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The Directors Chair

Shann Turnbull

How good is good governance?

In The Directors Chair with David W. Anderson: Dont let the friendly appearance fool you.
Shann Turnbulls best ideas have the power to bust up a boardroom
Photography by Peter Gumpesberger

Most doctorates awarded to business leaders with lengthy careers are of the
honourary kind. Not Australias Shann Turnbulls. His 2000 PhD thesis proposed
a science of governance inspired, in part, by communication in nature. A prolific
thinker and reformer, with contrarian views on independent directors (more
problem than solution), wealth redistribution (much needed) and plenty
more, hes spent 50 years on every side of the ball: CEO, chair and non-executive
director; private equity fund boss; serial entrepreneur; policy adviser; shareholder activist, and pioneer in governance and director education. Here, in
conversation with David W. Anderson, Turnbull explores his big ideas and
their background.

Shann Turnbull
Primary role
Principal, International Institute for Self-governance
Additional current roles
Cofounding member: Sustainable Money Working Group (UK); New Garden Cities Alliance (UK)
Former CEO
Public: Barwon Cotton Ltd.; Direct Acceptance Corp. Ltd.; Buckinghams Holding Ltd. Private: Development Trade Pty. Ltd.;
M.A.I. Ltd.; Home Loan Investment Corp. Ltd.; Aviation Facilities Pty. Ltd.; Performance Property Ltd.; Equity Funds of
Australia Ltd. (joint); Jefferson Approtrac Company Inc.; JAC Tractor Ltd.; Tjuringa Securities Ltd. (joint); JAC Tractor Ltd.;
Barwon Farmlands Ltd. Non-profit: Australian Ski Federation
Former chair
Public: Direct Acceptance Corp. Ltd.; Alfarm Australia Ltd.; Barwon Cotton Ltd. Private: Turnbull Krishnan Pty. Ltd.; Flight
Facilities Pty. Ltd.; Shann Turnbull Pty. Ltd.; Merelen Pty. Ltd.; Angus & Robertson (Bookshops) Pty. Ltd.; Agricultural
Resources Management Pty. Ltd.; Barwon Farmlands Ltd.; Barwon Farm Management Pty. Ltd. Non-profit: Australian
Employee Ownership Association
Former director
Public: Saxonvale Vineyards Ltd. Private: Donlan Developments Pty. Ltd. (alternative director); Australian Film Underwriters
Pty. Ltd.; Australian Employee Ownership Association; Fesca Qualos Gears Pty. Ltd.; Pacific Enginering Pty. Ltd.; Hi-tech
Power Drives Pty. Ltd. Non-profit: Company Directors Association of Australia; Australian Shareholders Association
Education
Diploma of Electrical Engineering, Hobart Technical College, 1957; Bachelor of Science, University of Melbourne, 1960;
Master of Business Administration, Harvard Business School, 1963; Doctor of Philosophy, Macquarie University Graduate
School of Management Sydney, 2000
Current age
82
Age when first became a director
29
Years of board service
53 years

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The Directors Chair

Shann Turnbull

David Anderson Youve not been shy in the scope of your thinking or action as a director, CEO or investor. Youve taken aim
at how we practice capitalism, particularly in the allocation of
wealth generated, management of conflicts of interests and
engagement of stakeholders; youve also identified a way of
organizing information flow, called network governance, to
aid in the exercise of corporate power. Why havent your prescriptions been widely adopted?
Shann Turnbull Ive asked myself that for years! Others have made
the same observations I have about whats not working, but the
solutions offered by business leaders, regulators and governance
experts address superficial problems and offer cosmetic answers,
often promoting more self-interest.
David Anderson Lets explore your ideas, starting with capitalism. Following your Harvard MBA, in the first class to which
women were admitted, you returned to Australia and became
what was then called a corporate raider, defining the sharp
edge of capitalismbuying, fixing and selling companies for
profit. How did this experience shape your thinking?
Shann Turnbull Starting in the 1960s, a small group of entrepreneur capitalists I belonged to took control of 12 public companies
and made a lot of money. The experience challenged my thinking
about the role of shareholders and stakeholders. Investors make
a decision to own equity with an expected return in mind that, if
met, would justify their capital allocation. Any returns beyond that
threshold would be surplus to the incentive to invest. Yet I watched
our foreign investors get grossly overpaid, taking hundreds of millions of dollars of surplus profit from my country that could have
been reinvested where that wealth was generated.
David Anderson What was your motivation for not taking this
excess profit that most investors would regard as their right of
ownership?
Shann Turnbull Theres no natural limit to human greed, so theres
no point at which people will stop on their own accord. I realized
that no firm can survive without customers, suppliers, workers and
a host community. Shouldnt they share in the profits alongside
investors? I realized we could distribute the wealth of nations to
people who create that wealth, not just the investors, and achieve a
better use of capital.
David Anderson You developed this idea in your 1975 book
Democratizing the Wealth of Nations, promoting worker ownership as a means to spread wealth and promote capitalism.
How does this work?
Shann Turnbull You can raise money without giving away ownership forever, because investors make decisions based on a time
and quantum-of-return function. So make corporate ownership
time-limited, as was the case when corporations were invented,
by transferring to stakeholders 5% a year for 20 years. At the end,
the original owners are gone, having got their desired return, and
the stakeholders own the company. This is important because as
soon as you have stakeholder shares, you have local reinvestment.
And ongoing, instead of CEOs taking a chunk of shareholder
wealth, the stakeholders are rewarded. I demonstrate in my social capitalism manifesto how a living income from stakeholder

