3. Learning objectives
• Define corporate governance and explain its historical
background
• Understand the components of contemporary corporate
governance theory and practice, including agency theory
and shareholder and stakeholder value theories of the firm
• Understand the role of corporate governance and the
boardroom in strategy making
• Distinguish between comparative corporate governance
systems
• Explain the role of corporate codes of ethics and corporate
social responsibility (CSR) in corporate governance
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4. Corporate governance
• Corporate governance covers the system of rules, practices
and processes by which a company is directed and
controlled by institutions defined in company law, financial
market regulation and industrial relations law:
• Cioffi (2000: 574) sees the context of corporate governance
as including a ‘nexus of institutions defined by company law,
financial market regulation, and labor law’
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5. Corporate governance
• Corporate governance involves:
– Broad issues relating to the processes and relationships
that affect how corporations are administered and
controlled, including incentives, safeguards and dispute-
resolution processes used to order the activities of the
various stakeholders recognized by the corporation, such
as owners, managers, employees, creditors, suppliers,
customers and communities within which business is
done
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6. Corporate governance
– Represents the formal
recognition that, despite
whatever may inform the
teaching agenda about the
functional homogeneity of
business and
management, corporate
life, riddled as it is with
different interests, can, on
occasion, be riven by
conflicts
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7. Origins of corporate governance
• Separation of ownership and control
• Where ownership and control are functionally separated,
issues of corporate governance come to the fore:
– the separation of ownership and control means potentially
that the managers controlling the corporation can use its
resources to pursue prestige, power or personal interests
– principal/agency theory
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8. Agency theory
• Agency theory refers to the relationship between ‘principals’
and ‘agents’ (e.g., shareholders and managers) and how
principals try to align agents with their own interests.
• Agency theory is concerned with resolving problems that
can exist in agency relationships
• Economists focus on allocative efficiency defined as a
matter of the optimal allocation of resources that are scarce
(in short supply), such as land, labour and capital, by
mechanisms such as markets and hierarchies (the
corporation and the state)
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9. Agency cost
• Where owners of capital lack
information about how the
organization in which they
have invested is organized,
they are potentially at the
mercy of the managers, the
agents, leading to the
problem of monitoring those
agents
• The cost of this monitoring is
called agency cost
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10. Problems with agency theory
• Maclean et al. (2006: 15) identify three major problems with
agency theory in relation to boards:
• Fails to confront the social realities of the boardroom and
business milieu; it is a set of abstractions with little empirical
content
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11. Problems with agency theory
• Fails to recognize that ownership and control are not
sharply separated; in part, this is a recursive effect of the
theory
• Fails to recognize that not all actors make rational choices:
deficient boardroom cultures and practices may encourage
abuses of power and recklessness in action, as the many
corporate scandals of recent years attest
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12. Inside the boardroom
• Stakeholders, creditors and outside members of the board
all wield influence on strategy-making:
– with the exception of creditors, whose influence is often
not invited, these stakeholders are chosen by the senior
management as board members
– part-time board members only have a limited commitment
of time and discretion given over to their board activities
– management is infinitely better informed and has access
to much more information and data than these external
influences
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13. Inside the boardroom
• Norms of board conduct often limit the influence of outsiders
to little more than an advisory role
• Boards are boundedly rational, non-linear, emotional and
political in their decision-making character
13
14. Problems with boards
• Ritualism
• Where authority is vested in a board that meets rarely and is
disengaged from operational matters, for all intents and
purposes these board meetings will be routine rituals led by
the CEO
• Concentration of powers
• Where the CEO is also the chair of the board, it is a virtual
guarantee that the board will be ineffectual. Given the
constraints attached to agenda setting, a board can only be
as independent and as effective as its CEO chair wants it to
be and is capable of making it, says Parker (2002: 239)
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15. Problems with boards
• Training
• Being a board member requires training; most nations have
an Institute of Directors that offer programmes of training for
board members
• Board size
• Parker suggests that a board of about seven or eight
members is likely to be more effective than one that is much
bigger
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16. Boardroom size
• When boards exceed 15 or 20 members, they become more
prone to factionalism and less able to work together
• In US research, it has been established that companies with
smaller boards:
– had stronger incentives for their chief executives
– were more likely to dismiss an under-performing CEO
– achieved larger market share and superior financial
performance
