Democracy in Business
For some time the consensus has been that democracy is the most desirable form of government. But if democracy is so great, why aren’t companies run like countries?
In this week’s podcast, we discuss democracy in business. We explore the multitude of company arrangements and ownership structures, Peter explains his principles for benevolent governance and how they differ from running a business and we trace back the origins of democracy to test whether the analogy between democracy in government and in business holds. Finally, we share the system of government we would most like to live in.
A few things we mentioned in this podcast:
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Transcript
Hello and welcome to the Cognitive Engineering Podcast produced by me, Fraser McGruer for Aleph Insights. In this series of podcasts we take a look at interesting topics and discuss what we think they tell us about analysis and decision making. I'm here with Jordan Fermanis, Peter Coghill and Nick Hare of Aleph Insights and this week we're discussing why firms are not democracies. Nick, one of the great things about running a firm is that you get to be a rampant dictator. Yes, yes. With an iron fist. Yes. So yeah, you know democracy is supposed to be good and everything. Right, yeah. Well, it is actually quite a good question posed by one of, I'd say one of the members of the Aleph team. I don't know what they were driving at, but the question is. We squashed it quickly. Yeah, the rebellion was quickly snuffed out. Stopped down on that. Is why firms aren't generally democracies? Now precisely what that means we will get into, but you know democracy is supposed to be good, right? We certainly think countries which are democracies are better. It's a byword. It's almost unchallenged, isn't it? Yeah, it's been the consensus for some time now has been that being a democracy is better for various reasons, which we'll probably want to get into. So why aren't companies generally democracies for the people who work there? Nice. So Jordan, can you pick this up? I think especially thinking about, well, how do firms operate? What are the political structures in place?
Speaker B:Yeah, so I thought about this and I took the idea of corporations, I suppose, rather than firms. I think it was easier to sort of think about corporations because there's all different sorts of shapes and sizes of firms, but corporations I think for sake of argument is just the easiest. And it seems as though there are different arrangements. So I think you could see them as already operating as democracies because they have shareholders. Shareholders have a vote and a value, an investment in the company. So that's a sort of way that perhaps they maybe already operate as in some sense as a democracy. Yeah, and there's accountability in what you've said there, yeah. There's obviously also a dictatorial element to corporations in some sense. I think the difference is that dictators can force citizens to comply, whereas corporations can't really use force against their employees or customers. We try. They keep saying it's illegal and stuff. Also, corporations generally have to keep their customers happy, right? Whereas like dictators don't necessarily need to keep the citizens happy. They just do it as they please. But they can probably sometimes feel like they're dictatorships because of the lack of power that maybe some of the staff have. There's also a sense in which they're oligarchies. There's a CEO, head of government, if you will, and the state, and then you have his commissars, his ministers, the board of directors. So the management structure can probably sometimes look like an Italian aristocratic republic rather than a modern liberal democracy.
Speaker A:Cool. I like that. I think that would be a good model to go with. Do we get to wear elaborate 17th century garments?
Speaker B:Yes.
Speaker A:Okay, I'm in. But as you say, you get all those sort of what appear to be closed off special privileges like here's the key to the executive washroom and stuff. But I think one of the things that you said that was really important is that they appear to be like that. But if we think about how those people are appointed, I think it can be very different. But anyway, sorry, you go on.
Speaker B:And then I guess there's also a communist kind of element as well. There's this overriding authority at the top and the rank and file sort of have little say in what goes on. But I do think at the end of the day, though, that even though there are sort of elements, and as you were saying, there are ways that you can sort of read in these things to companies and corporations. I don't really buy the idea that they are sort of like for like. I think ultimately a corporation or a company has a very different purpose to a government.
Speaker C:Yeah. And that might be the answer to our question. Peter. So yeah, purpose is definitely important. I came up with five or six. I haven't quite decided that they break down, but kind of. Is it a framework? No, it's not a framework, but they are sort of principles or their dimensions that kind of help you get your head around. It's a framework. That sounds like a framework to me. What makes government and business different and goals. So goals was the big one really is they're doing very different things. That's true, actually. So I think in broad terms, I'd say business's role is to maximise efficiency, really. It's to maximise how the best use of whatever resource it's got to accumulate more resource is really what a corporation does.
