Trust – but verify

The division between rich and poor nations is neither god-given nor does it have divine sanction. It is neither determined by rich deposits of resources (otherwise Angola, Botswana and Congo would be the richest and most developed nations) nor is it caused by the scarcity of resources (otherwise Japan, Singapore and Dubai would be among the poorest and least developed in the world).

These are consequences of man-made decisions. More specifically, it is the quality and integrity of the leadership of a nation that determines whether it is going to be rich and developed or whether it will continue to be plagued by poverty and under-development.

So, the critical question is: how does the system of governance of a nation identify, nurture, filter and elect or select people who would provide it leadership in different fields – education, administration, politics, economy and others?

Does the system of governance meet the demands of a developing country by supplying men and women of the quality and integrity that – in the words of former prime minister of Singapore, Lee Kwan Yew – create assets (value) where none existed? Or does it supply leadership that is ignorant, ill-equipped and un-tutored in the fiduciary responsibilities of democratic governance?

This issue is as fundamental for the success of an economic entity like a corporation as it is for a political system of democracy. It is important to flag the fact that modern economic and political entities are both products of the forces generated by the Industrial Revolution about 250 years ago.

From centuries-old small, family-funded mom and pop shops to corporations funded by millions of strangers – shareholders spread across cities and even countries – and from the small city states of Greece practising the direct democracy of the few who had citizenship rights to hundreds of millions of voters sending representatives to take decisions on their behalf, there is an underlying philosophy shared by both.

Both have been shaped by the forces of the Industrial Revolution. Both derive their strength from the mobilisation of millions of people – shareholders for corporations and voters in a democracy. Both have the same litmus test for success: enhancing value for shareholders, who are the owners of the corporation, and enhancing the wellbeing of the citizens, the owners of the state.

Both operate on the same basis of agent and owner relationship, because both involve the indirect participation of millions. Both also suffer from the same fears of agents abusing their trust – becoming usurpers and wasting or even stealing owners’ resources. Both depend heavily upon autonomous and independent mechanisms of checks and balances embedded in the systems of governance to prevent such abuse of trust by their agents (corporate and government leaders) or penalising if it happens.

In other words, the systems of governance – whether corporate or public – work on this simple principle: trust, but verify. Give power to the leaders to perform, but keep verifying that they do not misuse it. 

Similar concerns were expressed by Christine Lagarde, the managing director of the IMF in her recent visit to Islamabad. In polite but clear terms she emphasised transparency and accountability – so that the trust reposed by people in their governments can be verified for the purpose of good governance and to satisfy the owners (citizens) that their trust is not being abused by their agents (government).

But what happens if the agents disable the systems of verification of the trust? In such a situation, the owners cannot find out how the powers and resources entrusted to their agents are being used or abused. And, therefore, they cannot hold the agents accountable for anything.

Here are some examples. 

The bankruptcy and dissolution of Enron, Tyco, Arthur Anderson and others like these multi-billion corporations showed that their agents – the corporate leaders – had disabled the systems of verification of the trust of shareholders. These leaders were deceiving their shareholders with fake rosy stories of the success of the corporations even as they were committing insider trading and stealing wealth through crooked ways. Similarly, there is enough independent research to confirm that the generational poverty and under-development of the people in Haiti, Angola, Congo and others is result of disabling the systems of verification of people’s trust by their leaders and thus avoiding accountability. 

Let us put it this way. Would any reader – not being a relative or a close friend of any corporate leader – risk investing their funds in a corporation whose internal and regulatory systems of checks and balances either do not exist or have been disabled. Forget any profit on your investment; the chances are you may not get  even your principal amount back. That is why in developed countries several laws and regulations exist to sustain the trust of investors in fair business practices. And why severe penalties are inflicted against insider trading and other abuses of shareholders’ trust.

It is no different in a representative democracy. The governance of a developing country like Pakistan demands application of quality of inputs and integrity in addressing its several challenges. It is not a luxury to be ‘enjoyed’ – which is how it is practised by the leaders, judging by the daily drip of media reports. With such a worldview of governance, talk of quality and integrity of the leadership becomes meaningless. 

What does quality of leadership mean? This can be judged from the meteoric rise of China on the world stage. An experienced South East Asian scholar, while speaking of the quality of leadership provided by the Chinese Communist Party to the country, once told me that it was easier to be admitted to an Ivy League Business School in the US than to be admitted as a member of the Chinese Communist Party. It is this quality of leadership that has achieved the fastest rate of growth and lifted hundreds of millions out of poverty in a short time.

So, quality matters. The sooner we incorporate it into our political parties and systems of governance, the better for the country. Our complaints about democracy not taking roots or Pakistan not realising its potential will all disappear.

Because the future is what we make of the present, if present systems of governance have disabled all filters – technical, fiduciary, legal and constitutional – for reaching leadership positions, it is not difficult to predict that we are already looking at the future. 

A system of governance that supplies leadership of quality and integrity that meets the demands of a developing country, and is accompanied by an autonomous and independent mechanism of verification of trust, would guarantee a developing country being on its path to become a rich and developed nation.

But how can autonomous and independent institutions for verification of trust exist in a system of governance if a ruler has the power to hire and fire – at his sweet will – all the important people in the country? If the ruler controls these institutions, can they control him?

The writer designed the Board of Investment and the First Women’s Bank.

Email: smshah@alum.mit.edu