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Corporate Governance:Its scope,concerns and theoriesShann TurnbullThispaperoutlinesthe conceptual,cultural,contextualand disciplinary scope oftherapidly evolving topic ofcorporate governance.As a basis forimproving the rigourofresearch and analysis,some definitions are suggested.Reasons for the diversity of view-points and concerns are considered.To provide an orientation for new scholars and thosefrom specialised disciplines, recent surveys of corporate governance are reviewed from theirethnocentric,contextual,and intellectualcontingencies.The prospects ofdeveloping thetopic as a "science of organization" are considered along with areas for future research.Key words:agency,control,corporations,culture,cybernetics,directors,firm,finance,governance,information theory,institutions,ownership,political,power,regulation,self-regulation,self-governance,shareholders,stakeholders,stewardship,theory ofthe firm,transaction costs.IntroductionThe purpose ofthis paper is to providean orientation in corporate governanceforboth new scholarsand specialistsindisciplineswhich intersectwith thetopic.Thesedisciplinesincludemicro-economics,organizationaleconomics,organizationaltheory,information theory,law,accounting,finance,management,psychology,sociologyand politics.Each mayview corporategovernancein adifferentway,somewhatlike the apocryphalgroup ofblind peopletrying to identify an elephant through touchby each describing quite differentpartsofthe animal.To encompassmostperspectives,an in-clusivedefinition ofcorporategovernanceis introduced in the nextsection to includealltypesoffirmsand otherinstitutionalarrangementsinvolved in productiveac-tivities.Thethird section considershowsome key words are used in differentwayswithin,and between,disciplines.To assistin integrating the knowledge ofthe variousdisciplines,somecommonlanguageissuggested.A diversity ofagents is shown to be in-volved in influencing,controlling,regulatingand managing firms,productivenetworksand associations.Again,an inclusiveap-proach isused to encompassthe diversityofwaysin which leading workersin thefield define the topic of corporate governance.Thenextsection considerstheoriginsofthediverseviewpoints.Thevariousper-spectivesare related to the discipline andprofessionalaffiliationsofvariouswritersin the field as wellas to their culturalandcontextualsituations.We then consider howwelltheoriesofthe firm fitthese variouscontingencies and how governance practicesdiffer between cultures.Twosurveysofcorporategovernanceundertaken in 1996 by US scholars are thenreviewed from theperspectivesdevelopedby thepaper.Onesurvey undertaken bythe NationalBureau ofEconomic Researchcomprehensively reviews the extensive,butnarrow,financial perspective used by econo-mistswho base much oftheiranalysisontransaction costsand agency theory.Theothersurvey prepared forthe OECD,pre-sentsfourviewpoints.Theseare:(i)aVolume 5Number 4October 1997#Blackwell Publishers Ltd 1997.108 Cowley Road,Oxford OX4 1JF,UKand 350 Main Street,Malden,MA 02148,USA.CORPORATE GOVERNANCE180
simple finance model, (ii) stewardship theory,(iii)stakeholder theory and (iv)the politicsofshareholder controlatthe micro levelofthe firm.This fourth perspective is reviewedfrom a macro political context which includesan historical outline of how state and federalgovernments in the US concerned themselveswith the control and regulation of companies.The section concludes by considering someemerging politicalissuesraised by Monks(1996) in the governance of US firms and thenational economy.Three additional approaches are suggestedforanalysing how productive activities aregoverned by socialinstitutions.Thesearebased on analysing respectively:(i)culture;(ii)powerand (iii)theirinformation andcontrol (i.e.cybernetic) architecture.Research opportunitiesareidentified insuch topicsas:(i)limited lifeenterprises;(ii) worker ownership and control;(iii) com-pound boards with two, three and more tiers;(iv)information theory;(v)productive net-works;(vi) holonic structures;and (vii) self-regulation and