The world’s first multi-stakeholder business partnership?
On Tuesday I attended an event that felt very significant. It was the first AGM of Riversimple, an eco-car company I am involved with. We are, in our humble way, trying to re-invent the auto industry. You can learn more about Riversimple here. We have been working on our project for many years but only recently implemented our new structure and this is what we celebrated on Tuesday.
This gathering may have been a world-first. I am certainly not aware of any other AGM where such a diversity of interests was represented. For Riversimple is a multi-stakeholder partnership, whose board is mandated to serve, protect and balance multiple interests. At our AGM, there were individuals speaking for:
– commercial partners (e.g. suppliers)
– neighbours (including local and national government); and
– the environment.
There are of course other organisations that serve multiple interests. It is very common in the not-for-profit sector to have boards with representatives from different sections of the community. There is also the chemical business Scott Bader Commonwealth that is owned by a trust on behalf of the community as a whole.
So what makes Riversimple unique? There are two aspects of the structure that, I believe, make it unique and another aspect that is at least highly unusual. Like Scott Bader, we start by acknowledging that the business exists to serve multiple interests, not just those of the investors. The first difference is in the breadth of our definition of what makes a stakeholder. For we include the planet, mother Earth, in our scope. Secondly we have created “custodians”, individual legal entities, to speak for our various stakeholder interests, rather than relying on individuals to carry all that responsibility in their hands.
When devising the structure, we sat down to identify our stakeholders and we came up with a list of over 30. To make this manageable, we ended up grouping them into six. Interestingly the list we ended up with is not so different from the list of matters the board of a limited company are required to take into account, which are detailed in section 172 of the Companies Act.
Section 172 sets out what is known as an “enlightened shareholder” approach. A director is required “to promote the success of the company for the benefit of its members as a whole”. So investors (the members) come first. At the same time the director must “have regard to” a number of other matters, which are listed. Here’s a comparison of the Section 172 list with the Riversimple custodians:
|Section 172 Companies Act
|the likely consequences of any decision in the long term;
|the interests of the company’s employees;
|the need to foster the company’s business relationships with suppliers, customers and others;
|Commercial Partners (includes suppliers)Users
|the impact of the company’s operations on the community and the environment;
|the desirability of the company maintaining a reputation for high standards of business conduct; and
|the need to act fairly as between members of the company.
The key difference of course is that in the Companies Act it is (more or less) clear that investors come first, whereas in Riversimple our starting point is that the business is a partnership between multiple groups, of whom investors are just one. We believe that this approach not only makes the business more likely to care for the multiple stakeholder groups, it is also more likely to take into account the other matters listed in the Companies Act such as the long term and maintaining high standards of conduct.
It has taken us a number of years to reach this point because we had to overcome some hurdles. Firstly there were legal and tax hurdles. The underlying assumption that investors have ultimate control is embedded in corporate law in all sorts of ways. That is why we chose a partnership structure – an LLP under English law. Yet a partnership is not designed to include external investors. So our second challenge was to make sure that investors’ interests are properly protected, which is all about good governance. We have found it a tricky balancing act. Investors have a unique situation in a business since they make an upfront commitment and then seek returns over an extended period. By contrast other stakeholders (staff, customers and so on) may come and go. Although many stakeholders are committed for the long term, it is different from the way investors are committed. We believe we have achieved a good balance – in fact we believe that investors in Riversimple are better protected than in most limited companies. Admittedly as a group they have less control, but we believe our structure makes the organization more resilient and robust and thus more likely to survive the early years and thrive in the medium and long–term. We have taken particular care to protect investors’ interests in the first few years by giving them enhanced rights – the organization is most fragile and vulnerable in the early stages.
What we are doing is moving beyond any notion of ownership of the organization; rather we are establishing a trusteeship structure. It is customary to consider shareholders as owners of a limited company, although in fact the law doesn’t use this description. But what exactly does it mean to “own” an artificial thing, a mental construct made up primarily of a group of people? It seems to be mainly about rights – “my rights” as a shareholder, to vote, to receive dividends, to receive information. By contrast, trusteeship emphasizes responsibilities and this, to my mind, is far more likely to deliver a long-term sustainable business.
We have taken the unusual step of separating out the functions of the board, creating a “compound board” comprising two elements: an Operating board and a Stewards’ board, who sit alongside each other and share responsibility for leading the business. They have separate but overlapping functions (the Operating board more focused on management and the Stewards on governance) and they monitor each other and are accountable to the custodians. We believe such a structure will be more robust than the conventional “unitary board” which places huge power and responsibility in the hands of the board. Combining different perspectives offers a more rounded view – it takes two eyes to see in three dimensions.
Conventionally our society takes a very different attitude to corporate governance than democratic governance. In a democracy it is normal to divide power in order to avoid hubris or excess. We separate out Church and State, the House of Lords and the House of Commons, the Senate and House of Representatives and so on. We have an independent judiciary to keep a check on the executive, and a (theoretically) free press to keep a check on both. This is seen as vital to the health of our society. Yet in business we assume someone must be in charge. This might make sense in a small trading business such as the shopkeeper a plumber, or a hairdresser, but in larger, more complex businesses it becomes harder to defend. Some large multinationals these days wield far more power than many nation states yet they are led by a board of 10 or 12 people of roughly the same age and educational backgrounds. The benefits of some sort of balancing force to help avoid excess, hubris etc ought to be obvious. If the Royal Bank of Scotland had had a genuinely independent auditing function keeping an eye on Fred Goodwin and the Board, his charisma and driving energy might have been harnessed effectively and could have produced a strong, healthy organisation rather than a basket case that had to be rescued at vast (taxpayers’) expense.
Another challenge we have at Riversimple is how to integrate all the diverse, unique and sometimes conflicting interests into a coherent whole. This is one of the main objections people have to a stakeholder governance model. Although elevating shareholders’ interests above all other priorities has proved to be dangerous and harmful to the health of our planet, as well as leading to economic instability and social fragmentation, it has the advantage of simplicity. I don’t make light of this challenge – having to balance the interests of staff, the environment, investors, society and other stakeholders is a complex matter and can’t be done by the usual approach of discussion, compromise and negotiation. A dialogic approach, emphasizing listening and suspension of the need to control or dominate, is the only plausible way forward and is something we will be paying attention to in Riversimple.
We believe our approach links in with modern science. The limited company was designed in the 1800s with Newtonian thinking whereas we are looking to more modern scientific thinkers such as Einstein, David Bohm and Buckminster Fuller. We take much encouragement from complexity science, which seems to fundamentally support our approach. There is for example a recent paper by Professor Eve Mitleton-Kelly of the LSE, pointing out that corporate governance needs to go beyond its focus on the board/shareholder relationship, and take into account the vital role of other stakeholders in the business.
We also take encouragement from the recent surge in interest in different models. As the Financial Times pointed out recently, there is a “global re-examination of corporate models – from employee-owned companies to mutuals and co-operatives.” In the US, there are new corporate models emerging (notably the B Corp). New insights from biology, psychology and complexity science are starting to be applied in organizations around the world supported by networks such as the Society for Organisational Learning. And powerful new era organisations such as Flickr, Wikipedia, eBay and Linux are blurring the lines between customer and supplier, owners and staff, services and products. All these give me confidence that at Riversimple we’re just in the vanguard of a new wave of organising that will transform the way we think about business, society, and our place in this beautiful, complex and mysterious world.