aspiration to achieve usage and influence at national scale; as well as the likelihood that there are stronger conflicting interests among stakeholders since not all incumbents may be benefited equally by new infrastructure. Traditionally, the role of the state has been to step in to effectively ‘arbitrate’ this conflict through the direct provision of public infrastructure; however, the newer models of providing DPI are more likely to require public-private collaboration, which is achieved through the establishment of a corporate vehicle, as we have seen in the case of Open Banking.

The conventional oversight route may be necessary but is insufficient

The conventional route of ensuring that stakeholders play an oversight role over the purpose of an organization is to nominate representatives of groups of stakeholders to the governing body or board. This indeed is the approach proposed by the UK trade association, UK Finance, for the future board of Open Banking: representatives of consumers and SMEs, the two main target beneficiary groups, would each have one non-executive director seat (out of seven). There are some tricky issues to navigate here such as how best to select one person from each of those large, diverse constituencies: transparent call for nominations can help, but then some pre-existing group of people has to decide. Once appointed to the board, all directors are required by company law to prioritize the interests of the company over the specific interests that they may represent. This approach to constituting board representation is common in these cases, and may even be helpful overall, but we would argue it is insufficient.

So what is needed to ensure that a DPI sustains its purpose over time? Here are three ways which we believe may reduce the risk of either type of failure in building a new DPI. These are all part of ‘Governance by Design’ in this new and important terrain.

1) Undertake upfront stakeholder consultation about purpose

Purpose needs to be established for a new organization to have a clear view on its reason to exist and on how it will make a contribution to the long-term well being for all people and the planet. Necessarily this will involve discussions with stakeholders on what benefit it will deliver. Also on how to be accountable to them for both the positive and negative impacts and for the values that the organization espouses. Those charged with establishing the governance of any new organization which builds and operates DPI should identify likely stakeholders, consult with them and then seek to balance their interests when articulating the organization’s purpose. They then need to establish the channels to account to stakeholders on the fulfillment of this purpose in a manner that is both ethical and prudent. Having channels in place will contribute to ongoing reinforcement of the mandate of the governing body and ensure that the organization’s purpose remains relevant.

2) Be aware of legal paths for enforcement of neglect of governance

The duty of oversight, or of acting with due care and in good faith, is core to the responsibilities that governing body members accept in holding their position. This is both a legal requirement and a stewardship obligation. The governing body should understand the risks that the organization faces and set parameters for the management of those risks. It should ensure that those to whom it delegates the responsibility of executing the strategy to deliver the purpose are provided with parameters within which to act. It should monitor the progress towards delivering on the purpose along with the adherence to the parameters that it has set. Necessarily these parameters should define the risk limits and ensure that the purpose is delivered within prudential and ethical boundaries that minimize the negative impacts on stakeholders, on broader society and on the environment. The governing body should also set clear policies for its own actions to ensure that oversight without conflict of interest can be maintained. Failure to apply oversight is a failure to operate in the best interests of the company and to apply care, skill and diligence that should be expected of a person holding a position on a governing body. There is clear legal sanction for such neglect and failing to act in good faith across most legal systems.

Stakeholders and regulators have legal recourse when there has been a failure of oversight. In some instances, they are able to apply legal sanction directly against the governing body or some of its members. Furthermore, in some jurisdictions, they can launch a derivative case on behalf of the company against the governing body where there has been a clear instance of them acting in bad faith, negligently or against the interests of the company. It is even possible to initiate legal interventions that seek to avoid harm through seeking remedy where neglect is evident and the possibility of damage in the future is high. However, this route is costly. It often requires that loss as a result of an action or inaction can be clearly identified and quantified, which can be hard to do. Rarely do such cases get to court. But the mere existence of this recourse path can be a clear spur for governing bodies to exercise oversight more effectively.

3) Establish a ‘Protector’ function

While there may be legal recourse for stakeholders where there is failure of oversight in a company, there is no such recourse for departure from the stated purpose. This is because adhesion to the stated purpose is not (yet) defined as a legal requirement for governing bodies. However, a stated purpose may become subverted to pressures from a select yet powerful group of stakeholders. This “purpose drift” or capture may result in harm to other stakeholders but may not manifest as a failure in oversight or due care. Courts are typically not willing to involve themselves in what they deem to be the internal affairs of a company; and may not anyway have an understanding of the specialized issues around DPI. The outcome is that purpose, the emerging core of governance, is effectively unenforceable. Therefore, we need to find another mechanism that can enable stakeholders to hold governing bodies to account for a failure to achieve and account for the stated purpose.

There is a helpful precedent from trust law. In certain jurisdictions that allow for trusts, the settlor appoints a protector to ensure that the trustees fulfill the purpose of the trust in relation to the beneficiaries. This protector plays a powerful “apex” oversight role which includes the power to intervene and apply sanctions when there has been a failure of oversight. These sanctions could go as far as changing the trust documents, removing trustees, terminating the trust or even removing certain beneficiaries. Having a protector helps avoid potential losses to the beneficiaries that would otherwise lead to extended and expensive court cases.

Applying this precedent to DPI, even if it is not operated by a trust, we believe that there would be merit in appointing a skilled protector for each important DPI. This role may equate to an Ombuds-like function in some countries. It gives stakeholders rapid access to a specialized channel for recourse on issues relating to purpose. Through approaching the protector at times of alleged oversight failure or purpose drift, stakeholders would be able to request remedy without the costs, disappointments and delays of operating through the courts. The protector, who would be a person with the skills and experience necessary for the DPI in question, would assess a complaint and require that remedy is applied by the governing body. In cases where the governing body refuses to do this, the protector could have the power to reconstitute it. This is in sharp contrast to a conventional governance situation, where the power to replace governing body members is often reserved for a select category of stakeholders who may be the reason for the drift in purpose.

The costs of the protector function would have to be borne by the DPI under an independent budget line item. However, the standing costs need not be large relative to the scheme’s overall costs; although there must be provision to scale up to investigate and address material complaints if they arise. Costs like these may be seen as an investment in entrenching the purpose of a DPI. Alternatively, the protector costs may be seen as a form of ‘legal insurance’ which mitigates loss: stakeholders could seek recourse for the protector to intervene even before the organization has been damaged and they have suffered loss of wellbeing as a result of either lack of oversight or purpose drift.

Governance by design matters for DPI

All three of the routes we have laid out here take time and effort: effective consultation upfront around purpose cannot be unduly accelerated; pursuing legal pathways always consumes resources; and establishing an effective protector function will require upfront attention in scheme design. However, we believe that they are proportional to what is at risk with national scale DPI: not to achieve its purpose will likely result in great waste; and to have the purpose subverted over time may cause worse harm to public interests. Measures like these are what we would call part of Governance by Design, where the measures taken are proportional to the risks and benefits for society as a whole. With DPI, we have to be careful of moving too fast and breaking important things in society; and we must guard too against not moving at all: building governance measures around the bulwark of purpose is a helpful step in this direction. Although our argument here is that the potential risks, opportunities and sheer scale of DPI merits exploring these routes, they may also apply beyond the realm of DPI and may help to enhance accountability in this age in which may profess to be purpose-driven entities.