self-governance.Concludingremarks follow.DefinitionsCorporate governance describes all the influ-encesaffecting theinstitutionalprocesses,including those for appointing the controllersand/or regulators, involved in organizing theproduction and sale ofgoods and services.Described in this way,corporate governanceincludes all types of firms whether or not theyare incorporated under civil law.Firms can existas either common or civillaw companies,partnerships,jointventures,limited liability partnerships,co-operatives,mutualassociations,buildingsocieties,friendly societies,trading trusts,etc.Fama &Jensen (1983b)even considered churches.However,organizationslikea church,notengaged in the production and sale of goodsand services,do notmeetthegenerallyaccepted description of a firm.Firmsmay be publicly traded,privatelyheld, for profit, or not-for-profit. Much of theliterature on corporate governance implicitlyassumes thatonly publicly traded firms arethe subject of analysis (e.g.Blair 1995:3).Thiswould limit the topic to less than 40,000 firmsworld-wide and involve only a fraction of alleconomic activity in even the most advancedmarketsocieties(FIBV 1993;Economist1995:116).Restricting the study of corporate govern-ance to publicly traded corporations wouldlimitinvestigation into themostefficientinstitutionalarrangementsforundertakingproductive activities.Itmay wellturn outthat privately held entities could provide themost efficacious form of enterprise.A possi-bility supported by Jensen's (1993:869)viewof `a proven modelof governance structure'discussed later, and the outstanding record offirms found around the town of MondragoÂnin Spain (Turnbull 1995d).Iffirmsincludeallsocialinstitutionsengaged in the production and sale of goodsand services,then both public and privatesector organizations such as schools,hospi-tals,clubs and societies,need to be included.With firms defined in this way,the scope ofcorporate governance includes nearly alltheeconomic activity of a nation. It was by askingthequestion,`Why isnotallproductioncarried on by onebig firm?'thatCoase(1937) laid the foundations for developing a`theory of the firm'.Coase considered the existence of a `masterand servantrelationship',oran `employerand employeerelationship'asadefiningfeature ofa firm.However,thisconditionwould excludeactivitiescarried outbyteams,partners,jointventurers,strategicalliances,associationsand networks.Thisled Alchian & Demsetz (1972)to ask thequestion `whatismeantby a firm?'Theyconcluded that `The term firm as commonlyused is so turgid of meaning that we can nothope to explain every entity to which thename is attached in common or even tech-nical literature'.However,Coase(1937)also stated:`thedistinguishingmarkofthefirm isthesupersession ofthe price mechanism'.Thisdefinition avoidstheproblem ofidentify-ing the institutionalform ofa firm.Itdoesnotnecessarily avoid the problem ofident-ifying the boundaries ofa firm (Barney &Ouchi1986:78).Theboundaryproblememergeswhen analysingjointventures,strategic alliances,associations and networkswhich somescholarstreatas`economicentitieswhich haveacoherence,astruc-ture,and an individuality oftheirown'(Mathews1996b:116).Ambiguousbound-ariesarefound with MondragoÂn firms,theirrelationship groupsand theirsupra-organizationalsystems,aspointed outbyTurnbull (1995d).Theneed toidentifyfirmsand theirboundaries may notbe required to developthemostefficaciousinstitutionalarrange-ments for organizing productive activities insociety. The problem of defining firms or theirboundaries is avoided by defining corporategovernance as proposed atthe beginning ofthis section.SCHOLARLY RESEARCH AND THEORY PAPERS181#Blackwell Publishers Ltd 1997Volume 5Number 4October 1997
