Posting New Discussion Draft: "Trust Platforms: The Digitalization of Corporate Governance and the Transformation of Trust in Polycentric Space"

 

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I have been thinking about the way that digitalization has been transforming the institutional spaces through which humans operate and the cultural presumptions through which human collectives impose meaning on the world.  The transformations have been a long time coming, and they arrive unannounced. One of the most interesting areas of transformation touches on corporate governance in general, and the constitution of trust in particular.  Trust is an ancient concept intimately tied to perceptions of risk in interactions with institutions and institutional actors. It is also now aligned with fundamental cultural approaches to views of human nature and their transposition to institutional behavior. Where once those connections and alignments were personal and grounded in assumptions about character, now they are increasingly bound up in inferences (or judgments) derived from measurable actions, events or conditions that are judged against an ideal derived from standards that are relevant to assessing communities.

 

 

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Digitalization has made that possible.  Compliance cultures and accountability regimes have made it acceptable. And trust remains a critical facet of effective corporate governance.  But it has become a critical aspect of inter and intra-institutional operations for a much wider constellation of communities, each of which approaches issues of trust, and the risk parameters that trust represents in their relationships with the institution and its activities. Trust has fractured as a concept, an object, and a framework for risk and relationship assessment. Compliance has also fractured, along with the standards used to measure governance and assess trustworthiness. Human rights due diligence, legal and business compliance, sustainability and climate change compliance each are grounded in standards of risk, mitigation and remedy that are distinctly centered on different data sets and affect different consumers of trust differently. 

 

 

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In the process of these transformations, the components of corporate governance assessments, and the standards deployed to assess its effectiveness, have migrated. More than migrated, the conception of trust has shifted from trust in an enterprise or individual, to trust in the systems used to assess trustworthiness in that institution or individual for the functionally differentiated communities for whom this matters. Trust systems, then, appear to become more autonomous. And that autonomous system-object, now resides elsewhere; it resides in platforms. The components from which trust based assessments of 'good' corporate governance is made have become inputs and resources that are developed, utilized, produced and consumed not within an enterprise  but within platforms in which users--consumers, producers, and regulators of governance analysis factors can converge.  These platforms exist within and beyond the institution and the individuals who may be their objects. 

It was with the intent to work through some of these ideas that I produced an essay the discussion draft of which I am delighted to post here for comments. The essay is entitled "Trust Platforms: The Digitalization of Corporate Governance and the Transformation of Trust in Polycentric Space".

The ABSTRACT and INTRODUCTION follow below.  The discussion draft may be accessed HERE. 

Trust Platforms: The Digitalization of Corporate Governance and the Transformation of Trust in Polycentric Space

 

Larry Catá Backer, Pennsylvania State University

 

Abstract: This contribution explores the growing interest in transnational corporate accountability, arising out of the need to build trust in corporations. Emerging cultures of accountability and compliance, among other things, has driven the digitalization of corporate governance and the emergence of a polycentric order of transnational regulations (e.g., human rights due diligence instruments). While widely recognized conceptions of trust inform systems of decentralized, digital governance, the principles and practices of such governance recasts trust and its relationship to accountability within corporations. This contribution argues that this leads to “contradictions” between traditional systems of faith in the trustworthiness of the enterprise and its principal (human) and the emerging faith in the trustworthiness of systems of accountability from which enterprise trust can be objectively measured against an ideal-type, data-based metric. Trust in enterprises, then, become a function of trust in trust accountability systems. Competition among such trust accountability systems and the norms from which trust is measured produces polycentric regimes of transnational corporate accountability, and of measuring trustworthiness, that simultaneously enhances (through systems of exogenous objectification) and undermines (through incompatible standards and methods of trustworthiness) enterprise trust. Part I describes the problem and the challenge, one that arises from the near simultaneous shift in cultural expectations about trust from trust in character to trust in measurement, and the rise of cultures of data driven technologically complicated systems of compliance and accountability. Part Two then considers the transformation brought by efforts to respond that that challenge. These consisted of three closely interlinked trajectories: digitalization, complex compliance-accountability regimes, and the emergence of platforms as the space within which collectives of consumers and producers of governance and trust related data could interact. Part three then examines the consequences of the structures that have emerged as a product of those trajectories.  The first is the constitution of polycentric governance standards around which entities must now navigate and the second is the detachment of trust from the entity that is its subject. That is, it considers the rise of trust platforms as the autonomous pint of engagement through which the trustworthiness of corporate governance is negotiated.  

 

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1. Introduction.