shares limits the need for taxes and welfare, creating smaller government in the process.
David Anderson Conflicts of interests among decision-makers

vexes you. You see a distortion in decision-making that leads

to unjustified and unfair outcomes, privileging and protecting
those with power and under-serving the rest. One standard solution to this in corporate governance is the independence of
directors. How do you view this?
Shann Turnbull Director independence is an attempt to solve the
wrong problem that succeeds in making matters worse because it
both misses the point and gives the impression of everything being alright. What we need to do is disentangle the conflicts, separating the power to decide a course of action from those who may
benefit from it. Currently, our so called independent directors have
the absolute power to identify and manage their own conflicts of
interests without any outside oversight. The status quo deliberately concentrates power, leading to unconscionable, unethical and
counterproductive conflicts of interests which we then say directors have a duty to avoid. This is how good people can be enticed
to do bad things. The truth is people dont want to solve this. The
substantive solution I used in my own companies as the basis for
conflict-of-interest-free governance faces resistance from business
leaders precisely because it takes away the discretionary powers of
directors to corrupt themselves, the businesses they run and even
the financial system. So much of what we see today as good governance came about as a result of self-interested business actors
trying to prevent more significant government action to reduce the
very conflicts of interest which afford benefits disproportionally to
entrenched business powers.
David Anderson As an owner, you practiced what you preached,
showing discipline and restraint by imposing on yourself constraints to mitigate conflicts of interests that otherwise work
against minority shareholders. How did you disambiguate control issues where self-dealing is generally accepted?
Shann Turnbull The only way to remove the most fundamental
conflict of interest is to have the shareholders control the audit
committee, not the directors. Director independence is a smokescreen to hide the fact that they are just as accountable as executive directors for the accounts. No court of law would have a judge
preside over the court if those being judged had power over the
judge. Yet in modern corporations following the U.S. and English
models, directors control the audit which forms the basis of their
own performance review. Thus in the companies Ive created, the
audit committee was comprised of shareholders. I also made this
the governance committeein essence a governance boardwhich
operated on the principle of one vote per shareholder. This way the
smaller shareholders controlled the governance board and thus the
nomination, tenure and pay of directors, as well as the appointment
of the auditor.
I called this the corporate senate, which had veto powers over
these matters, but it couldnt direct the corporation. The veto powers
could be overturned by the directors only by going to a special meeting of shareholders where the conflicts of interest had to be made
public and the shareholders could then vote one vote per share rather than one vote per shareholder. This created checks and balances