TerminologyThe literature on the theory of the firm,cor-porate governance,and information theoryattributes different meanings and nuances toa numberofwordsin common usage.Aswords are the tools of thinking,they need tobe clearly defined to provide a basis for clearcommunication and rigorous analysis.Ambiguity existsin the meaning ofkeywords such as `control',`regulate',`manage'`govern'and `governance'.Both the ambigu-ities and circular dictionary definitions needto be resolved to develop rigour in the studyof corporate governance.Tannenbaum (1962) defined control as `anyprocess in which a person or group of personsororganization ofpersons determines,i.e.,intentionally affects,whatanotherpersonor group or organization willdo'.This defi-nition provides a word to describe a situationwhereno standard ofperformanceisre-quired.Otherwriters(Etzioni,1965:650;Downs,1967:144)use the word controlinthesenseofmeetingsomestandard ofperformance.In these situations,the word`regulate'willbe used whetherornotthe`regulator'is a manager ofthe organizationconcerned or an externalbureaucrat.Defin-ing `control'and `regulate'in thesewaysprovides a common language with the scienceofinformation and controldescribed as`cybernetics'(Ashby 1968).Thisfacilitatesthe use ofinformation theory in corporategovernance analysis.The word control,as defined above,infersthat a person or group possess the power todetermine what actions are taken. Self-controlthen means thatnotallthe power availableisused to furthertheselfinterestofthecontroller(s).Self-controlsimply becomestheavoidanceofusingpowerin somedegree,ratherthan meeting a given result.This is a requirement of directors, or a board,wishing to behave as `stewards',and will bediscussed later.The word `manage'willbe used to com-municatetheresponsibility forexecutiveaction.It could be ambiguous to mean eithercontrolorregulate.Theword `govern'islikewiseambiguous.`Governance'willbeused to describeasystem ofcontrolorregulation which includestheprocessofappointing the controllers or regulators.Self-regulation means that the standards ofperformance are established by those beingregulated.Self-governancemeansthatthesystem ofcontrolorregulation includestheappointmentofthecontrollersby thegoverned.By thismeans,self-regulationcan be introduced through self-governance.Self-governance involves a politicalprocesswithin institutions to appoint the controllersresponsible for regulation. Self-governance ina politicalcontext means `government of thepeople,by the people for the people'.Thisdescribesdemocracy.Theintroduction ofelements ofself-governance into institutionsinvolved in productiveactivitieswouldenrich democracy.Thereareargumentsand evidence thatthisproducesoperatingadvantages (Turnbull 1997c,e).In discussing systems of corporate control,economists frequently use the word `capital'in different ways. In their `Corporate Govern-ance Survey',Shleifer & Vishny (1996)usedthe word in four differentways to indicate:(i)themeansofproduction (p.6);(ii)aninvestmentwhich may notbe representedby the means of production (p.3); (iii) finance(p.2)and `externalcapital'(p.6);oreven(iv)justcreditcreated by contract(`bankdebt' and `junk bonds').The problem introduced by such ambiguityis illustrated by their reference to `the peoplewho sink the capital'(p.3).Itis notclear ifthese `people' are: (i) investors subscribing fornew shares;(ii)shareholders who purchaseexisting shares from others;(iii) bankers wholend money;or (iv) the managers/'entrepre-neurs' who purchase the means of productionor whatMoulton (1935:7)describes as `pro-creativeassets'.Theagency costs,benefitsand risk,change according to the variousmeanings of the word capital.Clarity of the Shleifer & Vishny statement isfundamentalfor their survey as they definecorporate governance as `the ways in whichsuppliersoffinance to corporationsassurethemselvesofgettingareturn on theirinvestment'(p.2).With thisperspective ofconsidering themoraland otherhazardsofinvestorsobtaining satisfactory returns,Shleifer & Vishny provide a comprehensiveliterature review.Confusion aboutthe word capitalcan becompounded by accountants who introducetheir own professionalmeanings which canalso be ambiguous.Clear analysis and com-munication would beadvanced with lessambiguous words,especially when the con-text does not make the meaning clear.In aninterdisciplinary topic like corporate govern-ance itmay be safer simply notto use theword `capital'.However,ambiguous words can be useful.Alchian & Demsetz (1972:note 1)use theword `meter'in the sense of both measuringand control. In other words, they are discuss-ing regulation as defined above. Ambiguity inthe words `manage' and `govern' can likewisebe useful.However,care needs to be takenAmbiguity in themeaning of`governance'But ambiguity canbe usefulCORPORATE GOVERNANCE182Volume 5Number 4October 1997#Blackwell Publishers Ltd 1997
