For centuries, the separation of powers has been the threefold pillar of all Western democracies. Thereby, the executive, judiciary and legislature each have their own unique tasks and responsibilities. They cannot take them away from each other. This creates a balance. That balance makes a democracy strong. By the way, ultimately the legislature is in charge. The people choose the legislature and therefore in every democracy, as the word implies, the ultimate “boss”. Yet, it doesn’t always seem to work well. The people aren’t always right. This inherent weakness can only be compensated for by a separation of powers. For example, legislation that is too radical can be found by the court to be in conflict with international human rights. Arbitrary acts by the government, whereby parliament doesn’t intervene, can be punished by the court as being unlawful. The executive and the judiciary have no more powers than the legislature gives them. So that works pretty well, this separation of powers.
When it comes to the governance of public limited companies you’ll see a system that is somewhat similar. There are three bodies: the management board, the supervisory board and the shareholders. Each has its own tasks and responsibilities. The governance in a company functions well if these bodies respect each other’s tasks and responsibilities. This applies to companies just as well as to countries.
In the past two hundred years this system has functioned reasonably well all around the world, with some trial and error. A parliamentary democracy is still regarded almost everywhere as the best form of government. If you’re a bit more cynical you would say, like Plato, that it’s the least bad form of government.
For this reason it is worrying that in the past few years parliamentary democracies with an initially properly functioning separation of powers are rapidly crumbling. What’s even more worrying is that it is precisely those people who can benefit the most from a parliamentary democracy and the separation of powers, the “citizens” who basically hold the power, that are the ones who simply seem to let it happen, even help to make it happen.
By now there are many large democracies where the leaders have been democratically elected, but where the separation of powers has been completely or almost completely abandoned. In those cases, the elected president controls parliament and the judiciary and, of course, also the executive. This process has quickly resulted in various democratically elected dictators. We see this happening in Russia, China, Turkey, Iran, South American countries and, yes, also on the horizon in the United States. It seems that the attraction of strong men is so great that we continue to put our trust in them, even if each day we visit the graves of our ancestors who suffered under the rule of previous strong men.
The remarkable thing is that this struggle with our democratic ethics takes place mainly at the state level and apparently less so at the company level. There are few large companies that are successfully managed autocratically. There are companies where the person at the top has a unique, inspiring and guiding significance. Well-known examples are Steve Jobs and Bill Gates. However, large companies such as Apple and Google are closely monitored by various regulators, governments and stakeholders. The result is that their “top men” (unfortunately only rarely “top women”) can’t afford to follow the example of too many contemporary heads of state and resort to abuse of power, manipulation, exploitation and self-enrichment. If they do so, they will be punished for it. An example is the fine of nearly € 4.5 billion that the European Commission imposed on Google in July of this year for abuse of power with regard to mobile phones with Android. It is true that also at the interstate level sanctions are imposed and applied regularly, but that mechanism itself appears to succumb to political bargaining. What does that teach us about corporate governance? Ladies and gentlemen directors and supervisory board members: respect each other’s different tasks, responsibilities and roles. If you fail to do so, you’ll contribute to the demise of the company where you work.
This blogpost is also available in Papiamentu. Download the PDF version.
Do you have a question about corporate governance yourself? Please e-mail it to governance@vaneps.com and perhaps your question will be discussed in the next blogpost.
The executive, judiciary and legislature each have their own unique tasks and responsibilities. They cannot take them away from each other. This creates a balance.
