Week-3
Joumal of Business Ethics (2005) 58: 249-259 DOI 10.1007/sl0551-005-1419-2
© Springer 2005
Organizational Governance and Ethical Systems: A Covenantal Approach to Building Trust
Cam Caldwell Ranjan Karri
ABSTRACT. American businesses and corporate executives are faced with a serious problem: the loss of public confidence. Public criticism, increased govern- ment controls, and growing expectations for improved fmancial performance and accountability have accom- panied this decline in trust. Traditional approaches to corporate governance, typified by agency theory and stakeholder theory, have been expensive to direct and have focused on short-term profits and organizational systems that fail to achieve desired results. We explain why the organizational governance theories are funda- mentally, inadequate to build trust. We advance a conceptual framework based on stewardship theory characterized by "covenantal relationships" and argue that design of governance mechanisms using a cove- nantal approach is more effective in building trust in organizations. A covenantal relationship is a specialized form of a relational contract between an employee and his or her organization. We argue that regardless of incentives and control mechanisms carefully designed through contractual mechanisms, in the absence of covenantal relationships it is extremely difficult to build trust within organizations. We propose that organiza- tions are more likely to build trust - both at the orga- nizational level and at the interpersonal level - when
Cam Caldwell is Assistant Professor of Management at the
University of Houston - Victoria. He was a Thomas S. Foley
Graduate Fellow at Washington State University. His research
has focused on factors impacting effective organizational lead-
ership and governance.
Ranjan Karri is Assistant Professor of Management at Bryant
University. He received his Ph.D. in strategic management
from Washington State University. His research interests in-
clude corporate and business strategies, ethical leadership and
corporate governance.
they create reinforcing and integrated systems that honor implied duties of "covenantal relationships."
Introduction
American businesses and corporate executives are faced with a serious problem: the loss of public confidence. This lack of trust has been accompanied by profound public criticism, increased government controls, and growing expectations for not only improved fmancial performance, but also increased accountability for financial results (Alkhafaji, 1989). At issue is corporate governance — how a firm is Inanaged to optimize perfonnance and who is doing the governing. At risk is the "consequential imph- cations of reciprocal dependence and vulnerabihty between participants" (Dingwall, 1983, p. 12). Put more simply, governance systems seek to balance trust and accountability, recognizing that the form of the relationship between parties directly influences the willingness to trust (Sheppard and Sherman, 1998).
This paper suggests that the organizational gov- ernance theories of traditional agency and stake- holder theory are fundamentally inadequate to build trust. We propose an altemative theory and ap- proach based on managerial stewardship. In this paper, we briefly compare agency theory, stake- holder theory, and stewardship theory as models of organizational governance. We propose that stew- ardship theory offers a system of governance that is ethically consistent with the needs of organizations in today's business environ. We conclude by pro- viding insights into the key implementation steps that are important in implementing an ethicaUy
250 Cam Caldwell and Ranjan Karri
consistent stewardship model - key steps for restoring and rebuilding public trust.
Three models of govemance
The governance form selected by an organization is based on decisions to reduce any potential exchange problems created by bounded rationality, on the one hand, and the threat of opportunism, on the other hand (Barney and Hesterley, 1996). The expectation is that the manager - or agent - will maximize perfonnance for the benefits of shareholders and other controlling interests. However, as trust erodes, an increase in organizational perfonnance may be offset by increases in the costs of attaining it (Williamson, 1975).
Traditional approaches to corporate govemance, typified by agency theory and stakeholder theory, have been expensive to direct and have focused on short-term profits and organizational systems that fail to achieve desired results (Baucus and Beck-Dudley, 2000). Agency theory assumes that humans are self-, interested and prone to opportunism (Eisenhardt, 1989). Arrow (1985) notes two sources of agency problems. First, moral hazard, or hidden actions are costly to observe. Second, adverse selection, or hidden infonnation is costly to ascertain. Monitoring and bonding agents in order to control their opportunism are two approaches that deal with these two problems. Thus, the solutions are driven by a lack of trust and increase the cost of doing business.
