Back to the future - a monastic perspective on corporate governance

Abstract

The financial crisis is a crisis of governance as well. In search of answers and solutions many scholars and practitioners recommend improved output control, i.e. better external incentives or even stricter regulations. Monasteries demonstrate that alternative models may be more suitable to enhance sustainable governance quality and to reduce agency problems. In the long history of monasteries, some abbots and monks were known to line their own pockets and some monasteries were undisciplined. Monasteries developed special systems to combat these excesses thus ensuring their survival over centuries. We study these features from an economic perspective. Derived from an analysis of the Benedictine monastery of Engelberg we offer three improvements of applied governance designed to reduce agency problems. First, monastic governance emphasizes clan control rather than output control. Monasteries demonstrate that organizations can prevent agency problems by complementing external discipline with internal behavioral incentives, such as value systems and voice. Second, organization members making firm-specific investments are motivated by broad participation rights and co-determination. Third, the Benedictines are able to apply supportive external control mechanisms, which are not perceived as controlling. Key words: corporate governance, financial crisis, psychological economics, monasteries, principal agency theory, Benedictine Order Introduction Religion and religiousness will play an extraordinary role in the future, despite the unremitting prognosis of fading into insignificance. The secularisation thesis - in the last century widely perceived as an irrevocable fact - has these days become highly disputed (e.g. Gabler 2005; Iannaconne 1998). The recognition of the continued relevance of religion has reawakened interest in this subject. The economic perspective1 allows new insights into the religious aspects of life. Not only is it worth paying attention to such concepts as faith, spirituality and religion in western organizations, but it is also worth taking a look at the religious organizations themselves. Throughout the centuries religious institutions were a decisive factor in the development of the economic system. Therefore, reflecting on the past may be highly relevant when analysing the current economic system. This article analyzes the governance of the Benedictine Order to gain new insights into good governance. Monasteries can be viewed as pioneers of governance and have had a major impact on the development of the economy in Europe (Zamagni 2008). On the one hand, the great economic success of numerous monasteries in medieval times serves as an example of efficient organization of commercial enterprises. On the other hand, the creation of wealth led to the temptation of misuse (Kieser 1987). As a reaction sophisticated governance systems were established within religious orders. The aim of our research is to gain deeper general insights into the functioning of governance structures, processes, and incentives. Deeper general insights into approved governance structures are important for the field of corporate governance.2 Today in particular this field is facing fundamental changes. Not only has the corporate sector been plagued by huge scandals related to excessive manager compensation and fraudulent bookkeeping (Osterloh/Frey 2004), but additionally the financial crisis made apparent the fact that the existing governance structures in stock corporations cannot prevent excessive risk taking and the abuse of power (Rost/Osterloh 2009; Zingales 2009). Agency theory - the dominant theoretical approach within the corporate governance literature - is not able to explain these recent incidents in a conclusive way. The theory suggests that external control mechanisms prevent such scandals by linking the interests of the owners with the interests of the CEOs, i.e. by acting on behalf of absent firm owners (Fama/Jensen 1983; Jensen/ Meckling 1976; Jensen/Murphy 1990a; Jensen/Murphy 1990b). …