David Porteous and William Frater are the founders of of Integral and Kutumikia respectively.

Bridging ESG Divides for Climate Resilience

Thu, 02 Dec 2021 19:41:20 GMT

Governance towards Social and Environmental Resilience: Reframing ESG to include perspectives of the Global South

By David Porteous and Jesse Fripp

Environment Social and Governance (ESG) measurement frameworks have proliferated in recent years, both in number and in scope of coverage. Emerging legal frameworks in Europe now seek to address double materiality: not only requiring reporting on how ESG factors may materially affect a company’s performance; but also about how each company affects the societal outcomes in these categories. A process led by the World Economic Forum and International Business Council culminated in the publication of the WEF/ IBC Report on Measuring Stakeholder Capitalism in 2020. This report distills longer lists of ESG indicators into a preferred set of 21 core metrics and 34 expanded metrics grouped under four pillars: E,S, G and a fourth called Prosperity (at a societal level). At the recent COP26, the International Financial Reporting Standards Foundation announced the launch of the International Sustainability Standards Board (ISSB), which will consolidate two previous reporting initiatives and seek to establish harmonized standards. These new sustainability standards will serve as a counterpart to IFRS Accounting Standards which already apply to large public corporations around the world.

We join many others in welcoming this level of focus and attention on ESG related issues. However, we have some concerns about potential unintended consequences which may undermine the achievement of the ultimate purpose of all ESG reporting : after all, all this effort towards disclosure and awareness should lead to more resources addressing the risks and seizing opportunities created by environmental and social issues. Certainly, ESG advocacy by large investors can help to focus management’s attention; but the complexity of some of the emerging frameworks and the speed at which they are evolving risks ESG becoming mainly an issue of costly compliance, best left to managers or professional advisors. In the latest PWC 2021 Annual Corporate Directors Survey of 850 corporate directors, while almost two thirds said that ESG factors were already linked to company strategy, up from just under half the year before, only 25% believed their board had a strong grasp of ESG risks . These gaps between expectations and understanding, and indeed, between investors and boards, open up the risk that the gathering ESG wave crashes on the shores of a compliance only approach. The “G” in ESG is in fact the platform for the achievement of the other two by integrating these wider societal issues in all corporate decision making. In this sense, the governance aspect of ESG is the critical focal point: seen from inside a company, addressing E and S issues is not an addon to governance but is the core of governance itself.

To achieve this outcome, that is to weave ESG factors into the fabric of corporate purpose, we see three divides in particular which need to be bridged.

Bridging North-South divides

In the context of emerging markets, or “Global South” environments, the application of ESG frameworks developed in the North for large public companies is more challenging. Data is less readily available and/or more difficult to verify--the latter is already a challenge even in the North. This is therefore mainly a divide in resources .

One way to bridge this divide would be to produce a slimmed down set of ESG reporting standards. A lighter set may be a more appropriate starting point for those institutions operating on ‘front lines’ of the effects of climate change in developing countries, rather than at the macro-levels of Global North capital markets and policymakers who are currently driving the ESG agenda. There is precedent for this in the process whereby the International Financial Reporting Standards published The IFRS for SMEs Standards for small and medium non-public entities in 2015 as a way of scaling the full blow set of accounting standards for non-public entities. However, this could only follow the publication of the main standard set, a process which is still a ways off. Another way would be to initiate bottom up processes for the development of appropriate approaches in categories of institutions in the global south, such as microfinance entities and for purpose banks. A process like this would help to ensure that developing countries are not merely takers, but also shapers, of the emerging reporting frameworks. This bridging would ensure better future convergence of reporting sets.

Bridging mitigation and adaptation divides

Current ‘E’ measurement sets, such as the recent WEF-IBG set, focus heavily on climate change mitigation--measuring GHG emissions at different levels of scope, for example. Barely 10% of all climate finance in 2019/20 went towards adaptation according to the Climate Policy Initiative . This is in part because mitigation has received much greater emphasis in industrialized economies, resulting in better resourcing and focus leading to better articulation and definition. By contrast, few indicators seek to measure climate adaptation, yet this is the issue most likely to affect an estimated 4 billion of the world’s most vulnerable who face the reality of direct impacts from the changing environment on their daily livelihoods, and indeed, survival. This reflects a divide in priorities.

Bridging this divide will require much more attention and focus on adaptation and resilience strategies post COP26. There are certainly some useful pointers to follow here. For example, the Impact Management Project , a collective of investors, funders, and development networks, has demonstrated progress in many areas towards a common set of “S” standards with an increasing view on how these relate to and can inform the “E” of environmental sustainability metrics. In 2020, the CEO of the IMP was seconded to the IFRS to inform and accelerate the recent launch of the ISSB with a series of collaborative framing prototypes for climate and disclosure standards, to provide the new standards board with a ‘running start.’ These include the ‘dynamic and distinctive materiality’ approach captured in their Statement of Intent to Work Together Towards Comprehensive Corporate Reporting and their Prototype of a Climate-Related Financial Disclosure Standard - both of which could be further developed and adapted to usefully inform the development of “E” standards that reflect a greater concern with better adaptation and resilience outcomes for vulnerable communities. Another possible benchmark to consider is the Climate Bonds Initiative , which has developed the Climate Resilience Principles , designed to ensure that adaptation & resilience criteria and metrics are incorporated into bond issuance and investor assurance related to green bond credentials in a voluntary market.

Not least, the recently launched Digital Finance for Climate Resilience Framework defines an initial roadmap for harnessing the tools of choice and control to enable vulnerable populations to achieve greater adaptation and resilience - and as fintech has been of late the fastest-growing emerging market asset class, affords an opportunity to enhance and indeed, better inform ESG considerations and metrics for the increasing wave of private and public investors entering this space.

Bridging risk-opportunity divides

Is climate change mainly a risk to be managed, or a potential source of new opportunities? It is likely some mixture of both for most organizations, but awareness of risks seems more prominent at present. The board of directors will play a key role in calibrating an organization’s prioritization of its response. This divide is largely inside the organizational mindset and decision making process.

In Making Sustainability Count , George Serafiem of Harvard Business School argues for a move beyond ‘box ticking’ for ESG compliance to integrating ESG into company decision making as a new source of competitive advantage for companies. There is evidence post COP that funders of all types are starting to think this way, unlocking resources for credible adaptation initiatives.