According to agency theory, shareholders repre- sent the only interests that managers should be concemed with in making decisions (Jensen, 1988; Jensen and Meckling, 1976). Managers, on the other hand, are presumed to be self-interested and, unless constrained, will inevitably behave in self-interested ways (Canella and Monroe, 1997). Agents may emphasize growth over profitability, since their individual compensation typically depends upon firm size. Alternatively, they may consume excess perks, or may initiate strategies that yoke them to the firm and make it difficult for the firm to remove them.
The assignment of a competent "agent" to manage the organization allows shareholders to diversify their portfolios and allows managers, who may lack resources for ow^nership, to specialize in managing. Although the separation of ownership
from control has many benefits, this separation also has a number of associated costs. Prominent among these costs are agency problems, which frequently manifest in opportunistic behavior by rnanagers (Williamson, 1975). Agency problems exist because principals (shareholders) and agents (managers) have difFering risk preferences and have conflicting interests (Eisenhardt, 1989). When agents misrep- resent their abilities (adverse selection) or put in less efFort than required to achieve their principals' objectives (moral hazard), principals must expend resources to monitor agent perFormance and/or create perFormance-based compensation systems to incent desired behaviors (Hendry, 2002).
Stakeholder theory, a Framework designed to examine situations in which executives pursue the best interests oF corporate owners but that also includes the needs oF other stakeholders, was pro- posed as an altemative theory to traditional agency theory (Donaldson and Davis, 1989, 1991). Winn and Keller (2001) posit that traditional stakeholder theories Focus on the achievement oF traditional corporate objectives — and the present and increas- ingly complexity oFthese objectives must be revised. The stakeholder theory concept is based on the ethical premise that "the task oF management is not only to deal with the various stakeholder groups in an ethical Fashion but also to reconcile the conflicts oF interest that occur between the organization and the stakeholder groups" (Carroll, 1996, p. 23). Advocates oF an expanding role oF corporate social responsibility recognize that organizations must pursue both proFit and service (Carroll, 1996).
Carroll notes that the traditional economic model, based on Adam Smith's notion oF the invisible hand, held that society determined its needs through the marketplace. He observes that the marketplace may do a reasonable job in determining goods and ser- vices to produce but that it does "not Fare as well in ensuring that business always acted Fairly and ethi- cally (CarroU, 1996, p. 29)." CarroU's (1996, pp. 9 2 - 93) model For moral organizational decision-making incorporates a standard oF normative ethics that requires those who govern to ask "What ought to be?" in terms oFbusiness behavior as the standard by which business ethics might be judged. Those who are advocates oF stakeholder theory argue For its virtues primarily in terms oF its normative value (Donaldson and Preston, 1995).
Organizational Govemance and Ethical Systems 251
The stakeholder relationship imposes duties that they describe as a network oF implicit contracts between each stakeholder group and management; proposing a set oF heuristic or social contracts based upon normative principles oF human conduct. Thus, the "Firm as contract" notion oF Freeman and Evan (1990) obtained precedent in which the manager oversees the contractual relationship with each stakeholder. Ultimately, Freeman and Evan (1990) see stakeholder theory as redefining the purpose oF the Firm as serving as a vehicle For coordinating stakeholder interests. Other scholars similarly argue that the duty owed to all stakeholders is the creation oFlong-term wealth (c.F. Hosmer, 1986; Post, et al., 2002; Selznick, 1992).
Davis et al. (1997) describe "stewardship theory" as a relationship in which managers are stewards whose motives are aligned with the objectives oF many parties. In their model, the behavior oF the steward is collective or organizationally centered in terms oF seeking and sustaining the objectives oFthe entire organization. They suggested that the role oF the steward was to protect and maximize share- holder and organizational wealth and to avoid or prevent substituting individual selF-serving behav- iors For organizational behaviors that enhance organizational Functioning and efFectiveness. Advocates oF the stewardship model argue that managers who are stewards are most efFective when corporate govemance structures give them high authority and discretion (Jones, 1995). However, this approach is likely to be viewed as dysFunc- tional, and possibly unrealistically naive, under agency theory assumptions.
In describing the ethical role oF the corporate steward, Davis et al. (1997, p. 26) provide clarifying detail:
"Given a choice between self-serving behavior and pro-organizational behavior, a steward's behavior will not depart from the interests of his or her organization. A steward will not substitute or trade self-serving behaviors for cooperative behaviors . . . Because the steward perceives greater utility in cooperative behavior and behaves accordingly, his or her behavior can be considered rational."