Speaker A:But also business has to make money.
Speaker C:Yeah, yeah. But it's kind of this modus operandi to do that. It only really exists to do that one thing. Accumulate more resource by being as efficient as possible with whatever resource it's got. Whereas government isn't really, that's not its main driver. Government's main driver is to kind of maximise the spread of overall goodness to all of its citizens.
Speaker A:To the people in its jurisdiction. Yeah.
Speaker C:And they're trying to maximise, also they've got different types of goodness, but you're trying to make the lives of your citizens overall as good as possible. So you're trying to maximise it. Now that might mean you treat different types of people preferentially in different ways.
Speaker A:It might mean you invade the next door country. It might mean you raise taxes, whatever it is. Yes, I know we're only halfway through, but I think I just want to make an important distinction here as well, because I was initially confused. But yes, Peter is saying that the citizens of a relationship they have to the government is different in that respect. But I think it's probably worth saying that the civil service, which is an organisation that the government uses to do its job, is much more like a firm and is organised like a firm. The civil service isn't a democracy, even though it is part of government and it's the organ that the government uses to. But it's still very different aims. Not really. I mean, actually, you know, there's outputs that you're trying to achieve. Okay, there isn't a price mechanism as such, but there's still outputs you're trying to achieve with inputs. And they very much care about efficiency and that sort of thing. But I think Peter's talking about the citizens of a government and what the government does for them in a sense. We're not talking about customers. Yeah, precisely. What we're not talking about, you know, the people who work for the civil service, which is a way it does that thing.
Speaker C:Sure. Yeah. Just briefly, then sort of the resources, mainly the types of resources and the well, the levers of power that businesses versus government have. So businesses really have people and money, and that's about it, really. Anything can be translated into one of those two things, whereas governments have got slightly different things. They could all be translated into money ultimately. But the thing that can't be is the estate, the sort of the sovereign estate that is ruled. The only way you can affect that is really by invading other people to get more of it. Very different powers. Very different sort of things you can, power base, if you like, gives you, you know, gives you influence. Size businesses generally much smaller than governments and on kind of most dimensions, like throughput, turnover, whatever you want to call it. And then, but another key one, though, is freedoms, right? So what things a business or government can get away with? And this includes a bunch of things like businesses can choose where they trade. They can choose what products and services they trade. So they've got a great deal of freedom in what they do. Government can't do that. Government, there's an expectation on government to provide certain services, to provide security and defence and et cetera, et cetera. So they've got lots of freedom in that respect. However, another freedom comes from sort of the ownership, who owns it, right? So who owns the government? Well, everybody owns the government. So everyone's got a bit of a say in how it's run. But it means that it kind of can't just go left of field and just do a thing because it's got to get quite a lot of consensus from lots of different people, which is good, right? The old checks and balances. Whereas a business kind of can, because it can, as long as the shareholders are happy, even if the shareholders aren't happy, it can force a sale on, you know, from shares and stuff. So it can do pretty much do what it wants. So there's a great deal of freedom. So in that kind of area, you don't need democracy, you can get away, you can be efficient without it. Absolutely. That was really nicely said out,
Speaker A:Peter. I liked that. Nick? So I think Peter's last one there, I think is actually the key determinant here, which is ownership. The reason, stop thinking about governments for a sec, but the reason that firms have different levels of control with different people is because of who owns them. That is what explains almost everything about the different kinds of structures you have in firms. So if you have a publicly traded company, it's owned by whoever wants to buy a share in it, hey Presto, you've got a vote. Brilliant. It is a democracy of shareholders. You know, if you have like Aleph, small number of shareholders, three directors, you know, we ultimately get votes because we actually own it. And I mean, the whole point of ownership is that is the same as having control over how something is used, right? So I mean, who is, you know, take your mobile phone, is there a democracy about how to use your mobile phone? No. Even if you lend it to someone else, you don't suddenly both decide how, you know, it's yours, you own it. That's why you have sole control over it. And then if we say, well, what would a democratic firm look like? It will be one owned by the employees. Will such things exist? Yeah, cooperatives. Right? Yeah, exactly. Cooperatives are exactly that. So in a, you know, so that one of the definitions of a cooperative company is that it's, you know, obviously owned by the workers and if workers leave, they stop owning that. And there's no such, the firm doesn't own the assets of the firm, for example, typically, they're sort of held in trust. And there you get democracy. Of course you do, because the people who own it have to make a decision. And they do that because you can't use something which belongs to someone without asking them if it's okay. So I think really, why different firms seem to have different sorts of types of control is explained by who owns them. But that really is pushing the question further down the line, because it's now why do we have owners? Why are firms typically owned by, you know, either a very large number of people or a very small number of people? Why don't you get more worker owned firms? Yeah, because it's about access, isn't it? I mean, not everyone can be a shareholder, for example. And yeah, it certainly doesn't feel, yeah, it feels a long way from a democracy sometimes, or often. Jordan?
