Gospel according to GaaS (2/25): The Trinity — Fairness

In everything, do to others what you would have them do to you, for this sums up the Law and the Prophets. — Matthew 7:12

Nothing in the Bible is truer than the above quote, which clearly expresses fairness in relation to administration. Fairness is an essential principle in stakeholder relations. It is the most important of the “trinity” of GaaS (Governance as a Strategy), the others being accountability and transparency (openness). I will discuss these further in my next article.

For people who love animals, a pack of African wild dogs is the best hunting machine in nature. Their strength comes from their numbers. The number is a big plus, but it elevates the prospect of conflict when the spoils are in. The challenge, therefore, is how you enhance the advantage of the pack but develop means to prevent or minimise the conflict after the hunt. The African wild dogs are known to be fair to each other, hence their success at forging a successful hunting bond with large (pack) team sizes.

The principle of fairness is based on the concept of stakeholders. When stakeholders join to pursue a common goal, they all enter the room with predetermined expectations. This applies to employees, directors, shareholders, and the government. Expectation is the promise that motivates people to join the ‘pack,’ and it is highly personalised to everyone. This complicates group dynamics because not all expectations are known. Some expectations are clearly conveyed and understood, but most are not.

Another aspect of governance expectations is that they evolve around a circle depending on how they are structured. For every expectation, there is an obligation; it makes no difference which comes first because there is always a chicken-and-egg relationship. When someone invests in a public company, they expect to have all the rights and privileges of a shareholder to the amount of their ownership; anything less, in any shape or guise, is unfair and breaches the concept.

I have heard many shareholders declare, “They want to take over my company”. That is incredibly unjust because they are both shareholders of equal standing. We previously invested in an insurance company, and the Managing Director called me to ask why we bought a 1% ownership without consulting him. Indeed, he does not understand the “A, B, C” of governance for a publicly traded corporation. We need no permission from anyone in the company to buy a publicly traded corporation. Fairness is not fear.

As I previously said, expectation and obligation evolve in a circle. The expectation of a shareholder imposes an obligation on the directors and management of a firm, and vice versa. The shareholder is committed to fund the company’s activities with the expectation of profit and value in many forms. Meanwhile, the directors and management must deliver profit and value using the shareholders’ funds. The board and management of a corporation that consistently loses money without providing sufficient compensatory value have lost their legitimacy to act in the stated capacity; they should resign and step down. They must allow other competent individuals to step up and get the job done.

The agreement between the shareholder and the Board of Directors is essentially based on performance and fiduciary duties; there should be no compromise. Perform or quit.

Another unique relationship that exemplifies fairness is that of majority and minority shareholders. However, there is an intruder in this relationship, known as “Independent Directors”. It is well documented that majority shareholders use independent directors to keep an absolute hold on the company’s board at the expense of other shareholders. This is unjust because the so-called independents often operate at the behest of the majority of directors who nominated them. I have an article planned for this, and I promise to provide solutions to address the anomaly of “Independent Directors.”

The most compelling aspect of fairness is that it is a successful means of conflict resolution. Conflict is bound to happen when there is more than one person in the room, and this potential for conflict increases as the value (money) at stake increases. Interest is the most common cause of conflict; each stakeholder has several levels of interest with measurable advantages, and interest is often served at the expense of other stakeholders, hence the term “conflict of interest.” The lateral test of fairness is used to discover potential conflicts of interest. It sounds pedestrian and commonsensical, but it is powerful. The test is straightforward: “Will you accept the terms if the roles were reversed?”

The final part of fairness I want to discuss is the equilibrium factor. Fairness ensures proper pricing and no arbitrary or disproportionate advantage. Directors and management cannot be paid exorbitant salaries while the company is losing money—that's not fair. In the same vein, a company cannot continue to declare profits year after year without paying dividends or capital appreciation. Even stockholders should not walk away with a large windfall profit without sharing it proportionally with other stakeholders.

In writing these pieces, I hope to democratise corporate governance principles by finding parallels with the street, market, and other societal circles. I also want to back up the concept with commonsense applications that everyone is familiar with, hoping that entrepreneurs who would otherwise not use governance to achieve their aims will be motivated to do so. This is obvious in the proverb, “There is honour among thieves.” I am sure they meant that you need justice to preserve the dynamics of a group effort, and you need a group to create a great business.

We all understand that fair is fair.