Banks in the global south are now able to mobilize resources through the issuance of sustainability bonds to finance projects defined as promoting sustainability, whether environmental or social. As one example, Rizal Commercial Bank in the Philippines issued the domestic equivalent of around US$60m in sustainability bonds in March 2021, but found market demand for the issue to be almost six times higher . In H1 of 2021, multilateral and bilateral development bank’s tripled their green bond issuance over 2020, with Germany’s KfW alone issuing a striking $6.1 billion in certified Green Bonds , nearly a third of the total, for deployment in a variety of emerging market priority sectors.

Following COP26, members of the coalition of bi-lateral and multi-lateral development and investment banks known as The Adaptation & Resilience Investors Collaborative (or just The Collaborative) issued a broadside of new member and major project commitments, including nearly $35 billion in climate A&R focused investments in the Global South over the next five years, and critical new innovation-accelerating facilities announced by the AFD, CDC UK, FMO, US DFC, and others. Perhaps most telling of all was the announcement by the Glasgow Financial Alliance for Net Zero of the intention to align $130 trillion - or nearly 40% - of global financial assets behind achievement of the climate goals set out in the Paris Agreement. While a laudable and timely statement of intent by nearly 500 leading global financial services firms, it increases the risk of super-charging a top-down ESG approach driven primarily by the mitigation priorities of the Global North, potentially at the expense of the adaptation and resilience crisis increasingly centered on the most vulnerable residents in the Global South.

Conclusion: an investor-led force, ESG should catalyse reinvention of purpose at company level

ESG measurement is clearly here to stay. This should be a positive development for accelerating traction around societal goals. In all the recent activity around ESG, we see some encouraging signs of movement toward greater alignment, but the outcomes from a Global South perspective remain uncertain: divides like the ones we have highlighted here risk fragmenting and even undermining progress. But as we have also highlighted, bridges can be built in ways which will ensure that ESG goes beyond being mainly an investor-led external force to prompt a reinvention of how governance can work for purpose in these days.

AUTHORS

David and Jesse are the founders of Integral and Shining Rock Ventures respectively. They both come from a long background of advisory, management and board roles in for-purpose entities, mainly in the financial sector and in emerging markets. They offer ESG Consulting as well as coaching and mentoring services. Their shared hope and goal is that better governance will result in serving vulnerable societies and people better.

Governing DPI: Lessons from Open Banking in the UK

Mon, 22 Nov 2021 22:48:19 GMT

The great potential and obvious pitfalls of innovative approaches to building new forms of digital public infrastructure

A previous Integral article spotlighted the rising focus on Digital Public Infrastructure (DPI). DPI is often provided through public-private collaboration. Building DPI takes place in a context of fast-changing technology choices and scarce skills to make the choices, often with the added pressure of ambitious goals and tight deadlines. The interests of public and private participants are not necessarily aligned; and even among private participants incentives may differ. In this setting, good governance matters a lot but is not simple to achieve or sustain. This article considers the governance challenges of the Open Banking scheme in the UK as an example of a newer category of DPI. The lessons are not simple. This case raises questions like: Is there a tradeoff between effectiveness and hygiene factors in governance? (or, if you prefer, Must moving fast always risk breaking things?) And the case suggests some answers to important questions like: How to structure and fund the role of an effective and innovative infrastructure builder and operator?

First, however, let’s sketch some background on Open Banking.

Open Banking spreads worldwide

Open Banking derives from the principle that customers should control the use of their own data. Although countries in Europe led the way in entrenching this principle in law, Open Banking has now spread worldwide: a 2020 BBVA article reported that 15 countries around the world were at different stages of implementing it in different forms. Of these, the UK is generally recognized as the leader in implementation so far. Three years into the process, the Open Banking Impact Report 2020 gives an indication of why. Evaluators counted 109 live Open Banking products or services at end 2020, an increase of 76% year on year, accompanied by a 450% rise in usage measured by API calls on participating banks. An estimated 3 million people were using at least one open banking service, double the previous year’s number.

To open up personally identifiable data of clients in this way securely and safely requires great care in design and robust implementation and oversight in an environment of fast changing technology and conflicting interests between banks and third party providers. In short, it requires good digital governance.

But is Open Banking a category of DPI?

Emerging Open Banking schemes in general satisfy at least two of the three requirements to be considered DPI. They are certainly digital , in that they rely on APIs for third party providers to access banks’ information about their clients in secure, privacy preserving ways. They are also public at least in the sense that they rely on defined standards and protocols for API exchange which are usually publicly available and sometimes publicly owned. In this sense, some Open Banking protocols could be considered Digital Public Goods . But not all schemes have the third element, which is the supporting central infrastructure which provides the scaffolding to leverage and extend their protocols into market tractions.

In this respect, the UK scheme implemented as the result of a competition enquiry into banks conducted by the Competition and Markets Authority (CMA) went further than other national schemes: it established a new infrastructure in the form of the Open Banking Implementation Entity (OBIE) to develop and manage the scheme. OBIE is a special purpose structure housed in a non-profit company limited by guarantee called Open Banking Limited. The CMA’s Order not only mandated the setup of this entity, but also required the nine largest banks in the country (known thereafter as the CMA9) to participate in it and to fund it in order to achieve defined objectives benefiting consumers and small businesses. In this respect, the wide powers of the CMA to craft competitive remedies allowed it to go further than is common in open banking laws alone.

By establishing OBIE, the UK approach effectively created a focal point for engagement with the multiple regulatory bodies who are inevitably involved in all Open Banking questions: while the OBIE itself is directly accountable to the Competition & Markets Authority , the Financial Conduct Authority (FCA) is responsible for consumer protection and the Information Commissioner's Office for data. The presence of an independent but well resourced infrastructure builder and operator in the form of OBIE has played a key role in why the UK scheme has thrived, whereas others have been slower to take off.

Governing Open Banking Phase 1.0 ( 2016-2021)

OBIE’s governance structure for the initial phase was set out only in general terms by the CMA Order: the presumption was that standard company governance principles and norms would apply. The Order appointed an independent Implementation Trustee responsible for setting the standards for the participation of CMA9 banks as required under the Order and for overseeing their compliance with them. The OBIE was designed as the vehicle for providing institutional support to the Trustee in this role. Effectively, the Trustee also served as the Executive Chair of the Board of the Open Banking Ltd company, with one other non-executive for most of this first phase. A Program Director effectively acted as the COO, managing day-to-day activities and operations of the OBIE.