notto use ambiguous words un-necessarily.The term `governance' is often used when theword `control'or `regulate'would be moreappropriate or provide greater clarity of theprocess involved.The study by Porter (1992)rarely uses the word governance.Ifthe term `management'isreserved todescribeprocesseswhich involveexecu-tiveaction then itdescribesasubsetofgovernance processes.However,the kudosperceived by somewritersin corporategovernance matters has resulted in the wordgovernancebeing overused.Many boardactivitiesaresubjectto managementpro-cesses such as establishing sub-committees.Greater clarity and focus would be achievedby using terms such as `board management',`board conduct',`corporatemanagement',`corporate organization',or`corporate con-duct',ratherthan thelessspecific,moreambiguous and ambitious phrase `corporategovernance'.A usefuldefinition forthe word `stake-holder'has been provided by Donaldson &Preston (1995).`Stakeholdersare identifiedthrough the actualorpotentialharmsandbenefitsthatthey experienceoranticipateexperiencing as a result of the firm's actionsor inactions'.In 1963,the Stanford ResearchInstitutedefined asstakeholders`thosegroups withoutwhose supportthe organiz-ation would cease to exist' (Freeman 1984:31).This class ofstakeholders are described byTurnbull (1997c,e,f ) as `strategic stakeholders'as strategic issues concern the ability of a firmto exist. Strategic issues transcend discountedcash flow analysis based on a relative per-formance measure of an `opportunity rate ofreturn'.The term `compound board'willbe usedto describe the existence of two or more con-trol centres whether or not they are requiredby law,the constitution ofthe firm orarecreated by relationships externalto the firm.Compound boards are commonly found inAnglo culturesalthough they may notberecognised as such.Publicly traded corpor-ations controlled by a parent company,con-trolgroup,relationship investororfamilyshareholder create a compound board.Twoand three tiered boards may be required bylaw in Europe (Analytica 1992) and are foundin Japanesefirmswheretheshareholderselect`statutory auditors'to oversee the con-formanceroleoftheboard described asKansayaku(Charkham 1994:93).AKeiretsuCouncil creates a third control centre.Influences which Affect theOperations of FirmsFirmswhose securitiesare publicly tradedgenerally have more externalinfluences ontheir operations than other firms. One way ofindicating the scope of corporate governanceis to considerthe more obvious influenceswhich can affectthe operations ofpubliclytraded firmsasindicated in Table 1.Theinfluences can be either internalor externalwith externalinfluences arising from eitherthe private or public sector.The multitude of stakeholders identified inTable 1 are consistent with the definitions ofTable 1.Influences affecting the operations of publicly traded firmsPrivate sector influencesPublic sector laws/regulatorsCustomersTrade practicesCompetitorsAnti-monopolyShareholdersSecuritiesEmployeesLabour & Equal OpportunityUnionsArbitration courts,etc.SuppliersFair tradingBankers & financiersCredit & bankruptcyAuditorsCorporateStock Exchange rulesFederal/State/Local taxMarket for sharesHealth & safetyMediaEnvironmentalProfessional associationsQualityTrade associationsBuildingDirectors & AdvisersCommunityDefining`stakeholder'SCHOLARLY RESEARCH AND THEORY PAPERS183#Blackwell Publishers Ltd 1997Volume 5Number 4October 1997