 

“Man uses the spoken or written word to express the meaning of what he wants to convey.  His language is full of symbols, but he often employs signs or images that are not strictly descriptive. . . Man . . . never perceives anything fully or comprehends anything completely. . . No matter what instruments he uses, at some point he reaches the edge of certainty beyond which conscious knowledge cannot pass.” (Jung 1964, pp. 20-21).

 

Since the 12^th century, and within its construction in Germanic languages including English, trust was understood as a relational concept (Etymology Online, trust).  On the one hand it was grounded in reliance by the person or institution extending trust; that reliance included at its inception a connection to faith in character of the object of trust. On the other hand it referenced the character of that faith or reliance, that is, what made the object worthy of trust: “the veracity, integrity, or other virtues of someone or something” (Ibid.). Trust expresses both the faith (by those who trust) and “fidelity or faithfulness” (good faith) of those worthy of such faith or reliance. To be trust-worthy, then, implied a mutual embrace of shared values and the expectation that those values would direct and govern the activities of the parties. “our trust in y is based on our trust in our beliefs about y, which is based on our trust in the sources (often social) of those beliefs.”  (Catelfranchi & Falcone 1998).

 

Trustworthiness produces a critical organizational consequence--the confidence to engage in relationships and ultimately to maintain the coherence and operations of collectives (Bodo & de Filippi 2021 forthcoming). This core premise of trust defined the fundamental principle around which the legal effects of relationships, and its premises with legal effect, could be constructed (Luhmann 1990). Trust as reliance and faith in character, and the expectations that this produced, were deeply embedded in the law of corporations. An important element of trust was to manage (and reduce) risk in transactions (Arrow 1974). Another important manifestation was in the way the law developed around expectations of trustworthiness--of directors, and of the employees and other stakeholders within the enterprise. Enterprises were once understood to be as trustworthy they could be relied on to operate with fidelity to the great public values of society. Its essence was expressed well in the resistance of courts to impose obligations of monitoring and surveillance on corporate directors.

 

On the contrary, it appears that directors are entitled to rely on the honesty and integrity of their subordinates until something occurs to put them on suspicion that something is wrong. If such occurs and goes unheeded, then liability of the directors might well follow, but absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists. . . If he has recklessly reposed confidence in an obviously untrustworthy employee, has refused or neglected cavalierly to perform his duty as a director, or has ignored either willfully or through inattention obvious danger signs of employee wrongdoing, the law will cast the burden of liability upon him. (Graham v. Allis-Chalmer 1963)

 

Trust, then, was manifested in and through individuals. It was qualitative in the sense of privileging character and was premised on the assumption that people ought to be trustworthy until they produce evidence (of conduct or character) that overcomes the presumption. This is a notion that survives still, for example, in the mechanisms for licensing professionals which remains grounded in the individual, in character, and in the (political and individual) therapeutic (Sloane 2001).

 

That was 1963. By 1996, faith in trustworthiness of the enterprise of and in the key actors responsible for its operation had eroded (Le Grande et al., 2008). This erosion occurred alongside the erosion of faith in the trustworthiness of the state (Weiskopf and Willmott 2013). The locus of trust migrated as well.  It moved from a focus on people as the objects of trust and a faith in their character as the touchstone of trustworthiness, to a faith in accountability and a reliance on the perfection of systems of monitoring and surveillance from which an accountability grounded trustworthiness could be enhanced (Frink & Klimoski 1998); Dai 2021 forthcoming). Character was no longer trustworthy; inference from evidence, what could be measured and assessed appeared to provide a sounder basis for evaluating trust. Trust and accountability became intertwined (Ammeter et al. 2004). That intertwining found expression in the fiduciary duty law of corporations (In re Caremark International Inc. Derivative Litigation 1996). The Chancellor first narrowed the concept of trustworthiness of individuals as legally significant (Ibid., 698 A.2d at 969-970). He then noted the shift from the reliance on personal trustworthiness to the trustworthiness of accountability systems grounded in the assessment of the good faith of persons in crafting and operating systems of enterprise accountability based on monitoring and surveillance (Stone v. Ritter 2006); trust in the system produced the standard against which the good faith (trustworthiness as fidelity or faithfulness) of those charged with its operation would be judged (Ibid. (“fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties”).  Law now assumes and privileges an alignment between trust(worthiness), legal compliance, and accountability (Nooteboom B. 2002). “Thus, I am of the view that a director's obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards” (In re Caremark International Inc. Derivative Litigation 1996, 698 A.2d 970).

