Managing Leadership^®

Responsibility is a surprisingly slippery subject in the world of modern organizations. We talk about it easily and with assurance. But it turns out that we can often find ourselves talking past each other about quite different uses of the term.

Let’s take a quick look at one way this works. Let’s say you own your business as a sole proprietor. In this case the nature of your responsibility is clear: it is complete. You may delegate some matters to certain individuals, but you remain responsible.

Sure, you can hold them personally responsible, for their assigned tasks, to you. But if there is a problem – a product doesn’t meet contracted specifications, an employee is injured performing assigned duties as prescribed, a process causes harm in the community where your facility is located – people are going to come to you for restitution.

You cannot claim that the matter is out of your hands because you had made someone else responsible; you will find that you have not. Nor, when you hold your delegatees responsible, will you accept the excuse that they really aren’t, having further delegated the matter to their own juniors.

So, the subject would seem pretty clear: you cannot delegate your own responsibility. Saying you have done so is really only to use a rather misleading figure of speech; all you have actually done is establish a specific relationship of personal accountability between you and your delegatee. This does not dilute in any meaningful way the responsibility that was, and remains, yours.

But the subject, in the modern economy, is really not that clear. In order to encourage and facilitate wealth-creating investment and entrepreneurship, various legal business structures have been created to limit individual exposure to risk, shifting it, in various ways and degrees, to the enterprise itself. These legal devices progress from the various forms of partnership to the corporation.

Let’s now suppose, then, that you are an owner of one of these, a publicly-traded, anonymous shareholder corporation. In this case, you have no responsibility at all for the administration of the business, nor for the consequences of its acts. The fate of your investment depends on these, but that is the limit of your similarity with the sole proprietor.

What, then, happened to the rest the roles, in this regard, of the sole proprietor? In general, the corporation itself, as a “legal person,” is responsible for the consequences of its own acts. The board of directors is principally responsible for its administration.

Thus, responsibility is cut off from its natural source, ownership. It is then allocated, according to two of its applications, to two institutions created or modified specifically to receive them, neither of which, of course, are in the ownership group.

This creates some serious problems. As we have noted here before, perhaps the most fundamental of these are related to corporate governance (please see the series index and this subject’s category, in the sidebar, for more on this).

But it also produces a broader, and graver, environment of moral hazard. This, as the daily news amply demonstrates, can have a baleful influence on the integrity and expression of administrative responsibility, as well.

It is important to note this. However, for the purposes of our current discussion, we will look at the question of administrative responsibility alone. We will also fairy dust away any moral hazard concerns, so that we can focus more productively on our main topics of managing the decision making process – and leadership – in an organization.

We will turn to that tomorrow. See you then!

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Today’s tips: Speaking of moral hazard and problematic corporate governance practices, please see this piece, from The Economist, about the unfortunate effects of cross-shareholding in Japan.

In the last series, “Conceptualizing capitalism,” we suggested that one should be wary of the world-view of experts. Please see this otherwise interesting essay by one, Gary Marcus, in the WSJ. Pay particular attention from paragraph 14, beginning “All this matters,” to the end. Then ask yourself what he might mean, precisely, by the need to confront “evolution’s limits” head on.

On another subject altogether, please be sure to see what Cultural Offering has to say about where the art of reading aloud is still alive, and why that is important.

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