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Shann Turnbull

against self-dealing such that the minority shareholders protected

their interests first with veto power. The corporate senate, independently elected by the smaller shareholders, was compelling enough
that regulators allowed us to avoid the expense of a special meeting
for a transactionbecause the corporate senate was regarded as fair
and legitimate. The regulator said the public interest was protected
through this mechanism and thus warranted their dispensation to
not hold a special shareholder meeting.
So this is why I suggest company directors and venture capitalists should provide leadership in trying out these different ways
to get progressive deregulation by proving that we can do better
self-regulation and self-governance. We dont need to wait for regulators to impose codes or regulation. We can innovate and write
these principles and practices into corporate constitutions. This
can reduce red tape by creating more self-reliance and social accountability, and thus lessen the need for government regulations
and associated costs.
David Anderson One implication of your work is that powers
now held by the unitary board of directors should be divided.
Practically, when could that happen?
Shann Turnbull Yes, there is no reason why directors should have
the power to manage and the power to govern. Think of venture
capitalists as they put money into a start-up. What do they do?
They create a shareholders agreement in which they, the venture
capitalists, stipulate that they take over the power of nominating,
appointing and paying directors and controlling the auditor. Think
about thisthe most sensitive time in business, a new business
start-up, the directors dont have standard governance powers. The
shareholders make sure of that as a condition of investing money.
The capitalists understand this and it works very well. In leveraged
buyouts, the same arrangements happen. A buyout association is a
second board, a governance board, stripping governance powers
from the management board. Rather than lose this arrangement
when it dissolves on going public, we should instead embed it in
the corporate constitution so that the minority shareholders can
have a governance board to take over the powers the venture capitalist has to give up.
David Anderson Compared to the status quo, while this addresses conflicts of interests, it may appear overly bureaucratic. In
your experience, does it slow down decision-making?
Shann Turnbull It actually makes decision-making quicker, because you avoid information overload. With separation of powersone board to govern and one to manageyouve immediately
reduced the conflicts and the compliance work. You reduce complexity with the decomposition of decision-making labour. And
you have access to richer information that you otherwise wont
get from the independent boardthe reason today we have regular board and in camera meetings. Venture capitalists find no
trouble with this model in the most sensitive timethey insist on
taking away the governance powers. Its well understood in cultures around the world that we need third parties to manage embedded conflicts of interests. Aboriginals in Australia have this as
well in managing relationshipssomebody outside who can say
things that others cant. But we dont institutionalize this in our
corporate governance. We need to embed this wisdom in the cor-

porate constitution so it doesnt exist at the grace and favour of

management or the board.
David Anderson The major thrust of your work goes beyond fix-

ing faults, such as conflicts of interests, in the current system.

How would you describe the potential value arising from your
efforts?
Shann Turnbull I think the answer lies in the course title being created for Columbia law school graduate students based on my work:
Designing corporate constitutions for optimizing operating advantages. I use this language because it applies to the private, government and not-for-profit sectors. The reason I emphasize the need
to get information independent of management via stakeholders is
because I care about creating resiliency, getting feedback and being
informed by the mistakes to spark innovation based on customer and
supplier input, managing risk, improving efficiency and yes, making sure organizational resources arent misused by management.
Theres a bigger picture. When you involve stakeholders fully, you
can actually reduce the need for government regulation, because
stakeholder self-interests are brought directly to the table. The reason we have regulations and regulators is to look after the voting
public. Shouldnt it be part of the license to operate for a company to
look after the public directly rather than have regulators do it?
David Anderson Youve integrated much of your thinking and

experience into network governance, a description of and

prescription for the optimal exercise of corporate power. You
present this in your book A New Way to Govern: Organizations
and Society after Enron. What inspired your reasoning?
Shann Turnbull Network or stakeholder governance is a better way
to operate. In a systemic way, it gets to the heart of power and control and results in higher-quality decision-making, which gets us to
the right outcome for the business and its customers. My inspiration was nature itselfin seeing the advantages of being contrary.
We can be cooperative and competitive, trusting and suspicious.
This gives us a huge variety of behaviour and learning patterns to
survive in unknowable, dynamic and complex environments. Why
dont we build contrariness or contestability into our organizations? Its all command and control, tow the corporate line, taking
off the table discussion of things that can damage us. In nature we
can see simple animals have much more success at managing complexity than chief executives with an MBA from Harvard. The science of information and control tells us to match environmental
complexity with leadership systems that can handle it. How many
times have we heard that boards are swamped with information
and cant possibly know enough, but still have and exercise authority? Lets use the lessons of nature to self-govern organizationally, to reduce the role and cost of government, be more socially
responsible and accountableand more effective and efficient.
David W. Anderson, MBA, PhD, ICD.D is president of The
Anderson Governance Group in Toronto, an independent
advisory firm dedicated to assisting boards and management teams enhance leadership performance. He advises
directors, executives, investors and regulators based
on his international research and practice. E-mail:
david.anderson@taggra.com. Web: www.taggra.com

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