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17. Emergent topics in board research
• Impact of independent members on boards:
– Independence promotes the potential for productive
conflicts
• Role of women and board diversity:
– Diversity introduces more perspectives; this might lead to
more conflict but also to the canvassing of a broader
range of options
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18. Emergent topics in board research
• Links between boards and organizational performance:
– Boards are ultimately responsible for organizational
performance so become the site of conflict where
performance is failing
– Diversity and independence enhance the likelihood of
failing performance not being tolerated
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19. Emergent topics in board research
• Role of boards in major corporate change:
– Boards are responsible for strategic – long-term –
decision-making
• Impact on boards of their operating context, such as the
size, location and history of the company:
– Boards are the repository of both history and renewal: the
former should not overwhelm the possibilities of the latter
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20. Emergent topics in board research
• Relation between boards and management:
– Boards and management need to be able to work with
each other effectively
• Responsibility for ethics, reporting and transparency:
– Non-executive directors have a particular role in ensuring
that standards are met as they can exercise a checking
and balancing function on organizationally internal board
members
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21. Comparative corporate governance
• Major variants of corporate governance include:
– shareholder capitalism
– social democratic stakeholder capitalism
– democratic stakeholder capitalism
– state capitalism
– familial capitalism in the Mittelstand
– East Asian hybrid capitalism
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22. Corporate codes of ethics
• A major aspect of governance is the rules and norms
through which governance occurs
• These are usually referred to as ‘codes of ethics’:
– law and codes
– codes and compliance
– codes and legitimation
– codes and conflict
– creating robust codes of ethics
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23. Corporate codes
• Codes have obvious
legitimation functions but
are also of real value in
framing the way that the top
management team
behaves
• Corporate codes are not
static documents and their
‘sense’ and interpretation
are never guaranteed by
what they state or what
they say
23
24. Corporate codes
• They are documents that are
subject to constant translation,
in process and in use:
– In some cases, instead of
acting to encourage and
facilitate the development of
moral learning and the
exercise of moral
judgement, codes can
operate to promote
routinized compliance when
strictly applied
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25. Corporate Social Responsibility
(CSR)
• CSR has been defined by the European Commission (2005)
as existing when companies integrate ‘social and
environmental concerns in their business operations and in
their interactions with their stakeholders on a voluntary
basis’
• The majority of organizations today have a strategy for CSR
as a part of their overall strategy
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26. Ecological modernization
• Ecological modernization
strategies suggest that
economic and technological
win-win solutions – gaining
less pollution and more
profits through more efficient
use of resources – can
ameliorate harmful
environmental effects
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27. Problems with CSR
• Banerjee (2007) criticizes existing CSR codes and practices
• Banerjee pushes instead for the following reforms:
– mandatory corporate reporting requirements on
environmental and social impacts
– a process for prior consultation with affected
communities, including environmental and social impact
assessment and complete access to information
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28. Problems with CSR
– extended liability to directors for corporate breaches of
environmental and social laws and corporate liability for
breaches of international laws and agreements
– rights of redress for citizens, including access for affected
people anywhere in the world to pursue litigation,
provisions for stakeholders to legally challenge corporate
decisions and legal aid mechanisms to provide public
funds to support such challenges
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29. Problems with CSR
• Banerjee (2007) continued:
– Community rights to resources, including indigenous
people’s rights over common property such as forests,
fisheries and minerals
– Veto rights over developmental projects and against
displacement and rights to compensation for resources
expropriated by corporations
– Sanctions against corporations for breaching these
duties, including suspending stock exchange listings,
fines and (in extreme cases) revoking the corporation’s
charter or withdrawal of limited liability status
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30. Conclusion
• You should now know about:
– Corporate governance
– Agency theory
– Boards
– Comparative corporate
governance
– Codes of ethics
– Corporate Social Responsibility
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31. References
• Banerjee, S.B. (2007) Corporate Social Responsibility: The
Good, The Bad and The Ugly. Cheltenham: Edward Elgar.
• Cioffi, J.W. (2000) ‘Governing globalization? The state, law,
and structural change in corporate governance’, Journal of
Law and Society, 27(4): 572–600.
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32. References
• Maclean, M., Harvey, C. and Press, J. (2006) Business
Elites and Corporate Governance in France and the UK.
London: Palgrave Macmillan.
• Parker, H. (2002) ‘Governing the corporation’, in Business:
The Ultimate Resource. Cambridge, MA: Perseus. pp. 239–
240.
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