Speaker B:It's also something to do with, like, accountability is that, like, governments have voted in, whereas companies and corporations are, like, they're, I mean, they're sort of, they're only existing at the whim of their shareholders. And they sort of work in the interest of the company and the shareholders. Whereas governments, while they have power, it's contingent on the fact that they're continually voted back into by elections.
Speaker A:But also, I think one of the reasons why firms don't look like democracies is because we see them in contrast to what we think or know is a democracy, i.e., you know, in our country, and for whom that firm operates in its interests, because there's a more narrowly defined, let's call it an electorate for a moment. Because whilst you might have a company, Uranium Mining Inc, that's got its shareholders, it's got its board, they're all elected, etc. And so in that sense, it's a democracy, but it operates, first of all, within a country, let's say, that actually is a democracy. And that's where you start to go, well, hold on. It's the interests here, in contrast, something that we feel definitely isn't a democracy. And two, if it's huge, Uranium Mining International, it could be going across a whole lot of different jurisdictions. Am I waffling? Have I got a point? Let's have Peter and then Jordan.
Speaker C:Yeah, I think there is something there. I might be taking a different direction. But the big corporations, they aren't democratic in the sense that democratic countries are, where everyone has a vote, and everyone's vote counts the same. They're more like the non-representative democracies where the pre-reform act, etc., where only the upper classes had a vote. So anyone who was an earl or duke or whatever. Landowners, which is the interesting thing. The serfs didn't. However, there is still influence, even though you haven't got a vote. In a corporation, you've probably got more influence than someone in a dictatorship. Because if Fluffy Bunnies Inc. started trading in weapons to North Korea, you're really opposed to that ideologically. You'd leave and people would leave en masse.
Speaker A:And if business was good, then someone else would quite easily come along and snap up your shares, maybe.
Speaker C:That's true, yeah. But the workers influence corporations all the time by striking and leaving and being disruptive or just not doing what they're told. So you have quite a lot of influence because it's a smaller pool of people than a country.
Speaker A:And also it makes me realize that how I view, because I'm a shareholder in a number of companies, but how I view myself as a voter in the UK and how I view myself as a shareholder in a bunch of companies, it's two very different things and what I want from that institution. And if I'm honest, as a shareholder, the main thing I'm looking for is growth, right?
Speaker C:Well, you're a net earner from your shares. You're probably a net contributor with your taxes.
Speaker A:True, yeah. And okay, if they suddenly did start investing in horrible chemical, then yeah, I would disinvest, divest. I don't think this is any different. This is just making me think the analogy works even better. Really? Yeah, because look, let's assume for a minute that, well, I think there is a discussion to be had about whether we as citizens are customers. Surely I want a broader range of things from the government, but sorry, go on. Yeah, but imagine it's like a news agent. It does lots of different things, right? But there's a question of whether we're sort of the customers and in some sense, the constituents of GB, PLC, right? But I think our ownership of the government, it makes sense as an analogy that your shareholders, you're just saying you want growth, right? Well, you don't actually. Why do you want growth? You want growth because you want money. Yeah. You want profits. You delegate your power to the CEO who delegates it to his management and their job. You don't really care what they do as a black box, but what comes out of it at the end of the day has to be money. Yeah. Now we delegate power to the government. This is the democratic sort of system and we don't really care how they do it. But at the end of the day, we want welfare and prosperity and all of those things. We want to have, you know, less crime and a better, more stable job market and all of those things that we expect the government somehow through its various primary and secondary legislation techniques to deliver, right? I don't think it's any different. Your relationship to a company, your relationship to the government, you sign a thing once every year or three years or four years and some things come back to you. You benefit out. Yeah. What's the difference? No. Well, surely the fact that one of them is, I think what I want from a company is fairly simple and it's more or less one thing. But what I want from my government is way more complex.