Tbis rational perspective Fits contextuaUy witbin a principle-based and a duty-based ethical Framew ôrk — sometimes called a "virtue etbics model". Tbis
duty is based upon a complex set oF etbical assumptions based upon tbe assumed "community/ citizenship" obligation oF organizations and utilitar- ian etbics - creating tbe greatest good For multiple stakebolders. Solomon (1993) articulates tbis multi- Faceted etbical relationsbip, noting tbat a business bas a societal duty to bonor its obligation to tbe community - an idea dating back to tbe early Greeks. ManviUe and Ober (2003) ofFer additional insigbts about tbe nature oF tbis community-based obligation, and opine tbat tbis same duty applies to modem day businesses. Tbe steward's perspective is contextuaUy rational as part oF bis or ber model oF bow a leader serves.
Peter Block proposes a related but distinctive stewardship theory model, based upon "service over selF-interest (Block, 1993, tide)". Adapting Block's model, we extend tbe role oF tbe steward beyond tbe perspective oF Davis et al. (1997) but fuUy incorporate tbeir view oF tbe steward's con- cem For tbe needs oF tbe entire organization and tbe creation oF organizational wealtb. Consistent witb the perspectives oF tbese autbors, we suggest tbat tbe steward's role is to pursue organizational goals, believing tbat botb organization and indi- vidual needs wiU be achieved best by pursuing coUective ends (Hosmer, 1996). Tbe Fundamental assumption underlying stewardship theory is tbat tbe maximization oF long-term economic wealtb wiU ultimately serve to be in tbe best interests oF tbe principals and tbe various stakebolders coUec- tively, in addition to maximizing social welFare and tbe long-term economic beneFit to society (CaldweU et al., 2002; Post et al., 2002).
Morrison and Robinson (1997) describe tbe employees' point oFview regarding tbis perspective, noting tbat employees bave perceptions and belieFs about the nature oFtbe relationsbip between tbem- selves and tbeir employer tbat relate to bi-directional obligations and entitlements. CaldweU and JefFries (2001) suggested tbat tbese perceived relationsbips are individuaUy assessed. Rousseau (1995) noted tbat tbe mutual responsibUities and obligations inherent in tbe employee—employer relationsbip oFten differ, as per- ceived by employee and employee. Yet, it bas been generaUy acknowledged tbat tbe violation oF the perceived contract or covenant by employers can bave a proFound impact on job attitudes and bebaviors (Rousseau, 1995; Tumley and Feldman, 1999).
252 Cam Caldwell and Ranjan Karri
Covenantal relationships
Rousseau (1995) notes that the duties of organiza- tions are often perceived as implicit contracts. Other scholars also note that the ethical obligations of organizations to individuals are subjectively detemiined and rise to the level of an implied con- tract (Caldwell and Jeffries, 2001; DePree, 1989). The concept of the organization as involved in covenantal relationships has an Aristotelian base and deep ethical roots (Solomon, 1993). Ethical philos- ophy has pursued an integrated set of expectations in honoring the rights of others, but management theory has consistently failed to keep pace in practice with ethical duty (Selznick, 1992).
Bamett and Schubert (2002, p. 280) defme a covenantal relationship as "a specialized form of a relational contract between an employee and his or her organization". They note that this relationship is both a transactional relationship and a psychological relationship. Smircich (1983), in her seminal dis- cussion of organizational culture, noted that indi- viduals interpret their organizational internal environment broadly - at the cognitive, the sym- bolic, and the psycho-dynamic levels. When employees are treated as complex individuals and understood in terms of their worth and value, they "feel valued by and value their organization" and the covenantal relationship is achieved (Bamett and Schubert, 2002). Selznick (1992, p. 479) defmed a covenant as integrated with the creation of a true community - fundamentally based upon "moral ordering" and "self-defining comniitment". Pava (2001: p. 86) also incorporated the concept of "shared community" in his definition of a covenant — noting that a covenant provides "a stable social location for the interpretation of life's meanings in order to help foster human growth, development, and the satisfaction of legitimate human needs".