 

By the second decade of the 21^st century, trust in the enterprise was substantially understood as a function of trust in its system of accountability (Haan and Bardoel 2011). Trust in an enterprise, and the individuals responsible for its management and operation, itself also became manifested in systems of accountability beyond the enterprise itself; trust systems became an exogenous constraint on or factor in governance like crypto economics (Schneider 2021 forthcoming). One could trust an enterprise because a trustworthy third-party certified trustworthiness and could hold the enterprise to account (Meidinger et al. 2003). Those systems of accountability, in turn, produced a law of good faith (fidelity and faithfulness) that could be used to seek remedies from individuals responsible for the trustworthiness of the enterprise and of the systems of accountability necessary to ensure such trust. The reciprocal relationship between those who trust and the trustworthiness of the object of trust thus became substantially more abstract. At the same time it became increasingly tied to accountability (of individuals and institutions) and compliance systems whose basis in expectations and values could vary, producing not just variability in the meaning and normative performance of trust but also multiple regulatory sources for authenticating trust (Chang, Dillion and Hussain 2006, 25-64). That reciprocal relationship between those who extend trust and the trustworthy became more generalized as the core premise of enterprise trust were manifested in the laws of mandatory disclosure Cossart, Chaplier, and de Lomenie 2017), in the rules for exercising prosecutorial discretion against enterprises, and in the expectations of enterprise trustworthiness with respect to legal and normative responsibility (United Nations 2011; Smit, Holly & McCorquandale 2020).

 

This move toward regulated self-regulation of trust in enterprises and their personnel and operations (Schulz and Held 2004), undertaken through accountability and (legal) compliance, produced challenges of information and analytics.  If faith or reliance on veracity, integrity, or other virtues was the basis of trust, then it was necessary to define those terms, and to determine how one might measure them against an ideal of trustworthiness. Where once that was understood as essentially a qualitative measure, one triggered by knowledge of conduct deviation (Allis Chalmers, supra), increasingly the systematization of trust within the structures of compliance-based accountability shifted methodology to quantitative measures represented by the trustworthiness in systems of ensuring enterprise trust (Stone v. Ritter, supra). That shift was made possible by significant advances in technology and a growing appetite for quantification and assessment against societally (or legal) constructed ideals. Trust, then, and especially trust in enterprises appears to have started moving from a faith in alignment of values and their application to enterprise conduct of those judged trustworthy, to assessment based on the quantification of deviation of data from an ideal.  

 

In this sense, the concept of trust could be said to have started to shift from faith or reliance to a data driven assessment grounded in analytics based on the calculation of (acceptable and unacceptable) deviation from the ideal of trustworthiness (in the context in which it was deployed). That movement, in turn, appears to have produced incentives toward the efficient marshaling of data as the necessary predicate for the operation of the quantitative analytics at the heart of accountability systems, the assessments of which are now instrumental in the construction of enterprise trust. This movement toward data-based quantification produced a parallel movement toward digitalization, that is the process of converting information into digital form.  That digitalization is an essential step in the process of operating the analytics necessary for trust assessments through accountability measures. Data digitalization, in turn, has shifted the process of demonstrating trust from presumption to internal digitalized data metrics, and from internal accountability systems to digitalized services in trust (Alves, Campos & Oliviera 2012). Those in turn, are consumed internally by corporate actors as well as externally by consumers, creditors, regulators, and the public (Josang, Ismail and Boyd 2007)--that is trust itself (or trustworthiness as a conclusion) is utilized through platforms (OECD 2019, 20). Trust in enterprises, then, becomes a conclusion (an assessment) which is ideologically informed (Tetlock, Vieider, Patil and Grant 2013). That objectification of trustworthiness is in turn based on the application of analytics to accountability systems operated internally and externally to develop not just assessments of trust, but also trust ratings. These, in turn, produce platforms for the rating of trust rating, and so on (Banerjee, Bhattacharyya, and Bose 2017).

 

This transformation of the object and character of trust in enterprises brings intertwines three related themes the examination of which is the objective of this contribution. The first touches on the digitalization of corporate governance expressed through the ideologies of corporate accountability and compliance (Backer 2020). This digitalization is expressed as data driven governance expressed through algorithmic analytics and operated within platforms (Backer 2018). One trusts must now trust the technologies of trust (analytical quantification systems) to produce assessment of enterprise trustworthiness (Porter 87-190). The second examines the way that these changes affect the character and expression of trust in these entities and their governance (Anderson 2019). Trust has been subsumed within cultures of compliance and accountability and infused with the animating principles of prevention-mitigation-and remediation (Swift 2002, O’Brien 2019). Trust is informed by the capstone architecture of cultural hard wiring—the principles (embedded in “coding” language of law, for example)—and its digitalization changes its application (chapters in Braithwaite & Levi, eds. 2003). It is the way in which old law sensibilities are embedded into systems of digitalized governance—the elaboration of systems of translation and transposition—that may ultimately shape the way that trust in institutions are undermined, or the measure of that potential reshaped. It is a small step from digitalization and assessment to modelling and predictive analytics of trust and trustworthiness (Tan & Thoen 2014). The third then explores the polycentric element in the construction of these data driven governance principles and practices, that reconstitutes the trust-accountability nexus within trust platforms (Ostrom 2010). Polycentricity here functions both as a means of diffusing and overlapping governance, but also in aligning governance within chains of responsibility delegation (Backer 2016a). Its fractures represent the effects of a politics of quantification through digitalization the produce different problems of trust and different forms of control (Fligstein 1998) and its manifestation in the construction of multiple systems each of which is both an instrument of trust making and the object of examination for trustworthiness in its own right (Spiegelhalter 2017).

