Алистер Смит - The Dictator's Handbook - Why Bad Behavior is Almost Always Good Politics

Blind fools don’t often get to rule countries or companies. Pretty much any leader worth his salt can see the dangers he faces when economic circumstances leave him bereft of funds to buy loyalty. Under such circumstances even leaders can believe that reform is their best shot at political survival. They might look for a fix even before their coalition does. Consider the experience of Chiang Kai Shek, who certainly was no fool. We might well ask why he encouraged much more successful economic policies on Taiwan than on the mainland of China. In the latter, even with extensive poverty, because there were so many people, there was plenty to enrich himself and his coalition. But when Chiang Kai Shek and his backers retreated to Taiwan, they took over an island with relatively few people and barely any resources. Only economic success could provide the way to reward his coalition. In the process of achieving that success, he also gradually expanded the coalition, perhaps in response to pressure from his essential cronies or perhaps under pressure from the United States, until one day he woke up to a democracy.

When the time or circumstances are ripe for change, coalition members must recognize that if they do not pressure for an expansion of public goods and public welfare, then others will. Provided that the chances of success are good enough and the expected gains from success outstrip the costs involved in gambling on a revolt, an intransigent coalition and leadership will find itself besieged by an uprising. In this circumstance, such as was seen in Tunisia, Egypt, Yemen, and elsewhere in the Middle East and North Africa, and as we saw in the proxy fight at HP over Carly Fiorina’s decision to merge with Compaq, people are willing to take big risks to improve their lot. They do so to call for exactly the same change as is widely favored by smart coalition members when and if any change becomes necessary.

A wise coalition, therefore, works together with the masses to foster an expanded coalition. The people cooperate because it will mean more public goods for them and the coalition cooperates because it will mean reducing the risk of their ending up out on their ear. Egypt’s military leaders, essential members of the Mubarak government, understood this choice very well in the early months of 2011. They ensured their continued place as important players in Egypt’s future by cooperating with the mass movement and supporting an expanded coalition, rather than hunkering down and risking losing everything.

What are the lessons here for change? First, coalition members should beware of their susceptibility to purges. Remember that it ticks up when there is a new boss, a dying boss, or a bankrupt boss. At such times, the essential group should begin to press for its own expansion to create the incentives to develop public-spirited policies, democracy, and benefits for all. Purges can still succeed if they can be mounted surreptitiously, so wise coalition members who are not absolutely close to the seat of power would do well to insist on a free press, free speech, and free assembly to protect themselves from unanticipated upheaval. And should they be unlucky enough to be replaced, at least they will have cushioned themselves for a soft landing. Outsiders would be wise to take cues from the same lessons: the time for outside intervention to facilitate democratic change or improved corporate responsibility is when a leader has just come to power or when a leader is near the end of his life.

Knowing what people want, and the conditions under which they will oppose reform and the circumstances under which the swing coalition members will support reform, we can now turn to concrete ideas about fixing, at least partially, the worlds of business and governance.

Lessons from Green Bay

The Green Bay Packers, a football team based in the cold climes of Wisconsin, are remarkable for the loyalty their fans show them. In fact, win or lose, Packer fans are nearly always satisfied. Virtually every one of their home games since 1960 has been sold out. Attendance averages 98.9 percent despite often appalling weather. The Packers have one of the longest waiting lists for season tickets among professional football teams.1 Despite being a small market team (Green Bay is a city of only about 100,000), they attract a larger, more loyal fan base than teams from many much larger cities. Their success with their fans, if not their success on the field, stems from their institutional structure.

The Packers are the only nonprofit, community-owned franchise in American major league professional sports. Their 112,120 shareholders are mainly local fans. The ownership rules preclude a small clique taking control of the team. No one is allowed to own more than 200,000 shares in the Packers and there are about 4.75 million shares outstanding. Thus, a tiny band of owners cannot easily overturn the many and run the team for their personal gain at the expense of the larger, small-owners fan base. The Packers have a forty-three-member board of directors.

We can see the relative representativeness of the Packers’ essential coalition by comparing the size of their board of directors to Carly Fiorina’s board at Hewlett Packard. Remember that the Hewlett Packard Board varied between ten and fourteen members. HP has about 2.2 billion shares outstanding. Roughly speaking, each Packard board member nominally represents the interests of about 185 million shares. Each Packers board member represents about 110,000 shares. The Packers have a vastly larger winning coalition in absolute terms (forty-three to about twelve). They also have a vastly larger coalition relative to the size of their nominal selectorate—about 1,700 times larger. Can it be any wonder that the Packer owners are extremely happy with their company/team and that sentiments are more mixed when it comes to HP?

The lesson to be extracted from the Green Bay Packers is that if firms can be made to rely on a bigger coalition they are likely to do a better job of serving the interests of their owners. But how can corporate governance be turned on its head to make this happen?

Consider what the main difficulties are for shareholders. They suffer from two big problems: First, in big corporations there tend to be millions of little shareholders, a handful of big, institutional shareholders, and a bunch of insider owners. The millions of little shareholders might as well not exist. They are not organized and the cost to any of them to organize the mass of owners just isn’t worth it. Second, the flow of information about the firm’s performance comes from pretty much only two sources: the firm itself and the financial media. Few owners read annual reports or SEC filings and the financial media don’t spend much time reporting on any one firm unless it is in huge trouble. By then it is usually too late for the shareholders to save the day.

We live in the age of networking. Much of the world, including owners of shares, Twitter and chat with “friends” on Facebook; they are LinkedIn; they can easily communicate with one another, even if they don’t always do so. Surely it would be relatively simple to design firm-specific Facebooks or other networking sites.

Companies maintain lively web sites to put their view across but entrepreneur-owners have not stepped forward to do the same to help organize the mass of little owners and to provide a way for them to share views. Sure, there are bloggers writing about anything and everything, but there don’t seem to be shareholder-controlled sites to exchange thoughts and ideas about a company that participants own in common. If something like this existed, the size of the influential, informed voters in any corporation would go way up. Then, for the first time, boards would really be elected by their owners and then the board would need, like any leadership group, to be responsive to their large coalition of constituents. A simple change that exploits the Internet to be a conduit for increasing coalition size can turn the AIGs, Bank of Americas, General Motors, and AT&Ts of the world into big-coalition regimes that serve their millions of small owners instead of a handful of senior managers.