Herman (1997, p. 39) suggests that covenants in an employement relationship are founded upon two generic commitments from both parties. First, the parties must be united around some common interest or purpose and second, in pursuit of this aim, the parties must bind themselves not to abuse the advantages they hold over each other. Herman (1997) cautions that contracting as a device to build enduring relationships is limiting in the sense that contracts provide the actors involved "certain stip-
ulations as a means of neutralizing the suspect con- tingencies they present each other". Covenantal aspect of a contractual relationship arises from going beyond the specified contingencies and committing to the two conditions stated above.
The steward's duty is to create this covenantal relationship (Caldwell et al., 2002). The long-term impact of a stewardship approach maximizes share- holder profits, achieves balanced professional growth and job security for employees, and honors corpo- rate social responsibility relationships (Hosmer, 1996). Solomon (1993) articulates the importance of organizational duty, noting that duties are defined by one's role in the organization carry a moral weight. In pursuing long-term organizational wealth rather than just short-term objectives, stewards serve the best interests of society, stakeholders, customers, and shareholders (Hosmer, 1996).
Covenantal duties operate within a framework of virtue ethics in which there is congruence between business, the public good, and the individual interest (Solomon, 1992, 1993). Organizational leaders operating from a covenantal penpective recognize that stakeholder interests are often syncretic or dynamically balanced and are sometimes not per- fecdy aligned (Lado and Zhang, 1998). This syn- cretic balance allows stakeholders to recognize that not every decision can benefit all parties equally - but that the nature of the relationship is such that the parties recognize that they seek to maintain a long- term interdependent relationship even if individual decisions may not result in a short-term maximiza- tion of benefits. Pava's (2001, p. 86) insights about the open-ended, long-term, and interest preserving nature of covenants are instructive here — allowing parties to be "simultaneously both free agents and members of a living community".
Solomon created a framework of six contempo- rary virtues for ethics in business: Community, Excellence, Role Identity, Holism, Integrity, and Judgment (Solomon, 1993). He defines these terms as follows:
Community — A corporation is more than a col- lection of self-interested individuals. A sense of community helps define individual identities. Communities focus internally on cooperation rather than competition.
Organizational Governance and Ethical Systems 253
Excellence - Corporations must both "do well" and "do good". Corporations must improve their ability to fully recognize and reward merit within and to thus inspire ongoing improvement.
Role Identity - Individual affiliation occurs best when personal and organizational values fit. Duties and virtue, rightly applied to the individual, en- able each person to align and integrate that fit.
Holism - Holism is synonymous with aligned con- text with the big picture, rather than an incre- mental focus. It demands a synergistic approach and a recognition of long-term priorities.
Integrity - Integrity is the integration of virtues into a consistent character. It encompasses moral courage and the will and willingness to do what one ought to do.
Judgment - The ability to balance conflicts in roles without compromising principle is the essence of judgment (Solomon, 1993, pp. 145-186).
Solomon's six virtues provide a foundation that is conceptually consistent with the factors of the cove- nantal relationship defmed by both Selznick (1992) and Pava (2003). Other scholars, (Cameron et al., 2003) suggest that this virtuous approach to organizational governance has not only an inherent connection w îth the interdependent duties of a community but is strong applicability to the modem business organization. The heart of the covenantal approach is its dependence upon values — to provide for "the interpretation oflife's meanings in order to help foster human growth, development, and the satisfaction of legitimate human needs" (Pava, 2003, p. 2).
The covenantal model
In an effort to clarify the elements of the covenantal model of stewardship theory, we provide a summary of its implicit assumptions and duties at the organi- zational level and contrast those assumptions with our view of parallel assumptions of both agency and stakeholder theories (Table 1).
In distinguishing the stewardship firamework from either an agency theory or stakeholder theory ap- proach, we present the stewardship model as ethically superior because it honors the societal obligations and the duties to all stakeholders. The strength of the covenantal approach of the stewardship model is that
it incorporates the ability to look internally (within both self and the organization) and toward the external environment in assessing organizational needs within a full context. Argyris and Schon (1978) described this process of simultaneous assessment internally and externally as a double-loop model for learning, a concept that is well accepted in the management literature (Senge, 1990).
