Thoughts of the Day

September 2021
.... Why do we have a Constitution?

The role of the Constitution is to agree the terms of the relationship between the Board and the shareholders / members. A constitution contains the fundamental principles that outline the purpose, structure, and limits of an organisation.

 

Essentially, the constitution provides a foundation upon which an organisation operates.

 

The ultimate Constitution is that of the Australian Parliament.  It establishes the composition of the Australian Parliament, describes how Parliament works and what powers it has. It also outlines how the federal and state Parliaments share power, and the roles of the executive government and the High Court of Australia .

 

The Commonwealth of Australia Constitution came into effect in January 1901 and lays out our fundamental law.

 

Most organisations have a constitution.  In smaller private organisations this may be the shareholders agreement and where there are both then the shareholder agreement will have superior authority.

The shareholder agreement lays out how the shareholding works, who will exercise authority and how.  It may include the way in which any governing authority will work.

 

The constitution usually outlines the mechanics of how governance and the structure for that governance will work in an organisation.

 

The constitution, at the highest level, is a written document that underpins a nation’s political and legal systems. Constitutions provide a framework for government and law. They establish bodies like parliaments or courts; distribute and limit law-making powers; and outline the structure of executive government. Some constitutions also guarantee rights, either explicitly or implicitly.

 

Purpose:

The role of an organisation’s constitution is to provide scope for good governance, while at the same time placing limitations on the powers of the governors.

The doctrine of the separation of powers, involving a system of checks and balances, is basic to liberal constitutionalism. The system of checks and balances begins with the separation through a constitution of judicial, executive and legislative powers.

In Australia we operate under the Westminster system where the ministry is further constrained by the reserve powers of the Crown and by ministerial responsibility to Parliament.

Within an organisation, the executive sphere is held by directors, who besides having a duty to govern in the interests of the whole entity, are obliged to work with their management.

Executive decision making and policy determination remain in the hands of these directors.

 

Principles:

The vast majority of contemporary constitutions describe the basic principles of:

  • the organisation,

  • the structures and

  • processes of governance that cannot be unilaterally changed

 

The content and nature of a particular constitution, varies considerably between organisations, and there is no universal and uncontested definition of a constitution.

Nevertheless, any broadly accepted working definition of a constitution would likely include the following characteristics:

A constitution is a set of fundamental rules that:

(1)  are binding on everyone;

(2)  concern the structure and operation of the company and its shareholders / members;

(3)  are based on widespread public legitimacy;

(4)  are harder to change than other policies;

(5)  as a minimum, meet the recognized legislative requirements of the country the organisation is registered in.

 

The Functions of a Constitution

Constitutions can:

  • declare and define the boundaries of the organisation and its governance structure

  • declare and define the nature and authority of the organisation and its purpose

  • they often declare some fundamental principles and assumptions,

  • they can express the identity and values of the organisation (some organisations place their ‘Code of Conduct’ in the constitution, but given the difficulty of changing and modernising this, it is better served as a stand-alone policy document)

  • make proclamations about the values, history and identity of the organisation

  • declare and define the rights and duties of shareholders / members

  • most include a declaration of fundamental rights applicable to shareholders / members

  • at a minimum, these will include the basic rights and many constitutions go beyond this minimum to include other stakeholders

  • they can establish and regulate the interface with the broader community

  • they can define the structure of the organisation;

  • prescribing their composition, powers and functions; and

  • regulating the relations between them.

 

It is almost universal for constitutions to establish how the board and management will operate with the best interests of the organisation at the foremost.  They establish the checks and balances on the power, authority and structure that supports the organisation in the most effective way.

In addition, there may be a symbolic position, such as President, to ensure the integrity of the process (otherwise vested in the Chair)

It may require appointing external institutions to ensure the accountability and transparency of those in power (such as auditors, or an ombudsman).

The constitution typically provides mechanisms for the democratic allocation and peaceful transfer of power (e.g. elections) and mechanisms for the restraint and removal of those who abuse power or who have lost the confidence of the shareholders / members.

Constitutions can divide or share power between different layers of the organisation such as regions or other sub-state communities

They traditionally have mechanisms for the arbitration of disputes.

 

Constitutional challenges:

Constitutions are written in a time and place but society changes.  This can result in the constitution being less meaningful over time.  The very essence of a constitution’s existence to constrain vested interest can actually work against the best interests of the organisation. 

The key intent, of the constitution, to constrain the powers of those in a governance role can also make it extremely hard to change a constitution to meet the needs of today.

Changing constitutions is extremely difficult.

The best way to future proof a constitution is to start any organisation with a principle based constitution rather than a prescriptive one.  The detail can then be held in organisational policies where the intent remains but flexibility is provided to the organisation for a modern day interpretation.