 

The interconnection between these themes frames the thesis of this contribution: Emerging cultures of accountability and compliance, among other things, has driven the digitalization of corporate governance and the emergence of a polycentric order of transnational regulations (e.g., human rights due diligence instruments). While widely recognized conceptions of trust inform systems of decentralized, digital governance, the principles and practices of such governance recasts trust and its relationship to accountability within corporations. The argument made here is that this leads to “contradictions” between traditional systems of faith in the trustworthiness of the enterprise and its principal (human)  and the emerging faith in the trustworthiness of systems of accountability from which enterprise trust can be objectively measured against an ideal-type, data-based metric (Sassen 2021 forthcoming). Trust in enterprises, then, become a function of trust in trust accountability systems. Competition among such trust accountability systems and the norms from which trust is measured produces polycentric regimes of transnational corporate accountability, and of measuring trustworthiness, that simultaneously enhances (through systems of exogenous objectification) and undermines (through incompatible standards and methods of trustworthiness) enterprise trust (Bodo & de Filippi 2021 forthcoming). It touches as well on the interconnection between movements toward decentering the role of the state as regulatory as well as polycentric regulation which recognizes the regulatory power of collectives beyond the state (Black 2008).

 

This thesis is closely examined through the lens of contemporary efforts to develop a law of mandatory human rights due diligence for enterprises. The movement toward the legal regulation of human rights due diligence illustrates the movement from trust in enterprises as they built their supply chains to a distrust of those enterprises, at least in their capacity to respect human rights throughout those chains. Trust was refocused from one that cantered on the faith in the trustworthiness of enterprises and a presumption of (faith in) all actors in the supply chain to comply with their responsibilities, to one that focused on the construction of systems of accountability from which trustworthiness could be determined.  That movement ultimately was systematized at the international level through the soft law instruments of human rights due diligence built into the UN Guiding Principles for Business and Human Rights (2011). That trust in due diligence mechanisms as the objectification of trust assessment produced the development measurable systems of diligence and their analysis that dovetailed with the emergence of digitalized enterprise governance. The due diligence mechanisms were then detached form the enterprise itself. That produced a double trust issue: first, the trustworthiness of the enterprise based due diligence assessments measured against an ideal, and second, the trustworthiness of systems of assessment. Trust effectively reproduces a blockchain space (Davidson and Potts 2021 forthcoming). A polycentric element was added where the systems of trust assessment (compliance with the requisites of human rights due diligence) were undertaken by private third-party enterprises applying simultaneously multiple domestic, private, public, and international standards systems (Backer 2012).  Trust enhancement then produced a movement back from privately ordered trust assessment to publicly managed legal compliance by transforming the issue of trust from a markets-based and relational issue to a regulatory one overseen by the state (Bayern 2021 forthcoming; Bright et al. 2020). The character of that transformation was well evidenced in the 2021 efforts to develop and enact a human rights due diligence system overseen by the state in Germany and within the European Union (Mateus de Albuquerque 2019). The consequence: the state, ultimately, becomes the trust platform through which enterprise trust authenticating systems operate (Dai 2021 forthcoming) reducing and managing risk exogenously (Smit et al. 2020).

 

This Part I described the problem and the challenge, one that arises from the near simultaneous shift in cultural expectations about trust from trust in character to trust in measurement, and the rise of cultures of data driven technologically complicated systems of compliance and accountability. Part Two then considers the transformation brought by efforts to respond that that challenge. These consisted of three closely interlinked trajectories: digitalization, complex compliance-accountability regimes, and the emergence of platforms as the space within which collectives of consumers and producers of governance and trust related data could interact. Part three then examines the consequences of the structures that have emerged as a product of those trajectories.  The first is the constitution of polycentric governance standards around which entities must now navigate and the second is the detachment of trust from the entity that is its subject. That is, it considers the rise of trust platforms as the autonomous pint of engagement through which the trustworthiness of corporate governance is negotiated. (Backer 2016b).