Speaker C:I think if you simplify anything enough, two things become the same. Yeah. But also, Nick, aren't we getting into...
Speaker A:I'm saying the relationship is the same. It's a delegation of power to deliver something to you. And also, isn't there... aren't we also talking about rights and ownership as well? That's a thing with government as well, I think. Jordan?
Speaker B:Yeah, to go on the ownership thing a little bit is democracy entitles one citizen to one vote. But companies, shareholders have varying degrees at stake of the company. And employees have even less. So in a way, why should an employee who's not risking any of their own money have a disproportionately high vote in a corporation versus the owners who have staked much more of their capital? It doesn't really make sense. Well done, Jordan. But it's kind of true. It's like, you know, we all have different things. We all stand to gain different things in a corporation.
Speaker A:And losses as well. Something that Peter said, which was just thinking about the feudal system and how, in fact, the analogy is even more literal. I think going back to... in as much as there was, let's say, votes or at least some sort of relationship of consent between your vassals and you as a king, who got to influence the king? Well, it was the people who literally owned the country. It was the earls who were the landowners in the country. It makes sense. They are like the shareholders of England because they own it. They literally own the land that is England. And it makes sense that they get the say over what happens to it. Right. And actually, if you trace the sort of development of democracy, you know, it was a gradual formulation and formalization of that relationship into, well, now we're going to have votes. It would be better instead of just having this sort of nebulous influence if we just had direct voting for the people who were in power. OK, maybe not the sovereign, but, you know, the ministers. And lo and behold, who get to do it? Well, it's the landowners for quite a long time. I think up until the late 19th century, if not beyond, you had to own land in order to have a vote. And I feel like that kind of the whole enlightenment development of the idea of the government is actually there to serve you. And there's a social contract between the citizens and the and the government is almost just a way of extending that relationship that was already there. The king is there to serve you as a vassal. And that's why you give him your support. You know, it's formalizing that and extending it to everyone else in the country. But actually, the relationship is the same. And it strikes me as it still is pretty similar to those of a shareholder. You know, you're in a firm. It's like, well, you're there to serve me. I own you. And, you know, the same. So I think it actually makes the analogy tighter to me thinking about the way that, you know, we've moved towards this idea of kind of complete universal suffrage from a system where literally the owners, the owners of the actual land got a say to a situation where, well, we're all considered actually jointly to sort of own the country now. But it's actually the relationship is pretty similar. OK, I mean, I'm slightly lost now. So what I'm saying is we've got a feudal system because we've got three people who own it all. And lo and behold, we're the ones with all the power. You know, if suddenly, you know, we had 10 extra shareholders, well, it'd be a different story, wouldn't it? Yeah. So what you're saying at the moment is that Aleph Insights is in a feudal state. Well, it's more like an advert. Yeah. I'm not convinced. If you're still saying that you think democracies and shareholders is very similar, I still didn't feel quite right just because of the complexities that we talked about. Let's draw a line. I think one thing we haven't discussed is why democracy is supposed to be good. Good point. I forgot about that.
Speaker C:I was going to start dipping into the value judgments of things. So, well, there's a question of, well, should business be more like government? There's also kind of like a question of should government be a bit more like business? And that's one that's often... That sounds like Tony Blair or something. It does sound a bit Blair, doesn't it? Yeah. But both systems kind of work, right? You know, democracies, countries tend towards democracy because it's sort of good for the citizens. It's good for other countries around you. You're able to trade and operate without beating each other up. But businesses seem to have sort of coalesced around this, the limited corporation of having shareholders and public corporations where you have a more public shareholdership. But this idea of a smaller number of owners compared to number of employees seems to be where they've naturally kind of gone. Now, I would say that's probably emergent. So it's probably a kind of natural sort of maxima. But is there another maxima over the hill somewhere that we've not seen yet for businesses or for government? I just put that out there as a question rather than anything concrete. I don't know what maxima means, but anyway.
