Bergamo CorpGov [Sola lettura] - UniBG Governance...Cadbury Report, 1992) ‘Corporate Governance is...

Prof. John Ferguson

Corporate Governance

Part 1 - What is a corporation and who should it serve?

CORPORATE GOVERNANCE

What is Corporate Governance?‘the system by which companies are directed and controlled’ (The Cadbury Report, 1992)

‘Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align, as nearly as possible the interests of individuals, corporations and society.’ (Sir Adrian Cadbury, foreword to the ‘Global Corporate Governance Forum’, World Bank, 2003)

CORPORATE GOVERNANCE What is Corporate Governance?System of rules, regulations and procedures by which corporations are directed and controlledIncludes: Company Law, other domestic law (such as employment law), Financial reporting requirements (IASB), audit, stock market listing requirements, international law, treaties, free trade agreements, soft law instruments, etc.As Tricker (2000) states, this assemblage of rules, regulations and procedures is variously concerned with establishing the purpose of companies, whose interests they should serve, and the duties and rights of various stakeholders. How such things are resolved has (arguably) a tremendous impact upon such things as: financial performance, distribution (who gets what), participation and voice (who gets a say), and wider social indicators

TWO FUNDAMENTAL QUESTIONS

What is a corporation?

And…

In whose interests should the corporation serve?

WHAT IS A CORPORATION?

Concern with understanding and defining the corporation has a long and complex historySee, for example:

Gierke, O.V. (1902) Political Theories of the Middle Ages, Cambridge University Press

Kahn-Freund, O. (1944), “Some Reflections on Company Law Reform”, Modern Law Review

Laski, H. (1917), “The Early History of the Corporation in England”, Harvard Law Review,30(6), pp. 561-588

Maitland, F.W. (1900), “The Corporation Sole”, Law Quarterly Review, p.335-355

Maitland, F.W. (1936), “Trust and Corporation”, in Hezeltine et al., Maitland: Selected Essays, Cambridge University Press

WHAT IS A CORPORATION?The above sources were concerned with various forms of group activity (township, village, church, state) and with what constituted corporate form and corporate personality.

These enquiries underpin a range of contemporary perspectives on the business corporation.

Millon, D. (1990), “Theories of the Corporation”, Duke Law Journal, No. 2, pp.201-262In exploring theories of the business corporation over 150 years, Millon suggests that theories over this period have focused on three dimensions/distinctions

1. Real Entity vs Aggregation2. Artificial Entity vs Natural entity3. Private vs PublicAccording to Millon, at different periods of history, these dimensions/distinctions have been combined in different ways

WHAT IS A CORPORATION?Real Entity, Artificial Entity & AggregationDuring much of the 19th century, the idea of the corporation as a real entitycharacterized legal understanding (corporations had the power to sue and had existence beyond the lives of its shareholders).

This view perceived the corporation as a real entity, rather than an aggregation of shareholders.

The corporation was considered artificial, in the sense that the corporation owed its existence to the state. Therefore, according to this view, the state had a constitutive role (i.e. corporations could only exist by receiving a charter by the state).

Therefore, this view is underpinned by a public law approach - designed to address important public concerns


Real Entity, Artificial Entity & AggregationBy the last decades of the 19th century, there was a decline in the state's use of its chartering authority – and and increase in general incorporation.Because the corporation could now be brought into existence without state charter – corporations began to be viewed as aggregations of private individuals (analogous to partnerships). These theorists sought an antiregulatory conception of corporate law that protected the financial interests of shareholders and their property rights

WHAT IS A CORPORATION?Natural entityAccording to Millon (1990), the aggregate theory began to loose it’s appeal – in particular, recognition of dispersed shareholding and increased power and discretion for directors made it difficult to make the analogy with partnerships.However, the notion of the corporation as a natural creation of private initiative and market forces replaced the idea that the corporation was artificial. Natural entity theory was therefore interpreted to imply the same private law, antiregulatory, shareholder-centered program that the aggregate theorists had advocated Natural entity theory moved away regulatory/public service view of corporate law and instead viewed corporate activity as fundamentally private in nature

WHAT IS A CORPORATION?Natural entityHowever, the natural entity theory was also used to support the idea of corporate citizenship and CSRIn 1932, E. Merrick Dodd, Jr., published a famous article, demonstrating how the natural entity idea could provide a theoretical basis for corporate social responsibility He emphasized the natural entity theory's distinction between the corporate entity and its shareholders and that (i) that management represented the corporation (and the shareholders only indirectly), and (ii) that the corporation, like any other natural person, should enjoy the freedom to act as a socially responsible citizen. Therefore, managers/directors were viewed as as agents of the corporate entity (which was distinct from the shareholder aggregation). If that entity was obliged to be a "good citizen" - then management, acting for the corporation, would enjoy the discretion to pursue wider social responsibilities.