Traditional management thinking is critical of approaches that do not pursue short-term bottom line results (McCoy, 1985). McCoy notes that cor- porations are increasingly recognizing that their obligations are not one-dimensional. We concur with McCoy's conclusion that the "paramount task" of leadership in organizations is the management of instrumental organizational objectives and nonnative values (McCoy, 1985, p. 13). As Hosmer (1996) has suggested, the managerial dilemma of governance represents the conflict between economic and social performance. He notes that extending the steward- ship responsibility of management to long-term issues and to all stakeholders is essential because the moral problems of management (1) have extended consequences, (2) multiple altematives, (3) mixed outcomes, (4) uncertain consequences, and (5) per- sonal implications for the parties involved (Hosmer, 1996, pp. 10-11).
Although many scholars focus on pursuing short- tenn profit and profit maximization as the primary mission of the firm, institutional microeconomic the- ory encompasses "ethical as well as economic precepts" (Hosmer, 1996, p. 33). Although profit maximization is a part of the theory of the firm, "it is only a part, and certainly not the central focus" (Hosmer, 1996, p. 33). The covenantal model is fundamentally committed to the ongoing process of managing change, recognizing that the governance role necessitates creating a culture that guides moral development while simultaneously meeting the legitimate needs of organizational stake- holders (Pava, 2003, p. 13).
Systemic implementation
Pava (2003, pp. 18-19) emphasized that "the idea of covenant implies that our theory of being human is inextricably related to how we construct organiza- tions". Lawrence and Lorsch (1967) suggested a systems approach to understanding how organiza-
254 Cam Caldwell and Ranjan Karri
TABLE I Organizational assumptions of covenantal duties
Agency Theory Stakeholder Theory Stewardship Theory
Overall Ethical Focus
Manager Role
Time Focus
Teleological or goal oriented and deontological or duty oriented Maximize short-term wealth for the Principal Often short-term
Manager Motivation Serving principals and preserving self-interests
Use of Information Maximizes profitability
Basis of Trust Moral Position Function of Rules Key Value Manager's Primary Function Organization Goal
Manager's Personal Goal Motivational Model
Vision/ Focus
Assumptions about People
Competence Conditional Control Results Profit producer
Create highest possible short-term wealth Preserve self-interest
Economic model with extrinsic motivators Protection of self-interest while People seek rewards in an exchange relationship and are individualistic utility maximizers
Focused on the utilitarian needs of all stakeholders with an ethics of balance Balancer of demands and advocate of coUective interests Both short-term and long-term Equalizing benefits to aU parties Creates understanding about interests and needs and identifies trade-ofis Equity Situational Clarify process Balance System maintainer
Create wealth and preserve relationships Serve aU parties fairly
Mixed model with mixed motivators Integrating shareholder and organizational interests Peope are concerned with equity and fairness and want to be dealt with justly. Utility is measured distributively
Virtue ethics based upon a commitment to society based virtues and rights Integrator of shared interests
Primary concem is long-term
Virtues and values and society
Achieves synergies
Integrity Principled Defme opportunity Authenticity Steward
Create long-term wealth and achieve best interests of aU Achieve potential
Self-actualizing model with intrinsic motivators Increasing organizational wealth to serve aU interests People are coUective self- actuaHzers who achieve utility through organizational achievement
tions can manage change. Although their model of organizational development and change does not address covenantal concepts specifically, they clearly understand the importance of a systems theory ap- proach to integration and differentiation. Similarly, Schein (1992) articulates the importance of extemal adaptation and intemal integration in aligning behaviors, values, and core assumptions. This sys- temic integration of values and behavior, Schein notes (1992, pp. 374-383), is the duty of the leader and the key to creating organizational trust. As Pava (2003, p. 21) emphasized, the way in which an organization is organized is "an inherently ethical activity" and "ethical issues intersect with organi- zational concems at every tum".
The ethical foundation of a covenantal approach parallels the thinking of practitioner studies that have begun to receive increased acceptance in the management Hterature. Pfeffer (1998) focused on the importance of valuing people while simultaneously pursuing the instrumental objectives of the organi- zation. CoUins (2001) and CoUins and Porras (1997) found that organizations that outperformed their competitors were value-based and reHed heavily on core values advocated by highly committed leaders. Cameron et al. (2003) have articulated the impor- tance of a virtue-based role in guiding organizations, and Cameron (2003, p. 190) has noted that virtuous firms outperformed those led by leaders with low scores in virtuousness in "profitability, productivity.
