Exit, Voice and Loyalty…

The title for this post is that of a book published some 50 years ago by economist/social scientist Albert (born Otto Albert) Hirschman, in which he explained the alternatives available to individuals who believe they have been let down, overlooked or otherwise mistreated:

– You can leave (“Exit”)
– You can speak up and try to effect a change (“Voice”); or
– You can decide do stay and put up with what is happening (“Loyalty”).

Of course, option two, has a more extreme version- Rebellion.

Now you may say; “But this is simply a statement of the blindingly obvious!”

It is.

However, the stated alternatives are also central components of organizational theory, and of corporate and institutional governance. They tend not to be given much conscious thought, precisely because they seem so obvious. Yet, a deeper understanding of how organizations (from governments, to businesses, to religions) either manage or ignore the three alternatives, and the consequences of doing so, is warranted.

In basic economic theory, Exit is seen as the most effective way of enforcing discipline- consumers do not buy, employees leave, shareholders sell, emigrants leave. It is unequivocal and direct. Hirschman acknowledged this, but argued that allowing individuals to exercise Voice was what underpinned the viability of an organization, and, in fact, concepts such as civil society. Voice creates reciprocity and also Loyalty. He posited that enabling and acting upon Voice was what give a deteriorating entity the chance of what he termed “recuperation”. Without it, Exit or Rebellion would likely ensue, with unfortunate consequences for all concerned. In effect, he was arguing for the effectiveness of an evolutionary approach, over revolution; although he understood that sometimes Voice would fail because of circumstances- such as increasing autocracy, or the presence of an “imperial” CEO. It is interesting to observe that the (re)insurance industry has not been immune to this tendency.

The interesting thing about Loyalty (which is generally seen as a “good thing”) is that, in reality, it can have a very dark side. If one thinks of a corporation, it is merely a collection of individuals who, at a particular point in time, are applying their skills, talents and time towards a particular goal. Properly managed, corporations are very effective at wealth generation, as well as providing their employees with a livelihood and purpose. It is when that loyalty is taken for granted, or manipulated or abused, that things start to unravel. Because human beings are social animals, and generally reluctant to be seen as dissenting from the “collective view”, they can be manipulated into acts which are against not only their self-interest, but that of the corporation and society as a whole. Examples are too numerous to count. The wise and perceptive leave; the gullible and weak stay. As a result, what can appear to be a modest problem, can suddenly become an existential one. Exit becomes disintegration; Voice becomes disruption or Rebellion. No-one benefits.

So, from the point of view of corporate governance, there is real value in being able to balance the weight given to each of the three elements appropriately to maximize an organization’s effectiveness. Failure to do so amounts to willful blindness. Unfortunately, one often wonders whether corporate governance “experts” or Boards truly think deeply, or are even aware of what we have described. We hope they are- in a systematic, rather than casual way.

The Awbury Team

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