While the Order required the CMA9 banks to share the operating costs of the OBIE, they did not have a direct voice on the board of the company. This was seen as a conflict of interests since they were essentially being asked to pay for opening up their client data to competitors. However, the Order established an advisory group called the Implementation Entity Steering Group (IESG) to review the standards and policies to be adopted by the OBIE. This group comprised representatives of the CMA9 banks, as well as the regulatory agencies and Treasury, and independent representatives for consumers and small businesses. Although the Implementation Trustee was required first to seek consensus at IESG, he also had the power to impose a decision if consensus could not be reached which acted as a forcing device to ensure momentum. The IESG introduced transparency and some voice for banks, regulators and end-users. This approach to multi-stakeholder governance is somewhat similar to that commonly followed by Open Source software protocols : a board of directors manages the business side of a developing and applying a standard, while a technical committee develops the technical standards. In fact, the concentration of power vested in the Trustee in the OBIE scheme is not unlike the wide powers wielded by founders in some Open Source movements. However, a key difference here is that OBIE was backed from the start by the regulatory powers of a state agency, the CMA, which could issue enforcement decrees to the CMA9 banks and even impose fines on them, though it had no powers over the other parties in the scheme.

Funding and operations

Like many infrastructures, OBIE ended up costing a lot more than expected: originally, it was envisaged at the outset that the costs of implementation might run to the equivalent of around USD27m, but in fact, the total costs to date have run closer to USD200m. Almost all of this was paid by a levy on the CMA9 banks. In its 2020 Annual Report , OBIE reported that it now had growing income from fees of some USD5m, or around 10% of its operating costs in that year.

The ballooning cost was in part because of growing realizations of what was really needed for effective implementation. This led to a growing scope of operations: having standards and directory infrastructure alone were found to be insufficient for success of the scheme. By 2020, almost a quarter of OBIE costs were attributed to ecosystem development, which covered onboarding new third party providers. As the developer of the infrastructure, OBIE came to have a full time equivalent complement of 154 people by end 2019. However, since it was not envisaged that OBIE would last long term, these people were all contractors: a reasonable way to acquire skills fast, but one which also contributed to subsequent governance problems.

Moving fast and breaking things: the independent investigation of OBIE governance (2020-21)

In 2020, a whistleblower complained to the CMA that OBIE was “devoid of basic governance.” Other complaints included that there was “No one at the helm” and there was a “total lack of accountability.” Allegations included that there were conflicts of interest in the hiring of contractors, that bullying and discrimination had taken place in the decisions to renew or terminate contracts, and that basic channels were lacking to address growing complaints of toxic work culture.

To investigate these claims, CMA appointed Alison Whyte to oversee an Independent Investigation as to whether OBIE was in fact properly managed. Made public in October 2021, the Investigation report concluded that while “...the Trustee and Program Director did an effective job of delivering the open banking program. ...Insufficient attention was paid to management of OBL as a limited company.” Some of the specific complaints resulted from a lack of clarity over key roles and from having too much power vested in one person, the Trustee, who was responsible for leading implementation while also overseeing it and the participants. The investigator concluded that the company Open Banking Ltd would have benefited from having at least one additional independent non-executive director throughout with a clear mandate of maintaining oversight.

In short, the apparent effectiveness of OBIE in delivering the outcomes desired by the CMA Order had come at a price. The structure had enabled rapid progress but in hindsight, it was not suited to overseeing a longer-term project which had accumulated a wider and lasting remit.

The Governance of Open Banking 2.0 (2022 onwards)

The initial roadmap to deliver on Open Banking as required in the CMA Order is expected to be achieved by 2022. Is there then still a need for a central infrastructure, that is, an OBIE in some form, and if so, in what form?

As the trade body for UK banks and financial service providers, UK Finance tabled a comprehensive set of proposals in March 2021 to address this question. These proposals essentially envisaged that OBIE would continue, but transition to become an independent entity without a trustee and with a board made up of an independent chair with 7 NEDs who would represent participants as well as users. The CMA invited a public consultation on these proposals and on what arrangements should follow.

The then Trustee, Imran Gulamhuseinwala, vigorously opposed key elements of this proposal, arguing that “whilst the implementation requirements of the order are coming to an end, the outcomes sought by the Order have not yet fully materialized.” Specifically, he argued for the need to continue to:

Have an independent Trustee Function which has powers to direct the new OBIE and monitor its work independently, and the trustee should be appointed as a Non executive director on its new board; and
Undertake ecosystem support as a mandated public good, not reliant on good will of banks as funders.

Following the publication of the Investigation, Gulamhuseinwala resigned in early October 2021. CMA appointed a new interim Chair and Trustee, followed by the appointment of an independent non-executive director in response to the findings of the inquiry. On 5 November 2021, OBIE issued a call for expressions of interest in a second NED appointment which would last for 6 months, presumably while the future structure is agreed.

Lessons for governance of DPI

What are we to make of this case in all its complexity?

In all its simplicity, the 2016 CMA Order seemed to establish the main elements for an effective governance structure for a digital infrastructure builder: one which had both sufficient power (as a result of being backed by regulation) and resources (as a result of the levy on banks), while also the flexibility (as a non-government entity) enabling it to make rapid and effective progress in a complex and contested environment. While cost overruns are all too common in infrastructure projects, effective delivery on a large DPI project is far less common. If OBIE were rated as a tech startup barely more than three years in the market, it would receive loud plaudits.

However, the parallel to a tech startup doesn’t stop there: the patterns of toxic behavior uncovered by the Investigation also sound rather like some of the stories from other successful tech startups in recent years--think Uber, for example . But OBIE was not a private venture; rather it was a very visible vehicle for a public-private partnership in a contested market space. The level of scrutiny was always going to be higher for OBIE.

In retrospect, the very simplicity of the CMA Order meant that there was insufficient clarity about key roles (such as Trustee and Director); and especially that checks and balances for greater accountability were lacking. These are timeless corporate governance considerations. The lesson from the OBIE case to date is not that the use of special-purpose structures like OBIE is risky per se , but rather that it is possible to double down on the elements which can make these structures both effective and accountable; and to equip regulators and boards to play the roles expected of them.

It should be possible to move fast enough in the building of new Digital Public Infrastructure while breaking fewer things.

Nonprofits Can Be Lean Startups Too

Mon, 15 Nov 2021 13:20:09 GMT

Starting a nonprofit organization

Eric Ries’ bestselling 2011 book The Lean Startup launched a movement that’s spread far beyond Silicon Valley. Sometimes called “fail fast”, this movement treats startups as grand experiments. Rather than over investing time and resources in development, “the goal of every startup experiment is to discover how to build a sustainable business around the vision,” says Ries. Entrepreneurs should focus on building a minimum viable product (MVP), ship it, then iterate and learn from early adoption.

Could founding a nonprofit work the same way? Should it? My co-founders, Gavin Krugel, Ignacio Mas, and I, were seasoned entrepreneurs with backgrounds in financial inclusion when we launched the Digital Frontiers Institute (DFI) in July 2015. We didn’t set out to apply the lean startup philosophy, but it’s helped us scale and build a sustainable organization around our vision.