WHAT IS A CORPORATION?The Aggregate Theory and the Privatization of Corporate Law Berle (1932) and Berle and Means (1932)

in 1932, Berle responded to Dodd by arguing that corporate management should devote its attention solely to shareholder wealth maximization

Berle and Means viewed management as trustees for the shareholders – and that, as trustee, the manager must act for the benefit of the shareholder

By analyzing the corporation from the perspective of the shareholders' "private property" rights, Berle and Means insisted on the preeminence of the shareholders’ financial interest.

In this respect, Berle and Means abandoned the notion of the corporate entity and “peered directly into the corporate enterprise, focusing their attention on those they considered to be the relevant actors- shareholders and the professional managers”

WHAT IS A CORPORATION?The Aggregate Theory and the Privatization of Corporate Law Since Berle and Means – the shareholder primacy principle has been extremely influential in the context of corporate governance debate

However, it is important to recognize, as Millon (1990, p.222) does,

“Berle and Means were not implacably hostile to the sort of corporate socialresponsibility that Dodd and others were advocating. They acknowledged that adifferent legal regime might mandate that "the corporate profit 'stream in reality nolonger is [the shareholders'] private property, and that claims on it must be adjustedby some test other than that of property right””.

We will explore Berle and Means (1932) comments in relation to corporate responsibility later in Part 2


Economic Theory of the Corporation: ‘Nexus of contracts’Emerged as an alternative/criticism to ‘managerialism’ (the dominant model of the corporation between 1930s and 1970s).

The managerialist model overlaps with Dodd’s conceptualization of the corporation –i.e. corporate directors and professional executives viewed themselves as stewards or trustees charged with guiding a vital social and economic institution in the interests of a wide-range of beneficiaries.

The nexus of contracts displaces the management-centered conception of the firm.

It maintains that the firm is a legal fiction that serves as a nexus for a set of contracting relations among individual factors of production.

WHAT IS A CORPORATION?Economic Theory of the Corporation: ‘Nexus of contracts’

According to the nexus of contracts approach, management is considered a continuous process of negotiation of successive contracts

In this capacity, managers act as agents for the shareholder principals

As agents, the directors must act in furtherance of the shareholders’ interest

This gives rise to the “classic agency problem” – i.e. how do principals (the shareholders) ensure that their agents (the managers) behave in their interests.

Recommendations include that the number of independent directors should be increased; the roles of chairman of the Board and of CEO should be split; managers should be paid in stock options, etc.

IN WHOSE INTERESTS SHOULD CORPORATIONS BE GOVERNED

In whose interests should corporations be governed; to whom do directors have duties ?This issue has been largely addressed in the preceding discussion – and is hence, very closely tied to how once conceptualizes the corporation.

In short, if one views the corporation as either (i) resulting from the aggregateconsensual agreement among its members, (ii) as a natural creation of private initiative and market forces, or (iii) as a nexus of contracts – then the private interests of the members/shareholders will take priority

If, on the other hand, if one views the corporation as (i) an artificial entity created by the state or (ii) as a natural entity which, like other natural persons, should enjoy the freedom to act as a socially responsible citizen – then the interests of the corporation and the wider public interest will be considered

IN WHOSE INTERESTS SHOULD CORPORATIONS BE GOVERNEDIn whose interests should corporations be governed; to whom do directors have duties ?So - opinion on this issue can (rather crudely) be divided into two camps:

- Those who believe shareholders should be accorded priority (and most often associated with the nexus of contact/agency theory approach)

- Those who believe that a firms other stakeholders should be of equal concern in the governance of the corporation (most often associated with what is referred to as the stakeholder approach).

IN WHOSE INTERESTS SHOULD CORPORATIONS BE GOVERNED

In addition to the conceptions of the corporation outlined previously, the shareholder/stakeholder debate is reflected in both different philosophical and cultural traditionsThere is a rich academic literature, informed by work in ethics and political philosophy, which argues that a range of stakeholders have certain rights vis-à-vis the corporationFurther, classification of international corporate governance systems often make the distinction between Anglo-American shareholder orientated governance systems(US/UK) and other governance systems which exhibit stakeholder characteristics (Germany, Japan, Scandinavia)

CORPORATE GOVERNANCE – IN DIFFERENT CONTEXTS

Shareholder (Anglo-American) • Competition driven • Legal framework emphasises

shareholders• Shorter term strategy• Greater reliance on equity• Shareholder primacy• No employee involvement• Dispersed shareholding structure• Strong managers weak owners

Stakeholder (Germany/Japan)• Consensus driven• Legal framework emphasis social role of

companies• Longer term strategy• Greater reliance on debt• Stakeholders/ company focus• Co-determination/ worker councils• Concentrated ownership & control• Strong blockholders /weak “dispersed

owners”

Part 2 – Critique of the shareholder primacy model

CORPORATE GOVERNANCE & SHAREHOLDER PRIMACY

It has been argued that governance systems throughout the world are converging on a shareholder approach But why…?What is the rationale for ascribing priority to shareholders when considering whose interests a corporation should be run?