corporate governance provided by a numberof authorities in the field.Demb & Neubauer(1992a)state that`Corporate Governance isthe process by which corporations are maderesponsivetotherightsand wishesofstakeholders'. Monks & Minow (1995:1) wrotethat:`Itisthe relationship among variousparticipants in determining the direction andperformance ofcorporations'.While Tricker(1994:xi)states`Corporategovernancead-dresses the issues facing boards of directors,such as the interaction with top management,and relationships with the owners and othersinterested in theaffairsofthecompany,including creditors,debt financiers,analysts,auditors and corporate regulators'.However,otherwriterslikeSternberg(1996)do notacceptthatpublicly tradedcorporationsshould be`responsiveto therightsand wishesofstakeholders'aspro-posed by Demb & Neubauer (1992a).Stern-berg states that`stakeholdertheory is bothmisguided and mistaken',and that`stake-holder theory of accountability is unjustified',it `undermines private property,agency andwealth',`is incompatible with business'and`with corporate governance'.Even before the contribution by Sternberg,thediversityofviewsaboutcorporategovernance led Pound (1993b) to state:`Thelack of a broad defining paradigm has createda sense of intellectualvertigo in the increas-ingly intense debate over corporate govern-ance reforms'. An objective of this paper is toprovidesomeorientation fordebateandresearch.Differences in ViewpointsOne reason why diverse views can exististhat different scholars investigate firms fromdifferentviewpoints.Donaldson & Preston(1995)pointoutthata firm was viewed byAdam Smith (1937)and by contemporaryinvestors as an organization which obtainedresources from its investors,employees andsuppliers to produce goods and services forits customers.Marxists,financial economists,and Sternberg, view a firm as an organizationwhich obtains resources from its employeesand suppliers, with cashflows contributed byits customers to service its owners.In otherwords,Marxistsand othersview firmsasservicing theirownersratherthan theircustomers,employees and suppliers.The stakeholder view of a firm is differentagain.It considers that investors,employees,suppliers,customers and stakeholdersgen-erally both contribute and receive benefitsfrom a firm. In addition, other parties may beinvolved in relationshipssuch asunions,tradeassociations,governmentand evenpolitical groups (Donaldson & Preston 1995).The various views on corporate governancecan alsoberelated todifferentculturalcontexts,intellectualbackgrounds and inter-ests ofscholars.Workers in the field comefrom different academic disciplines.There isoften little,orincomplete,integration be-tween the various disciplines.The overlap ofcorporate governance with other disciplinesis rarely articulated or even recognised.Toindicate how different viewpoints arise,andto provide an overview ofthe topic,someexamples are considered.`The phrase corporate governance is oftenapplied narrowly to questionsaboutthestructureand functioningofboardsofdirectors'(Blair 1995:3).This view is foundamongstsome business schoolscholars andmanagementconsultants.LexDonaldson(1990:376),defined corporate governance as`thestructurewherebymanagersattheorganizationalapex are controlled throughthe board ofdirectors,its associated struc-tures,executive incentive,and other schemesofmonitoring and bonding'.This view wasreflected by his colleague, a former McKinseyconsultant,inStrictlyBoardroom(Hilmer1993).Thedefinition ofcorporategovernancequoted above by Tricker (1994) is focused ontheboard room butextendsthescopetoinclude `owners and others interested in theaffairs ofthe company,including creditors,debt financiers, analysts, auditors and corpor-ate regulators'.Such widerconcerns reflectthe audience for company financialreports,consistentwith both Tricker'saccountingbackground and the targetaudience for hispublication.Monks & Minow (1995) have an interest in`relationship investing'asdescribed byMonks (1994).Theirdefinition ofcorporategovernanceisbased on `relationships'asquoted earlier.Monks& Minow formed acommercialmutualfund which they called`Lens'to focus on under-performing corpor-ations.As active shareholders they seek toadd value to companies by relating to theboards of their investee companies as owners.In making recommendationsto changethe pattern ofownership and controlofUSfirms to make them more competitive,Porter(1992) targeted policy makers,investors,andcorporations.He identified the need to in-volvestrategicstakeholderssuch asem-ployees,customers,suppliers and membersof the host community, in the ownership andcontrolof corporations,to make them inter-nationally competitive.CORPORATE GOVERNANCE184Volume 5Number 4October 1997#Blackwell Publishers Ltd 1997