We were driven to solve a bottleneck in the global push to extend digital financial services to “the other half” of the world’s population. A human capacity bottleneck. Our two-part hypothesis is that:

There’s a gap in the learning and growth available to digital financial professionals around the world, even as demand for their skills is rising; and
A network that offers ongoing training and connects professionals across borders could sustainably fill this gap.

We also decided DFI should be a nonprofit because it clearly fit the mission of education and professional development, and to ensure the network focused on its public purpose.

To test our hypothesis, we defined our MVP: an online certificated course in digital financial services, the starting point of a training and professional journey. The idea behind an MVP is to get to market fast, to test customer responses (in our case, student responses), and establish willingness and ability to pay.

Also, our seed funding from the Omidyar Network only lasted 6 months, so we needed the first course to be ready by January 2016. To do that, we needed several pieces to come together quickly.

Nimble Structure, Right Partners

Our first challenge was that starting a nonprofit entity – and securing a charitable tax exemption – is a lengthier process than starting a new business. We were fortunate to secure the fiscal sponsorship of Rockefeller Philanthropy Advisors (RPA) in New York. RPA, itself a 501(c)3, has incubated successful nonprofits like the Global Impact Investment Network , which have later obtained independent nonprofit status – essentially being spun off.

Sponsorship by RPA gave us and our co-funders the benefits of nonprofit status, while leaving the accounting and reporting functions in RPA’s capable hands. Think of RPA sponsorship like an IT startup using the Amazon Web Services platform: it’s back office administration as-a-service. We agreed to a framework of delegated authority for our steering committee, giving us the freedom to be decisive and move quickly, while ultimately accountable to RPA’s board. This legal arrangement gave us a structural ‘safe harbor’ to focus our energies during the early stage on our MVP rather than on structural issues.

Second, because DFI was new, and didn’t have an established brand as an educational provider, we sought a university partner who could bring credibility and expertise. In return, we could help them extend their online learning offerings. We spoke to six universities around the world and found a partner in the Fletcher School of Law and Diplomacy at Tufts University. Fletcher already had successful blended learning courses; and was willing to experiment with us on a year-long pilot: offering the first known online Certificate in Digital Money. A joint Fletcher-DFI Curriculum Group now oversees the syllabus and structure.

Finally, we needed a quick and relatively inexpensive learning management system to host our first course. A web design firm in Cape Town, BOnline , took our vision for the learning experience and adapted Guru LMS (a low-cost, open source system) to our needs.

Getting It in Students’ Hands
One of the core tenets of the lean startup movement is to enlist early adopters and get customers involved as early as possible. In our case, that meant students.

Our most likely students were probably digital natives already, so we relied on a digital marketing campaign. We also marketed the course through our personal networks. Our target was 100 applications for the first cohort. By the deadline, we’d received more than 130. They’re a diverse group, from around the world, representing the private, public, and development sectors.

To test how the course material works, we ran a Friendly User Trial in January 2016 with 10 students over 3 weeks (a compressed timeframe of the 12 weeks for the full course). This testing enabled us to iron out issues before going live on February 8.

The first online Certificate in Digital Money started this week – on time, on scope, and slightly under budget. With our MVP in students’ hands, we’ve raised additional funding to carry us for 2 more years. By year three, our goal is to reach 1,000 new students.

To be successful, Ries says lean startups need to build, measure, and learn quickly. We’ll do that with our online courses, while testing our hypotheses and reaching for our greater purpose. Focusing on our MVP and outsourcing all non-core activities helped us get to this point. Without running our nonprofit like a lean startup, we couldn’t have come this far, this fast.

NOTE: I wrote this article in early 2016; and it was for a while posted on the Omidyar Network website. That site has been revamped and the article is no longer available. Nonetheless, the topic of how to apply innovation in nonprofit space too remains an important theme so, with permission, I republish it now here. As a footnote about what has happened since then: Digital Frontiers turned 6 years old in 2021; and has provided training to more than 8000 unique professionals from more than 2000 organizations in some 160 countries. The hypotheses we framed at the outset have held over time, even though the structure and offerings of the company have evolved considerably. DFI today is ready for a next stage of growth as a capacity building organization focused on equipping professionals to meet SDG goals.

Board Effectiveness Reviews: Why They're Necessary and When to Undertake Them

Tue, 02 Nov 2021 15:32:17 GMT

Reviews are growing more complex and sophisticated but remain more art than science

I sit on the board of a company which initiated its first effectiveness review in 2020. The organization was then just over five years old, and the full board had been in existence for only three years: in the initial two-year period, the co-founders had governed through a steering committee structure which included a seed funder. At the time of the first review, there was no legal requirement nor even pressure from funders to undertake it. So, was it worth the time and money to do it? And did this first board review come too early or too late? In this article, I reflect on that experience, mixed in with some evidence from the burgeoning literature on board effectiveness reviews.

What is the ROI of board effectiveness reviews?

Board effectiveness reviews vary greatly in their scope and depth, and therefore in how resource-intensive they are. Following a self-assessment approach may reduce the cost, although external help may be needed to craft an appropriate questionnaire for the first time at least. Even self-assessments may involve more than a questionnaire only--the chair or lead independent board member may choose to conduct more detailed interviews as well or instead. For public companies, annual , or at least regular , effectiveness reviews are now required in various jurisdictions. The widely respected UK Corporate Governance Code requires that there is an external review for large (FTSE350) listed companies at least every three years. The practices of board evaluation, and the level of disclosure about them, are growing more comprehensive and rigorous for large companies at least: for example, the E&Y Center for Board Matters reported that among Fortune100 companies in the US, 39% of companies included individual board member self-assessments in 2019, a big increase from less than a quarter the year before. The outcome of all this assessment activity seems positive overall: the latest annual PWC Corporate Directors Survey 2021 reports that 88% of respondents felt that their company had an effective board evaluation process. However, in a telling reminder that there may be barriers to real honesty at board level, 67% reported that they felt there were limits to being too frank.

In our case, with a younger, non-public company, we opted for a self-assessment via individual questionnaire for our first time. The questionnaire was designed to take around 30 minutes for each director to complete. We included a specific section only for the CEO to evaluate his views about the board’s engagement since we believe that a constructive board-CEO relationship is an important mark of board effectiveness. We then used the services of a consultant to compile the results and prepare a summary deck of the findings. This was a way of anonymizing individual comments and also ensuring that the summary feedback was independently filtered. All this involved a modest investment of board time and money leading up to a year-end board meeting when it was discussed.

The return on this modest investment was very positive, however. The feedback catalyzed board in-committee discussions among non-executive and executive directors first separately, then together. In this case, it didn’t lead to any specific changes, unlike 72% reported in the PWC 2021 Survey. But it did tighten a culture of mutual accountability for performance and open up new channels for reflection which have been very healthy. Those are benefits which are hard to measure in the short run and in purely financial terms. But I have little doubt that the net return of starting this practice of regular evaluation has been positive.

