Corporate governance with different set of eyes
Discussions about the role of boards in companies are often puzzling because the underlying theoretical frameworks differ. In the literature at least eight challenging theories can be found underpinning various perspectives and which may possibly lead to challenging arguments. Some researchers argue a general theory of the board is needed which avoids such confusion, as well as an appropriate conceptual framework to adequately reflect the reality of governance. Different perspectives and a vivid theoretical debate are, however, not unusual in a relatively young field of study such as corporate governance. Research in corporate governance is merely a few decades old, and the phrase ‘corporate governance’ was seldom used until the 1980s. This is interesting, as boards of directors can be traced back to the nineteenth century and because The Modern Corporation and Private Property by Berle and Means, published in 1932, is often quoted as the introduction to the field. Therefore, a short exploration into the history of the field follows, to understand its different perspectives.
The scandals
The history of corporate governance seems to have been driven by corporate scandals. Although it is not noted in Berle and Means’ thesis, it is hard to disregard the fact their book was written during one of the most severe recessions in modern times, a recession which had an immense influence on politics and commerce around the world. There are indications waves of interest in corporate governance occur at the break of prosperous times and (irrational) corporate confidence. Millstein and MacAvoy (1994) have, for example, studied the history of corporate governance in parallel with the waves of mergers in the 20th century. This is even more noticeable in the emergence of corporate governance codes. The Cadbury Code of 1992 was a response to a series of scandals in Britain in the 1990s, most notably Coloroll, Polly Peck, Bank of Credit and Commerce International, and Maxwell enterprise. At the same time, some legendary corporations like IBM, General Motors and Sears were faltering in the United States, which led to increased pressure from institutional investors, takeover firms, and judicial interpretations of fiduciary duties. The Sarbanes-Oxley act in the United States was pushed through congress in the aftermath of corporate scandals like Enron, WorldCom, Global Crossing, Lucent, Williams, Dynegy, K-Mart, and HealthSouth. This did not come as a surprise. To quote Warren Buffet: “It’s only when the tide goes out that you learn who’s been swimming naked.”
Emphasis on monitoring
The effect of this scandal-driven process of discussion of corporate governance was an emphasis on the monitoring duties of the board. At the same time, interest in the ‘directing’ concepts decreased. It is important to acknowledge the Delaware courts in the United States have emphasised both the monitoring and directing functions of the board. As has been made clear in a series of famous cases, e.g. Paramount Communications; Grobow v. Perot; Hanson Trust PLC v. SCM Acquisition; Moran; Smith v. Van Gorkom, “boards could and should determine key strategic decisions, acting independently of management, through a thoughtful and diligent decision-making process”. Furthermore, directors themselves have emphasised the need for increased strategic participation. Therefore, it can be argued the monitoring function has been fed, while the directing function has been starved. A parallel theoretical discussion emphasises a kind of duel between the monitoring function and the directing function. Agency theory, which is often used synonymously with governance theory, emphasises the monitoring function of the board. On the other hand, stewardship theory, a counter theory to agency theory, proposes the main function of the board should be directing. However, agency theory has received the most attention in the literature.
The Anglo-Saxon dominance
Most discussion on corporate governance is dominated by the Anglo-Saxon perspective. Also, most initiatives for governance reform have been initiated in the USA and the UK, the Cadbury code and Sarbanes-Oxley act being the most notable. There is little doubt these Anglo-Saxon initiatives have had a global influence, for better or worse. Although the pressure for change has been the most obvious in the USA and UK, the winds of change have blown all over the world. According to the European Corporate Governance Institute, by 2003 at least 50 countries had introduced a governance code for companies, countries as different as Mauritius, Russia and Switzerland. There are concerns that although the initiatives of the Anglo-Saxon perspective have been well received, these approaches may not apply or may be less effective when, for example, legal traditions, cultures, institutional structures, and ownership structures differ. Therefore, the perspective may need to be broadened when corporate governance is discussed in an international context, although the Anglo-Saxon perspective can be used as a starting point.
Relevant perspectives
There are many different perspectives, and different dimensions of perspectives, in the corporate governance literature, which make it both complex and paradoxical. By understanding the origin of the different perspectives it is easier to understand the implications and the relevance of those perspectives. Contingency theory claims that some perspectives will be more relevant than others in different situations. It is important to acknowledge that rather than clinging to the perspective of institutional theory for further advancing the discussion of corporate governance.
References
Berle, A. A. and Means, G. G. (1932). The Modern Corporation and Private Property. New York: Macmillan.
MacAvoy, P.W. and Millstein, I.M. (2003). The Recurrent Crisis in Corporate Governance. New York: Palgrave MacMillan.