Organizational Covernance and Ethical Systems 255
innovation, quality, customer retention, and employer loyalty." Stewardship leaders provide an integrated and congruent set of organizational systems that reflect an aligned set of priorities and that focus on contextual fit.
We note, as did Lawrence and Lorsch (1967) that a well-founded systems approach that integrates organizational govemance principles and values will impact organizations at the organization-to- environment, organization-to-organization, and individual-to-organization levels.
Building trust
The stewardship model is neither unique to ethics nor to management theory. It assumes a commitment to the welfare, growth and wholeness of others that Kouzes and Posner (1994) find in their studies to be critical to the establishment of organizational credi- bility. Although trust has been acknowledged to be an elusive constmct at both the individual and organiza- tional levels (Mayer et al., 1995; Hosmer, 1995),trustis also acknowledged as the glue that holds organizational culture together and the basis of interpersonal and organizational success (Reina and Reina, 1999).
Block defined stewardship as "to hold something in trust for another." (Block, 1993). In a true conve- nantal relationship govemance occurs by pursuing long-term, wealth producing interests for aU stake- holders. Block explained that choosing service over self-interest occurred when leaders were willing to be accountable without choosing to control or manip- ulate others. Block's approach was to treat stake- holders "as owners and partners" without creating conditions of dependency or control — by creating conditions of empowerment that "offers choice and spirit" to core workers (Block, 1993, p. 22). At the same time. Block recognized that the stewardship approach was respected by practitioners and aca- demics when it passed "the test of the marketplace".
Similarly, Pfeffer (1998) endorsed an approach to developing within employees a commitment to the organization and its purposes. Consistent with a systems approach, Pfeffer (1998) advocates creating a culture of high involvement and ownership. Pfeffer is sharply critical of govemance techniques and menus that seek success by imitating other organi- zations without understanding the conditions under
which govemance principles are based. Pfeffer explains: "success frequently entails implementation rather than coming up with great ideas" (Pfeffer, 1998, p. 13). It is not enough to find or define an- swers — implementation that occurs with the coop- eration and buy-in of fully involved employees is the key to successful organizations. Both PfefFer and Block wrote eloquently about the importance of employees at the lowest level being involved in developing and implementing solutions that serve, both intemal and extemal customers.
Pfeffer observes that there is "a substantial and rapidly expanding body of evidence, some of it quite methodologically sophisticated, that speaks to the strong connection between how firms manage their people and the economic results achieved "(PfefFer, 1996, p. 31). The key catalyst for achieving this result is a faithful adherence to principles, duties, and core values. Block (1996) advocated that the key to releasing this energy in people came by redistribut- ing the role of management organization-wide through the process of clearly articulating employee roles, estabhshing new social contracts in relation- ships, and empowering employees by supporting them in their positions and redefining the role of bosses. He acknowledged that creating a new social contract "based on partnership and empowerment is the difficult emotional work of stewardship" but declares it to be an important step in creating a stewardship culture (Block, 1996, pp. 84-85).
The process by which stewardship governance - a covenantal relationship - occurs most easily in what Senge calls a "leaming organization" (Senge, 1990). Both Senge and Block emphasize the importance of open dialogue in creating such a culture. Block puts this process of dialogue into cultural context:
Moving fi-om parent to partner comes down to a series of conversations. Dialogue is the solution. The con- versation is about purpose, ownership and responsi- bility. Shifting these concems fi-om the exclusive province of the management class and distributing them among people doing the core work. We do this for the sake of the institution, not because the load is too heavy. The boss says in effect, "I want you to share in the felt ownership of this fi-anchise. I plan to share with you the power and privilege of ownership, as long is it is used in service of the larger unit. This is the partnership agreement that I want to manage by." This
256 Cam Caldwell and Ranjan Karri
conversation accompanies the definition of the stew- ardship contract ... which defines the playing field. (Block, 1996, p. 86)
The willingness of organization leaders to reframe their mental models and to create an empowering dialogue with employees is consistent with DePree's thoughts about the obligations of the servant leader. He also describes the leader's duty as a "covenantal relationship" in which the leader and the organiza- tion owe a broad array of obligations to employees at all levels (DePree, 1989, p. 53). In addition to defining expectations about the organization, leaders owe employees the opportunity to grow and to make a contribution to organizational objectives. Defining the new reality is "the first task of the leader" according to DePree — including identifying boundaries and ground rules both internally and in the external environment (DePree, 1989, p. 11).