When to undertake effectiveness reviews?

Even if board effectiveness reviews are indeed generally worthwhile, as I firmly believe, the question remains about when they should first be undertaken, and then how often . In my example, in other words, were we too late in starting this practice three years after the establishment of the full board? Or rather, were we a bit early to derive the full value from it? In my opinion, I find it hard to conclude that we were too early--if anything, I think we may have derived value from starting earlier, rather than regarding evaluation as a practice to follow when we grew up.

Of course, the usual disclaimer applies: “When you know one board, ...you know one board.” The deciding factor on timing may be the purpose behind a review . A review which is targeted at understanding and addressing specific issues relevant to the stage of the organization’s life cycle seems relevant, no matter how early. A review designed mainly to inculcate good practice may be deferred for a while, until a clearer sense of self-identity emerges.

The reality is that opening channels for constructive feedback is usually necessary and helpful across all stages of organizational growth; and perhaps especially necessary when organizations start to scale. This is the time when disciplines may be abandoned or not built in time. In my example, even during the early co-founder-led stage of the company, we tried to maintain the discipline of accountability to one another when we met in person periodically--not always easy to do during the hustle and bustle of early stage life but essential to organizational hygiene.

Although there are now a range of checklists and templates which boards can follow, designing an effective approach to measure board effectiveness, and thereby improve it, remains more art than science . Saying that doesn’t mean that the process is mysterious or mystical: far from it! Rather that it requires discipline and practice to become good at it; and that it benefits from flair which can craft a review to fit a particular setting. Even the discussion which should precede any review--such as, for which desired outcomes is the board effective?--may help to surface issues which can promote a climate of good governance within organizations at any stage of life.

What is good governance and why does it matter?

Thu, 07 Oct 2021 23:19:26 GMT

The journey from complexity to clarity over the principles of good governance in private and public sectors

Over the years, I have had the opportunity to serve on governing bodies of quite a wide range of organizations: private companies, publicly owned development finance entities, public-private partnerships, associations, non-profits, even a church. I have seen at first hand the difference which governance makes in whether an organization achieves its purpose or not. As a result, I have a high view of the difference governance can make--but also a realistic understanding of how often the topic is clouded in mystery, even mystique. And how often the difference governance makes to organizations is not positive!

The growing jungle of governance complexity

Because of its sprawling nature, the topic of governance remains slightly murky notwithstanding three decades of attempts to define it and codify it in specific sectors.

In the private sector , the pioneering work of the Cadbury Committee spotlighted the shortcomings of governance within the UK corporate environment in its landmark 1992 report. Since then, codes of good corporate governance for listed companies have proliferated around the world. Activist investors have taken up the charge to go beyond code compliance. Today, mainstream investment managers espouse reporting against ‘ESG’ frameworks , where the G stands for governance right alongside a company’s environmental and social impact. Funds which screen for ESG performance have attracted ever-increasing inflows as investors vote with their wallets in favor of companies performing according to these indicators.

The public sector has not been left out of the growing focus on governance. Back in 2009, a UN agency defined good public governance in terms of eight characteristics: it is participatory, consensus oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive and follows the rule of law. Political scientist Francis Fukuyama has gone further to argue that good governance is the biggest factor explaining differences in the wealth of nations. But he has also pointed out what he calls the ‘getting to Denmark’ problem: that there is no one easy technocratic path which leads to good governance.

Good governance: a unifying definition at last

Even as these parallel tracks of sector-based discussions have unfolded and spawned much analysis and many indices, we have lacked a unifying framework for understanding of what governance is about. However, there is some recent good news: in September 2021, following a three year process, international standard setting body ISO published a new standard (ISO 37000) for governance . It is built on a clear definition of governance as “the system by which an organization is directed, overseen and held accountable for achieving its defined purpose.”

I find this to be a useful definition for taking forward the discussion of how to promote good governance. First, it covers organizations of all types , not only large companies, so it should help to reduce the fragmentation created by overlapping and varying codes and sets of principles. Second, it recognizes that governance is a ‘system’ —a group of interacting items which must form a whole—not just one single issue to extract from its context. This recognition brings complexity explicitly into the governance frame, allowing for great differentiation in the composition, structures and processes of governance bodies while accepting that these factors all interact. And third, the definition links governance explicitly to achieving the organization’s purpose . Of course, ‘we’re all purpose-driven now’, to adapt the quotation about Keynesians attributed to Milton Friedman. I, for one, consider this generally a good thing. I do have reservations about how broadly the concept of purpose is defined and applied in some contexts but that is the subject of a future article. But by linking governance to purpose in the definition, the ISO standard neatly closes a loop: all governance should promote the achievement of organizational purpose. This is not just an outcome of good governance. Governance which does not seek to achieve an organizational purpose is not just bad governance: it isn’t really governance worthy of the name at all. Of course, a corollary of this definition is that the first emphasis of governance should be to define and clarify an organization’s purpose. Much cyber-ink has already been spilled in defining purpose and measuring it, and much more is yet likely to be spent (which is another way of saying this will be the topic of a future article on this site). But at least the standard of governance is now about how it provides greater clarity of purpose and is accountable for progress towards this destination.

How much does governance matter and to whom?

While there is therefore more convergence now than even a decade ago about what governance is, the question remains as to how much it matters, and to whom. It is all too easy to respond ‘a lot’ and ‘to everyone’, just as we might when asked the same question about parenthood, or any other great natural ‘goods’.

Studies are now showing some of the payoffs from good governance. For example, recent research by New York City-based think tank Diligent Institute found that the top quintile of S&P500 companies in corporate governance rankings performed 15% better on average than the bottom quintile over a two year period to end 2018, concluding “Strong corporate governance is critical for companies that seek to maintain high performance and avoid devastating crises (See Diligent Institute - 2019 The High Cost of Governance Deficits: A Case For Modern Governance )." Research like this typically uses market capitalization as the measure of corporate performance. This of course captures the most traditional sense of corporate purpose—namely, return to shareholders. Broader measures are not yet widely available or consistent. To believe that these firms are meeting their wider purpose beyond financial return only, we must for now infer that capital markets are rewarding public companies which at least pay some attention to current measures of governance; and that this reward could help promote a virtuous circle towards better practices.

The reality today is that we notice governance more often by its absence. Our societies are made up of myriad organizations of greatly differing scales and types and with varying purposes. If significant organizations cannot and do not achieve their intended purposes, there is at very least a societal opportunity cost or deadweight loss. This failure may not be the fault of governance in the short run at least—execution also plays a vital role. Exogenous factors can also disrupt outcomes. But since governance determines whether and how organizations adapt and change over time in ways which can sustain or undermine their purpose, in the long run at least, organizational failure can be attributed to poor governance.