September 2021
.... 'Languishing in Lockdown takes us back to basics'
 
As we all 'languish' in various stages of COVID lockdowns it is a great time to catch up with many of the old texts of history that have had such an impact on our lives and inform us in so many ways.  Those that I'd like to highlight today are from Adam Smith, credited with being the founder of Economics, and Lord Acton, on ethics and morality.
Starting with Adam Smith, whose two tomes, 'Moral Sentiments' and the 'Wealth of Nations', are foundational to economics.  Many quote the 'Wealth of Nations', when justifying their economic positions but forget the book that preceded it which asserted that we needed to have a moral compass in all that we do.
In 'Moral Sentiments',  Smith, recounts morality as a matter of social psychology. Certain rules of action
generate a well-functioning society. When they are followed, society prospers, and when they are not, it is destroyed. Whilst, Smith was writing a century before Darwin, he was trying to express an evolutionary view: nature has endowed us with conscience and morality because it helps us to survive.
In referencing the rich, Smith says they benefit the rest of us without meaning to. They give employment to all those people who make the luxuries and the status symbols they demand; it is a great equalizer. The supposed benefits of wealth may be a delusion, but the pursuit of riches drives people to enormous exertions, which improve not just manufactures, but science, the arts and intellectual life along the way.
Smith refers to a truly virtuous person as having prudence, justice and beneficence. Prudence helps moderate the individual’s excesses and therefore benefits society. The rules of justice prevent us harming others and beneficence promotes the happiness of others, so helping society as well.
Of recent times many of these qualities would seem to be wanting, especially amongst our ruling classes.
 
Lord Acton, was an English historian, politician and writer of the 19th Century.  He is best known for the quote "Power tends to corrupt, and absolute power corrupts absolutely" but this was followed by some rare insights into the human psyche, "Great men are almost always bad men, even when they exercise influence and not authority; still more when you superadd the tendency of the certainty of corruption by authority.  There is no worse heresy than that the office sanctifies the holder of it".
These insights of Lord Acton, could have been explaining the behaviour of the Taliban in Afghanistan, or Donald Trump in America, or indeed our own politicians as they play the politics, and the men and women of Australia to their own ends.  Their blatant use their office to sanctify their positions. 
 
Having also just finished reading, 'The Boys Club', by Michael Warner, I've gained some insights into this very phenomenon on our doorstep in Australia.  The AFL, the game of the public, has been plundered.  Whilst, surely having started out to do the 'right thing', the AFL executive have become captive of delusional thinking, born of huberis and self-servence, believing that their position and authority gives them licence to behave as they see fit.  The extraordinary misuse of this authority, granted by the clubs, players and community, can be seen extending into the Corporate world.  Here their glaringly bad behaviour and conflicts of interest have plundered and destroyed organisations, and seen incredible ignorance and self-serving transgressions of governance.
Reading these lessons from history puts more recent events into an historical perspective and sadly, whilst, much in life has certainly improved over the centuries, our human nature does not appear to be one of them.  Our democracy indeed feels fragile as we see the rise of some crazy thinking born of 'alternative facts'.  This feeds into our very planetary existence.  Oh, to have some leadership that is prudent, just and beneficent!
Easy access to Adam Smith's books can be found through the 'Adam Smith Institute', and 'The Condensed
Wealth of Nations and The Incredibly Condensed Theory of Moral Sentiments' by Eamonn Butler.
 
April 2016

 

What has happened to the heightened expectation of a new way of doing things under Malcolm Turnbull.  I think the term 'wishy washy', has a relevant ring to it.  We expected so much and seem to have got so little.  Even a Marketer starting out knows that they need to keep the message clear and simple.  We're still trying to find the message!

 

The essence of business is to understand your customers needs and cater for them - then make sure that the message of your offering is made clear to them.

 

In politics it seems to have become de rigeur to put self-interest and short termism ahead of the customer needs but since this is the case for both parties then we never get any valuable or worthwhile change.

 

 
March 2016

 

So much focus is currently extended to the minutiae of the day to day political and financial movements that I believe we sometimes miss the forest for the trees.  Sometimes we get so immersed in the current political and economic environment that we miss the true historical changes that are or aren't taking place.  It is only when you have time to reflect on the history of events and then to look at the currency of events that parallels can be drawn.

 

It strikes me that little has been learnt from recent past history and the gambling with our futures that caused the recent economic and financial woes continues.  There were no consequences to the actions of those who perpetrated the economic problems and indeed many benefitted significantly from it.  Little surprise that they now continue to do much the same with our children's futures.  Collateralized debt obligations (CDOs), the bad boys of the financial crisis of 2008, are coming back, now renamed but the same.

 

The rewards that we give our leaders for short termism has also meant a lack of commitment to building strong foundations for future businesses.  I would challenge that this is not a serious commitment to shareholder value and wealth but indeed a commitment to self-interest.  Who ever got paid for non performance in the way that equities and share brokers do. Now we are even gambling on the promise of a possibility - a sure thing for those who do it, since they use other people's money with a socialising of losses should they eventuate.  It is guaranteed that they will. 

 

This inevitability underscores our need for a political resolution.  However, there is no will, no-one gets a pat on the back for solving a problem that isn't there yet.  Politically they can only benefit from being seen to solve a problem that has eventuated and is not of their making.

 

This is the oil that our society has come to run on, that of personal vested interest in the near term not the virtuous notion of leaving a legacy to future generations.