The critical role of the leader in the covenant relationship model is not an autocrat coach - al- though the transitional role of coach may be nec- essary for the short-term (Block, 1996). Block explained that the coaching role carried the same limitations as benevolent patriarchy. "Turning supervisors into coaches keeps the managing and the doing of the work separate" but managing the organization must become a part of each employee's duty (Block, 1996, pp. 105-106). In the model we propose, the leader fulfills his/her role by securing funds for unit operations, communicating results and requirements for continued financial support, and brokering services and other supports that enable the work unit to succeed - tasks that make leaders vital to teams while reinforcing the fact that governance is a function that is integrated throughout the organi- zation (Block, 1996, p. 107).
Implementing systemic covenantal approach has a variety of human resource applications. For example, a covenantal approach instead of focusing on perfor- mance appraisal - criticized by many as organiza- tionally dysfunctional (c.f. Deming, 1986; McGregor, 1960) - is team-based and customer-focused. Block (1996, p. 97) noted that the key focus on performance must begin w îth knowing what the customer values "and how the unit is doing in living up to those values". Both intemal customers and end-users of organizational goods and services are the determiners of unit effectiveness and "each person should be en-
gaged in this discovery process" (Block, 1996, p. 97). Rather than the boss being the customer of the em- ployee, the stewardship model revenes this relation- ship and "the subordinate is the customer of the boss" (Block, 1996, p. 107). In honoring the covenantal duty "the leader must become a servant and a debtor" to employees PePree, 1990, p. 11).
In a similar vein, compensation systems congruent with a covenantal model must be team-based and systemically reinforcing. Baucus and Beck-Dudley (2000) noted that traditional compensation systems result in outcomes that tend to divide organizational loyalties and produce the wrong results. Kerr's (1975) famous article about the "folly of rewarding A while hoping for B'' similarly acknowledged the dysfunction of traditional human resource compensation systems. Among Pfeffer's seven practices of successful organi- zations is his recommendation that organizations establish contingent compensation systems, such as gainsharing, based upon organizational performance outcomes (Pfeffer, 1998, pp. 64-65). Effective orga- nizational leadership requires establishing congruent and well-conceived organizational systems that dem- onstrate a commitment to all of stakeholders — and a commitment to governance that transcends short- term outcomes at the expense of long-term success.
Implementation is the key
The challenge of implementing a covenantal model of organizational governance is that its successful adoption requires much more than an understanding of its concepts and principles. PfefFer (1998) and Block (1996) note that successful organizations rec- ognize that the design of improved organizational systems must "ultimately get beyond the issues of philosophy, architecture, and mind set — even though these are absolutely critical and fundamen- tal" (Pfeffer, 1998, pp. 99-100). Pfeffer noted that the alignment of system elements is "easier described than accomplished, because few organizations have developed a set of consistent practices" (Pfeffer, 1998, p. 100). As a result, managers make the mis- taken assumption that "because they recognize the need for alignment and state the concept on paper and make one or two changes - at one point in time — that everything is suddenly in alignment" (Pfeffer, 1998, p. 104).
Organizational Governance and Ethical Systems 257
Collins and Porras (1997) also emphasized that the key to successful implementation of change is in understanding change as an evolutionary process that takes time and extended effort. Changing traditional mental models and developing a driving core ide- ology - inherent in a covenantal approach - was the critical first step. They emphasized that a short-term "build it quickly, make a lot of money, cash out, and retire" approach is not consistent with long-term success. Nonetheless, the systemic and ahgned ap- proach that they advocated has been the method of great companies in the past fifty years.