In respect of clarity of purpose, the new ISO37000 governance standard at least “eats its own dogfood”: the standard states its own purpose as promoting the achievement of certain Sustainable Development Goals (SDGs) , specifically SDG 16: to “promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels. ” SDG16 serves as a foundation for achieving all the other SDGs, just as organizational governance underlies organizational performance. Organizations of all types are starting to express their purpose with reference in part to achieving SDGs. Whether ISO37000 can achieve this, it is at least a worthy aspiration to link governance to human development in this way.

Now that’s a purpose for organizational governance which I can certainly get behind!

21st Century governance

Wed, 29 Sep 2021 23:19:26 GMT

How technology is starting to change the way organizations make decisions

The most boards on which I have participated still live mainly in the Twentieth Century in terms of their practices. This remains true despite some visible shifts: videoconferencing, for example, was not widely available until this century and it is now widely used for remote board meetings. Boards have followed the general trend toward greater use of digital technology, yet the practices of their decision-making are little changed. Digital adoption has hardly freed up time or focused attention. Instead, board meeting time seems all the more scarce and often harried; and the allocation of time is often mismatched with those agenda items where it might achieve the highest return for the organization. Decision-making is still largely based on documents emailed before a quarterly meeting, the information in which is often at least a month out of date by the time of the meeting. A typical board meeting often involves much sifting of dense status updates; and all too little time for robust discussion of future opportunities and risks.

In their book Governance in the Digital Age , Brian Stafford and Dottie Schindlinger go further to point out that much contemporary board practice is built on the value of ‘deliberating’, a word whose very meaning suggests slow and cautious decision making. They are not against deliberation; nor am I. But ‘slow and cautious’ may be no better than ‘moving fast and breaking things’ at a time when opportunities and crises erupt suddenly, certainly not waiting for the next meeting cycle. New tools are becoming available which can upgrade the time honored practice of deliberation, buttressing it with more relevant information, timely discussion and convergence to decision.

Boardtech tools for the digital age

Stafford and Schindlinger describe three typical types of corporate boards widely encountered today at different stages of growth—foundational, structural and catalytic boards. They then make the case for evolving towards a fourth category which they term a futuristic board. This is one in which directors want and receive real time information about a company via dashboards and scorecards which monitor key areas of risk, compliance and indeed their own effectiveness. In this context, the board itself becomes a strategic asset of a company, rather than being mainly a watchdog or a rubber stamp of management’s actions. There are all too few boards like these around.

Stafford and Schindlinger practice what they preach about dashboards, as they are respectively the CEO of leading boardtech firm Diligent Corporation and Executive Director of its research arm, the Diligent Institute . The field of boardtech has taken off over the past ten years, as tech vendors like Diligent vie to provide governance tools as a service to companies and governments around the world. New York City-based Diligent reports having more than 25,000 customers from around the world, with recurring revenues exceeding $300m in 2019. But it is not alone in the expanding category of ‘boardtech’ providers: among others, NASDAQ linked Boardvantage and BoardMaps offer comparable board portal services.

Today’s boardtech tools are built around board portals— access-protected storage sites from where directors can access board documentation with secure messaging and even voting options. Some integrate videoconferencing technology to secure this channel too. Certainly, boardtech tools like these are a part of supporting better decision making: at very least, they can bring efficiencies to meetings and also better security for corporate information. But boardtech tools can go beyond document managing and messaging alone. Portals may include board-relevant dashboards which provide directors with access to real time organizational information. By changing the pattern of information flow, they start to transform the essence of governance: from a ‘contact sport’ played out on the ‘field’ of intermittent meetings to an ongoing discipline of accessing and assessing relevant timely information to support better decision making. In the future, boardtech services widen the information flow beyond company sources only: they may also help to curate third party information sources for non-executive directors so that they are not reliant only on information from management or their personal sources. The expanding reach of some of boardtech providers may enable them to function like Facebook or Google but for governance—for example, notifying subscribed members that ‘directors in companies like yours are reading this trending article or following this breaking news.’

The aim of introducing boardtech tools like these should not be to double-guess management nor to encourage non-executive directors to interfere more in the domain of management. It should rather enable non-executives to ask better questions of management. They can also become more active in the development and evolution of strategy as an active conversation, not a document updated once a year. This active role is recommended strongly by economist and public company board member Dambisa Moyo in her 2021 book How boards work . She starts her book with the observation that “virtually every board … is contending with sometimes conflicting demands for environmental and social change with urgency.” She then makes three cogent recommendations about innovating board practice, of which this role in strategy is one. It’s worth a read for anyone interested in this field.

Data governance is at the heart of 21st century governance

New tools alone are not sufficient to answer the question of how governance can, should and even must evolve in the 21st century. As it does in other sectors, digital transformation both requires and enables deeper changes than merely adopting new tools as they become available. It does this by changing the basis on which decisions are made in organizations.

The currency of governance is the good judgment of the ‘governors’ . This currency is ‘minted’ by the mental models which individual directors bring to the board of an organization, often shaped by relevant experiences in other organizations. The value of the currency in an organization is determined in large part by whether those different personal mental models cohere to shape an robust guiding ‘model’ for an organization: that is, one where its purpose meshes with its operating model and ethical foundations. In the fast-changing digital world, the degree of fit of any model to circumstances depreciates rapidly. So, creating enduring value through organizations comes not from sticking to one model but rather from refining and re-shaping models as new information and circumstances emerge.

To define the basis on which information is collected, verified and used, boards need a new understanding of data governance . All too often, data governance is seen as the preserve of the CIO, and delegated to risk committees of management, when really it concerns how the most valuable asset of digital-first companies—their data—is stewarded. This is of course a big topic in itself—the subject of future articless on this site to be sure—but in essence data governance is about defining and overseeing the flow of appropriate data within an organization. The flow has to be continuous, reliable and diverse: improving distributed cognition in the face of complexity requires that a much wider range of data, information and weak signals is considered and boards must oversee the curation process which harnessed the flood.

Organizations which succeed in the 21st century are likely to be those which redesign their governance to take account of the tectonic shift towards better stewardship of digital data. In time to come, we may look back on today’s boardtech tools as akin to the elementary ‘compasses’ which guided the golden age of maritime exploration in the Sixteenth and Seventeenth centuries. Even though compasses remain useful navigational aids today, they have largely been supplanted by GPS devices which are now considered essential for most maritime travel. Using a GPS, the captain still directs the ship; but has access to a much richer set of relevant, timely and valuable information which creates more options for routes. Boardtech is on a journey to becoming more like the GPS for organizational governance.

Governing Digital Public Infrastructure

Wed, 22 Sep 2021 23:19:26 GMT

What is Digital Public Infrastructure (DPI) and why is it tricky to govern well?