Speaker B:Jordan? Well, I think, yeah, if we want to look at things that democracy is good at, I think most of the reasons that people seem to cite are things that relate to democracy as a political system, not as something that is enacted by businesses or firms. Things like democracies don't fight one another as much as other forms of government. Accountability and participation are encouraged. They're more likely to be humane. And on the whole, they take better decisions. For example, Churchill and Roosevelt made fewer mistakes than Hitler and Stalin. And their casualty lists were far less. But these are all things – these are all government things. So they don't really necessarily apply to corporations.
Speaker A:No, I think they do, because a large shareholder-owned firm, I think, is going to make fewer mistakes than one run by, you know, entirely owned by a potentially unpredictable entrepreneur for the same reason. Any particular companies in mind there? No.
Speaker B:But they're also – I guess that comes into what democracies maybe are bad at, though. And some of the things they're bad at are making efficient decisions, potentially, because they have sort of endless elections. There's a potential for unqualified leaders to rise to prominent positions by virtue of –
Speaker C:Wanting to do it enough?
Speaker B:Yeah. Or just like – or funny electoral systems, like an electoral college vote, for example. And uninformed voters as well is another one. So like people just voting for candidates to rise to leadership positions without maybe necessarily having the right qualifications. And it kind of – it can potentially lead to short-term thinking over long-term goals. I would say that's the big one, is long-term planning, long-term goals. Yeah.
Speaker A:Yeah. But, I mean, so, you know, to be honest, I feel like I've had a major insight here. Brilliant. Which is that I have always in my head considered voting-type behavior to be something totally different from owning-type behavior. And I really – this has crystallized in my head that really they're the same thing and that the reason we're a democracy is because we have gradually come to the conclusion that all the citizens own the government. We all collectively and equally own shares in the country. And you can do it a different way. You can have a family firm-type country like North Korea. And that has all the benefits and drawbacks of a family firm-type firm, which is at some point you might get a crap leader. You know, why have we done it that way? Well, probably because in the grand scheme of things, because it's very – they're not very competitive countries. You know, there isn't really a – it's not marketized what it is that they do. It is to an extent in that you can move countries, but it's much harder than sort of buying a different brand of baked beans, right? So I think we have come to the conclusion that in the same reason that we have to regulate industries, we've decided to regulate government by giving it to everyone. And that seems to be better. I think we've concluded collectively that giving everyone a share in the government is just a better system. Makes everyone equally unhappy. Well, yeah. But, I mean, it does mean you've got less risk of a kind of, you know – admittedly, you won't occasionally get an Alexander the Great, but you also won't get a Hitler or a Mao as often. Although, to be fair, Hitler was democratically elected, so what do I know? I think much of what you said, I think I'd probably agree with. So therefore, the question which we posed at the beginning, why aren't companies run more like democracies? I think more or less we asked that. The answer is, well, actually, they are more than we think is what we might have discovered. There's nothing stopping you setting up a worker-owned company. I mean, and from what I've looked at, the evidence is that they're not significantly better or worse. But I think the point is that – But even the ones that aren't still have got a lot of similarities. Yeah, but I suppose what I'm saying is it's not actually better or worse or right or wrong. Democracy is what you get when the employees own the company, and you don't get a democracy when that's not the case, right? It's not like, OK, there's ownership structure over here, and then there's this totally separate thing of political structure. They're the same thing in both governments and firms. Yeah, yeah, yeah. OK, we need to stop there. Before we do, I want to ask a question, but actually I don't know what question to ask. OK, so here's one. If we didn't – we're lucky enough, actually, not all listeners might be, we're lucky enough to live in a liberal democracy. You're deluded. No, we don't. But if you didn't, what kind of system would you want to live in? Nice and interesting. It depends on who you are in that system. Ah, well, let's take a Rawlsian view that you don't know. You've got to roll the dice. Ooh. And it's weighted by the proportion of people in that.
Speaker C:So I can't change the people who are living there.
Speaker A:Oh, well, no. I mean, you can say you want to live in an autocracy, but you've only got a one in 10 million chance you'll be the autocrat.
Speaker C:OK. That's all. Has anyone – yeah, I've got – go for it. I would – if people were people, a sort of ultra-socialist society would be ideal because it would be sort of theorist and aligns with my values. But actually, I quite like the idea of a meritocratic dictatorship where, you know, the best person to run the country runs the country, kind of irrespective of if they want to or not. My answer – yeah, yeah.