TYPICAL ARGUMENTS FOR SHAREHOLDER PRIMACY

Shareholders OWN the company Shareholders are the PROVIDERS OF CAPITALShareholders are the residual BEARERS OF RISK


OwnershipGoyder (1951, p.23) “A company is self-owning”, the idea that it belongs to the shareholders is a “fiction”. As a separate legal personality it “is incapable of being owned”

Deakin (2012, p.355), “From a legal perspective, shareholders own neither the “firm” nor the “corporation” nor its assets”.’


OwnershipThe assets are owned by the separate legal entity – the corporation. “The corporation, in turn, cannot be owned as a “thing” precisely because… it is a person - a legal subject - in its own right” (Deakin, 2012, p.356) .Shareholders have certain rights – such voice and voting rights to rights in relation to distributions – by virtue of their ownership of sharesHowever, “these rights do not constitute ownership” (Goyder, 1951, p.24-25)

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Providers of capital?

McSweeney (2008) notes that since the late 1920s, ‘corporate retentions overall in the US have never been less than 66 per cent of all sources of funding over any five or six year period’, while ‘during the period 1982–7 shares provided only 3.1 per cent of net sources of funds for the 100 largest US manufacturing companies’.

Mumford (2000, p.5-6) notes, ‘much of [a company’s] capital is in effect self-owned… much of its capital comes from its own earnings, and that most of the ‘reserves’ represent the proceeds of its own endeavours’.


Providers of capital?

Meyer (2013), notes ‘The net amount of equity capital raised from stock markets in the last few decades of the 20th century was negative in both the UK and the US’

The value of acquisitions was around $3 trillion in 2009, while new issue of shares raised around $700 billion. Between 2005-2007, net new equity issued was negative - companies actually bought back more than they sold (Meyer, 2013).

For Ireland (2001: 163), the assumption that ‘shareholders actually give something to corporations’ is a ‘mythology’ - rather they simply place bets on their future profitability

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BiG Co.

BiG Co. Initial Public Offering

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BiG Co.

Subsequent trading of BiG Co. shares

TYPICAL ARGUMENTS FOR SHAREHOLDER PRIMACYResidual Bearers of RiskAs Stout (2002) notes – this proposition assumes that the contracts entered into by nonshareholder groups such as employees, managers, and creditors are explicitcontracts that entitle them to fixed payments, such as salaries and interest payments. In contrast, shareholders rely on an implicit contract that entitles them to whatever remains after the firm has met its explicit obligations and paid its fixed claims

HOWEVER…

Shareholders only (remotely) get treated as residual claimants in the case of bankruptcy. Otherwise, directors have considerable discretion in terms of how profit is used/distributed

TYPICAL ARGUMENTS FOR SHAREHOLDER PRIMACYResidual Bearers of Risk

Goyder (1951, p.17) a shareholder’s risk is limited and hence ‘known in advance’, whereby the worker’s risk is often ‘unknown and unforeseeable’’ As Mumford (2000, p. 6) notes:

the argument that the shareholders are the principal risk-bearers accords ill with the observable facts. Employees, managers, suppliers and customers are also likely to suffer alongside debt-holders when a company collapses, and some of these groups may enjoy less portfolio diversification than the average shareholder

Collison et al (2011, p.17), ‘the liquidity of stock markets allows shares to be traded and for shareholders to diversify and spread their risk – again, options not readily available to employees and other stakeholders’

SO… ON WHAT OTHER GROUNDS MIGHT SHAREHOLDER PRIMACY BE ADVOCATED?