Bricks vs clicks: physical and digital infrastructure

I have spent a good part of my career on the design and implementation of retail payment systems around the world. Accelerated by the rapid spread of mobile phones, digital payment systems are now being used by a critical mass of people in many countries. Although the sums being transferred are low relative to large value payment systems, these digital systems are increasingly recognized as ‘prominent’ or ‘system-wide.’ Their large reach across society has made them a leading example of what is now called digital public infrastructure (DPI). This new name is both a recognition of the growing reality of their importance, as well as a call to action to build more and build better. So what is DPI and how does it differ from other forms of infrastructure?

According to Marte Nordhaug and Kevin O’Neill in their July 2021 blog , DPI comprises “systems which allow data to flow seamlessly while accomplishing basic but widely useful functions at a societal scale”. They argue that DPI should enable a rapid, more effective response to crises, and can also provide the foundation for more inclusive digital economic development. As a result, development financiers are now actively considering new ways to promote the building of DPI.

Development financiers have long recognized the importance of physical infrastructure for development. Elaborate public-private mechanisms have been designed to attract private financing because state financing alone is inadequate. However, according to projections of the Global Infrastructure Hub , a G20 initiative which tracks these trends, the gap is growing between the financing needed to bring physical infrastructure up to SDG standards and the likely funding available. In an October 2020 blog, the Global Infrastructure Hub suggests that the reasons for this shortfall have a lot to do with a poor public governance environment in developing countries.

The limits of private governance of DPI

In this context of generally weak public governance, how should the emerging new category of digital infrastructure be governed? The answer to this question will affect both the ability to attract funding and whether it can achieve defined social purposes. Can DPI escape the governance problems which have plagued many large physical infrastructure projects?

The default approach to governance of DPI so far has been to leave it to privately owned infrastructure operators. This is true for some of the most globally important DPIs today, like Google search and Facebook’s social media platforms. These are governed primarily through corporate governance of these public companies. Accountable ultimately only to its founder who still controls 58% of voting shares, Facebook itself functions like an authoritarian nation state as Adrianne Le France writes in a September 27 2021 article in The Atlantic. Under public pressure, Facebook’s governance is in fact evolving. Facebook appointed an Oversight Board which began work in 2020 to arbitrate content policy on its platforms. But this move alone cannot be the final word in the governance of DPI of this sort.

Tech giants like Facebook and Google have such lucrative core business models that not only do they provide their widely used digital services for free but they can also spend considerable sums on the rollout of the physical infrastructure for digital connectivity in developing countries. However, the model of privately owned, operated and governed digital infrastructure is hitting its limits. The apparent alignment of interests between big tech and the governments which used to welcome their taking care of the problem of digital inclusion at little or no cost to the state has broken down. Only in authoritarian states so far has there been the will and the power so far to regulate tech giants closely, or else to provide DPI directly.

Governance of the digital space in general, and especially of DPI, is indeed one of the central questions of our time. It needs focus, resources and urgency. Tristan Harris, the founder of the Center for Humane Technology which was behind the Emmy winning 2020 documentary The Social Dilemma has called for a ‘Manhattan project’ on digital governance In a September 2021 edition of the Center’s podcast Your Undivided Attention .

An alternative approach: Digital Public Goods

The ‘P’ for ‘public’ in ‘DPI’ has referred to public in the sense of population scale usage, rather than public ownership of infrastructure, as the Facebook example shows. But what if DPI could be rolled out on the foundation of non-proprietary assets? This could change both the cost basis and the governance model.

This is the essence of an emerging approach to the rollout of DPI which relies on deploying digital public goods (DPGs). DPGs are open-source approaches to software, data, AI, standards and content. In the tighter form of the definition espoused in the UN 2020 Roadmap for Digital Cooperation , these open approaches must also:

1. adhere to privacy and other applicable best practices,

2. do no harm and

3. are of high relevance for attainment of the UN’s 2030 Sustainable Development Goals.

DPGs are not necessarily free, but the principle of ‘openness’ of access applied across a spectrum of licensing options removes the thick wedge of monopoly rents accruing from proprietary ownership and reduces the risk of lock-in to proprietary solutions. To advocate for the widespread use of DPGs for development purposes, a group of interested organizations led by a bilateral donor (Noraid) and a UN agency (UNICEF) set up the Digital Public Goods Alliance (DPGA) in 2019. DPGA has operationalized a standard for defining a DPG and maintains a registry of qualifying DPGs .

Reliance on DPGs to build DPI may reduce the total costs of infrastructure deployment although it does not eliminate financing challenges: in fact, DPGs may require considerable investment upfront to create, test and propagate the approaches to the level where they are robust and can be relied upon. This is especially true in societally sensitive sectors such as identity provision and management. Because their open source nature dilutes potential returns relative to proprietary options, DPGs are less likely to be able to attract commercial finance. This places more pressure on concessional pools of finance.

DPGs also don’t eliminate the fundamental problem of weak governance in many developing societies but they change it: they shift the locus of control away from governments negotiating with proprietary vendors towards the standard setting bodies which guide, vet and control the open solutions. The governance of open source solutions differs widely: from relatively authoritarian around charismatic founders (think Linux or Ethereum) to more community-based forms. Open-source foundations provide the legal homes and oversight for an increasing range of open software. Some of the best known of these include Apache Software Foundation and Mozilla Foundation. To entrench their independence from private interests, these foundations usually take the legal form of nonprofit companies which have a corporate board of directors appointed to represent wider stakeholders and a technical board appointed to oversee technical standards. The Mojaloop Foundation formed in 2020 to guide the development of an open-source payments ecosystem is one of the most recent.

Governing the great ‘Opens’ of our time

Mojaloop is an example of the wider trend towards Open Payments and Open Finance more generally which has gathered momentum in many parts of the world in ways which have the potential to transform retail finance thoroughly. The infrastructure supporting these latest ‘opens’ are also part of DPI: they perform the complex tasks of setting and maintaining standards, publishing software APIs and enforcing data protection norms. Building and operating this infrastructure requires a new breed of adequately resourced entities, the specialized governance of which must be able to balance conflicting interests while achieving a defined public purpose.

Governing DPI is no easy task. But it is an essential task if the benefits of DPI are to be realized in the form of meaningful digital inclusion and the achievement of SDGs. That’s why at Integral, we will watch closely what is happening in this emergent area; and why we have an active interest in supporting better governance outcomes especially of DPIs.

I personally don’t think that this will require a single ‘Manhattan project’ as Tristan Harris argues for digital governance more generally: rather it needs an active learning approach to observe closely the evolving governance of the many different forms of DPG and DPI already active around the world today. It must allow for the diversity of contexts and challenges while exploring and supporting common emergent themes. It also needs to experiment with new digital organizational forms--perhaps DPGs will be housed in Decentralized Autonomous Organizations (DAOs) in the future. In this mix of experiences, it is more likely that strong and appropriate governance can be identified and then cultivated for DPI in future.