Speaker A:You're compelled. You're compelled. Compelled to be the guy.
Speaker C:By a sense of duty, but also by your capacity. I mean, there's still room for politicking in that sort of thing because you can hide your thing under a bushel or you can sort of over-promote yourself. But you go through a test to get any kind of political job. Some kind of brain scan. You have a test. There's competency required.
Speaker A:It always starts with Peter's vision. It'll start sounding nice, and then it turns into a Black Mirror-esque techno thing. You're being ushered into some sort of scan. Don't worry, it's fine. Yeah. Well, congratulations. You've passed. You're now king.
Speaker C:Yeah, yeah. Yeah, we predicted three generations out. On your 10th birthday, you're going to be crowned.
Speaker A:Yeah. My answer is – I don't know if it is a political system. I don't quite have the words for it. But I'd want to live in a tribe, OK? And whatever system comes out of that. So let's say we have a tribe of up to 100 people, OK? I think it would be a collective. A collectivist sort of anarcho-syndicalist. Would all the decisions be made collectively? I think so, yeah. And it would be a sort of – we've got our elders, we've got the tribal leaders, we've got our fighters, we've got our shaman over there.
Speaker C:You'd never get anything done just sitting around chatting about everything.
Speaker A:Well, that sounds great. Yeah, but I mean, if it's truly collective, you're not going to have status. I mean, that's an anarchist sort of vision of how a society should work. I guess it is in a way, isn't it? And if you don't have a government-type institution or the equivalent, then yeah, you're essentially an anarchist. Yeah.
Speaker C:And it's kind of each to their own sort of skills and so on. You need a parliament building big enough to house 60-odd million people. We'll have a chat. But there's only 100 people in my tribe. There's only 100 people in your tribe. But what happens if the next tribe starts stealing your wolf? Details.
Speaker A:Well, that's the best. No, that's the best bit because that's because we're such because we're a tribe. We're together. And it will just be like dances with wolves. But who's organising the military training? How are you going to pay for the materials? The fighters. Yeah. But then you start saying, well, OK, now we're going to have to have terms of service. And he's monitoring that. Suddenly you need an administrative class. And what happens if the fighters don't want to be fighters? And the whole thing descends into a... Conceptual issues and problems you're talking about easily get dissipated because we're also connected, invested without a tribe mind. Like a hive mind. Yeah.
Speaker B:Jordan. I think, yeah, some kind of communist utopia. Oh, yeah. Everyone drives the same car and has the same job and wears the same clothes. But everyone's really happy. And, yeah, just there's no sort of there's none of the problems and flaws that have existed.
Speaker A:So communism, but somehow fixed. Yes. I think that's a good answer. Have another go.
Speaker C:We just learned a few lessons last time. Let's just iron out the wrinkles and have another go.
Speaker A:Yeah. OK. Nick. Oh, feudal, medieval feudal system, I think. Even if you're at the bottom of that pile. I reckon, yeah. Because the advantage of my tribal system and also of Jordan's communist system, and maybe yours because it's meritocratic, is you're OK in that society no matter where you are. Have you got knights wearing armour, though? Yes. Oh, what do I do? No, no, I don't. I don't. No, your system. That's what I was going to say. But what if you're a serf on the end of a lance that's on the end of a knight in armour? Well, at least you get to go. I mean, look, they've been drafted into, you know, the local lord's army and go off to France every sort of five years or something. You know, have a few scraps, come back with a few bits of loot. A few bits of limb missing. Just a more. It's a civilised age. And everyone knows their place. Dead of an infection at the age of 27. Brilliant. But also kings and, you know, and maidens and towers and castles and that sort of thing. Yeah, yeah, yeah. Just be cool. And also what I like about yours is there's an element of the gambler about what you're saying. Because although I'm saying, hey, but what if you're a serf? What if you're a prince? What if you're a fair maiden? What if you're a king? Then the feudal system is brilliant, surely. So, yeah. OK, right. Let's stop there. Thank you, as always, for listening to the Cognitive Engineering Podcast. I'm Fraser McGruer. We've been here with Jordan Fermanis, Nick Hare and Peter Coghill of Aleph Insights. Until next time. Goodbye.