The rejection by Sternberg (1996)ofsuchstakeholderinvolvementwasmadein thecontext of the author being based in Englandwhere intense politicalinterestarose in thenature of a `Stakeholder Economy' which wasraised by the leader ofthe then parliamen-tary opposition party (Tony Blair 1996)oneyear before a generalelection.As a formerelectronics engineer,and motivated by beingafounderand formerPresidentoftheAustralian Employee Ownership Association,Turnbull(1997f )utilised information theoryto provide counterarguments to Sternbergbased on his re-interpretation ofthe theoryof a firm (1994a,d).Table 2 indicates some ofthe diversity incorporate governance analysis and concerns.The interests ofeach ofthe scholars listedcould be far greater than those particularlynoted.The scope ofthe inquiry into `TheFinancialAspects ofCorporate Governance'was limited by the terms of reference of thecommittee chaired by SirAdrian Cadbury(1992).The committee was established as a`damagecontrol'initiativeby theCity ofLondon following some high profile failuresofpubliclytraded corporations.Similarfailuresoccurred in Australiaduring the1980's when Henry Bosch (1995) chaired theNationalCorporationsand SecuritiesCom-mission.The contribution by Shann Turnbull(1975b)waspartofthefirsteducationalqualification for company directors and arosefrom concern over earlier corporate failuresin Australia and from his activities as a cor-porate raider,company promoter and chair-man of publicly traded companies. Corporatefailuresin theUSduring the1980'sledMichaelJensen (1993) to analyse `the failureofcorporate internalcontrolsystems',JohnPound (1992; 1993a,b) to review the politics ofcorporate control,and MichaelPorter (1992)tocomparetheUSsystem ofcorporategovernance with those found in Japan andGermany.Cultural Specificities in Theoriesand PracticeResearch into the theory and practice of cor-porate governance has been heavily focusedon English speaking countries and the US inparticular.Allscholars listed in Table 1 arefrom `Anglo' countries. `Most of the availableempiricalevidence in the English languagecomes from the the United States'(Shleiferand Vishny 1996:6). Hollingsworth, Schmitter& Streeck (1994:4)state:`In the 1950sand1960s,hardly anyonedisagreed with theassumption thatthemoretraditionaland,therefore,backward economieslikeJapan,Germany,or Europe as a whole would haveto adoptAmerican patternsofindustrialorganization'. The lack of research in compar-ing different systems of corporate control wasTable 2.Subjects of analysis and variables relating to corporate governanceAuthors (date order)Subject of analysisVariableSimon 1962InformationManaging complexityTurnbull 1975b & 1993bDirectors' responsibilitiesManaging conflictsJensen & Meckling 1976Agency costsFinancial structureWilliamson 1985Transaction costsIndustrial organizationHollingsworth & Lindberg 1985Four modes of governanceSocial organizationMonks & Minow 1991;1995;1996Board accountabilityRelationship investingDemb & Neubauer 1992aStakeholdersFirm responsivenessCadbury 1992Financial aspectsBoard conformancePorter 1992Nature of ownershipFirm competitivenessHilmer 1993BoardroomFirm performancePound 1993bPolitics of ownershipEconomic efficiencyJensen 1993Publicly traded firmsFailure in control systemsBosch 1995;AIMA 1995Directors' dutiesCode of conductSternberg 1996Stakeholder appropriationShareholder valueHawley & Williams 1996Fiduciary capitalismCorporate performanceShleifer & Vishny 1996Moral hazardsInvestment returnsPersson,et.al.1996Separation of powersWelfare of stakeholdersTurnbull 1997c,e,fCybernetic architectureOperating advantagesSCHOLARLY RESEARCH AND THEORY PAPERS185#Blackwell Publishers Ltd 1997Volume 5Number 4October 1997
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