Block noted that the implementation of stew- ardship concepts provides "no safe path" although the change in mental models is decidedly difficult (Block, 1996, p. 237). The question of "How?" - the implementation issue, he noted, "becomes more interesting than the answer" (Block, 1996, p. 233). But Block also noted that the implementation pro- cess is as much a "letting go" of old thinking as it is an adoption of new ideas.
The chaUenge
A covenantal approach to govemance suggested by the stewardship model is a profound challenge for corporate leaders because it presumes to share con- trol, reframe the traditional leadership model, and focus on values rather than techniques. Despite nearly fifty years of acknowledgement of the duties of corporate social responsibility, agency theory is still the predominant mental model for corporate gov- emance (CarroU, 1996). Notwithstanding the track record of great companies identified by Pfeffer (1998), Cameron (2003). Collins (2001) and Collins and Porras (1997) organizational leaders are unwilling to rehnquish models of self-interest that are acknowledged to be morally and, possibly, eco- nomically hmited (Hosmer, 1996; Carroll, 1996).
The ethical implications of pursuing long-term organizational wealth, multiple stakeholder inter- ests, socially beneficial outcomes, and mdrally beneficial purposes are perceived by some to be in confiict with the profit-focused thinking of cor- porate traditionalists. As W. Michael Hoffman (1989) noted in his article, "The Cost of a Cor- porate Conscience", ethical behavior can "cost dearly", because, in the words of Andrew Stark,
"ethics and interests can and do conflict" when short-term economic objectives are given primacy (Stark, 1993, p. 40). Nonetheless, evidence from many successful organizations makes it clear that long-term economic growth and profit can be achieved by organizations that operate within a framework consistent with the stewardship model.
Contributions of our model
In this paper we suggest that stewardship theory's covenantal model of corporate governance offers the following contributions:
(1) It provides a meaningful altemative to agency theory and stakeholder theory that is not inconsistent with instmmental goals of long- term profitability for organizations.
(2) It offers a normatively superior approach to corporate govemance based upon qualitative virtues that have worth in and of themselves.
(3) It is a model of govemance consistent with management theories that have both a practical and a theoretical base.
(4) It is systemically hohstic and founded in weU- estabhshed management theory and organiza- tional development principles.
(5) It is intuitively acceptable as ethically virtuous. Its commitment is fundamentally centered on opti- mal solutions and the growth and thriving of a community of participants.
We acknowledge that a covenantal approach is fraught with challenges for many corporate leaders - particularly because those leaders possess a control- focused paradigm for corporate govemance that tends to treat employees either paternalistically or with little regard for their long-term welfare. Clearly, acceptance of our proposed model will not be undertaken without a significant refi-aming of the mental models of corporate executives, managers, boards of directors, and academicians.
Conclusion
In Ught of the fact that corporate America is strug- gling to gain increased public confidence, the prin- ciples upon which corporations are governed seem
258 Cam Caldwell and Ranjan Karri
to merit close examination and possible reform. The model of covenantal relationships presented in this paper offers an ethically solid altemative to agency theory and stakeholder theory. Although a cove- nantal govemance model is unlikely to be accepted quickly, its assumptions and principles merit both careful review and practical testing. As a paradigm for ethical govemance, covenantal theory is founded upon an ethical base that is theoretically sound and that has a realistic practical foundation as well. Fur- ther testing of this model seems merited in hght of the demand for a more socially responsible ethical and moral framework for American business.
The model of covenantal leadership presented and described in this paper contains opportunities for a wide variety of future research. One potentially fruitful area to test is the continuing research being done that identifies outstanding and fmancially suc- cessful organizations (cf Cameron et al., 2003). Another potentially rich area of research is the exploration of the ethical mental models of corpo- rate executives, boards of directors, managers and employees. Studying those models in the context of understanding the underlying theories of govemance inherent therein can provide insights into what might be necessary to sustain comprehensive stew- ardship theory as a new system of corporate gover- nance. Additional research opportunities exist through qualitative research in work units or orga- nizations on an experimental or applied basis.
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Cam Caldwell University of Houston — Victoria Campus,
Victoria, TX 11901, U.S.A. E-mail: camcaldwell2002@yahoo.com
Ranjan Karri Bryant College,
Smithjield, RI 02911, U.S.A.