John Parkinson (1993) provides a useful summary of the normative assumptions that underpin the nexus of contracts/agency theory approach. According to Parkinson –these assumptions are as follows:

• Society's wealth is maximised when production takes place at lowest possible costs

• A company committed to maximise profits will seek to minimise their costs

• The residual rights of shareholders create appropriate incentive for them to exercise disciplinary function

SO… ON WHAT OTHER GROUNDS MIGHT SHAREHOLDER PRIMACY BE ADVOCATED?Lets revisit some aspects of the nexus of contract/agency theory approach…

Work in this tradition often draws (perhaps inappropriately) on Berle and Means (1932)

Henry Manne (1962; 1965) the disciplining control of markets

Further developed by Demsetz (1967) and Alchian (1969) - The residual rights of the shareholders create an appropriate incentive for them to activate the relevant disciplinary mechanisms

According to this residual rights perspective, shareholders play a key disciplinary role in ensuring that profit maximisation is pursued, acting as a countervailing power to management and thus ensuring society’s welfare is optimised

Jensen and Meckling (1976) and Fama (1980) reject the concept of ownership, claiming that the firm is merely a ‘device to facilitate contracting between individuals’ – A “Nexus of Contracts”

According to Fama (1980), while shareholders own the capital contributions, this should not be confused with the ownership of the firm.

The notion of an ‘agency relationship’ was introduced to describe the relationship between shareholder (principal) and manager (agent), with the assumption that the ‘principal retains the power to control and direct the activities of the agent’

In order to reduce ‘agency costs’ (i.e. the loss to shareholders resulting from management decisions which are not in the shareholders’ financial interest) shareholders will seek to align managers’ interests with those of the shareholders through monitoring and incentive mechanisms


This position is underpinned by a certain a moral perspective –in particular, Utilitarianism

i.e. a system of corporate governance which prioritises the interests of shareholders leads to the “maximization of society’s total wealth” (Parkinson 1993, p.41).


How well does this claim hold up?

SHAREHOLDER VALUE & INEQUALITY

Existing research highlights that greater disparities of wealth are evident in Anglo-American countries where shareholder value is, arguably, most pronounced(Aglietta and Reberioux, 2005; Froud et al, 2006; Harvey, 2005; Wilkinson andPickett, 2009).

One reason cited in the literature is the increase in earnings achieved bycompany executives as a result of agency-theory-informed incentive schemesbased on a maximisation of shareholder wealth objective.

As Froud et al. (2006: 58) note, the ratio between the earnings of ordinaryworkers and CEOs in the US grew from 50 times in 1980 to 281 times in 2002.While the disparity was more modest in the UK, there was still a similarlyproportioned shift over the same period – from 10 times in 1980 to 50 times in2002 (see also, Dore 2008; McSweeney 2008; Monks 2008).

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SHAREHOLDER VALUE & INEQUALITYIn linking inequality to the emergence of the emphasis on shareholder primacy, Dore(2008, p 1107) notes that ‘measures of income inequality are rising…faster in the most‘financialized’ Anglo-Saxon economies’, adding: ‘median incomes stagnate while the toppercentile, and especially the top permille make spectacular gains’. Moreover, the topearners ‘are not traditional rentiers…with the highest incomes going to those in financialservices at the expense of everyone else’ (Dore 2008, p. 1107).

This has partly been explained by a “shift to investor dominance [which] is steadilyincreasing the capital share and reducing the labour share in GDP” (Dore, 2008, p.1108)

And, an increase of highly paid intermediaries, such as hedge fund managers, investmentbankers, lawyers and accountants which has created “a new stratum of working rich”(Froud et al. 2006).

For McSweeney (2008, p.66) by exacerbating inequality, the priority ascribed toshareholders can be linked to “cardiovascular disease and cancer”, “infant mortality andlife expectancy, height, mental breakdown, tooth decay and morbidity”.

LEGAL ORIGIN, INCOME INEQUALITY AND SOCIAL HEALTHCollison et al. (2011) developed a critique of La Porta et al.'s body ofwork by considering the link between legal origin and social healthIn their early papers LaPorta et al. (1997,1998) developed theproposition that stock market size and consequent economicdevelopment were promoted by a legal system which protected theinterests of shareholdersCollison et al. (2011) find that common law countries (i.e. those with thegreater legal protection for shareholders) have the worst socialoutcomes

The significance of La Potra et al.

Proponents of an agency theory approach

Academic 'rock stars' (Aguilera and Williams, 2009, p.1424)

La Porta et al.’s ‘ideas have been adopted in international developmentinitiatives by the World Bank as the basis for one set of its policyprescriptions for economic development in emerging markets’ (Aguileraand Williams, 2009, p.1424; see also Cioffi, 2009)

LEGAL ORIGIN, INCOME INEQUALITY AND SOCIAL HEALTH

Further, ‘their ideas are indicative of and have supported, thevirtually unrelenting pressure on European countries to adopt moremarket-dominated systems for organizing their economic life’(Aguilera and Williams, 2009, p.1424)

However, 'the premise that shareholder capitalism enhances socialwelfare has not been seriously examined as an empirical matter byleading corporate law scholars in the United States. Rather, it hasbeen accepted as an article of faith or has been demonstrated byvirtue of high share prices' (Williams and Zumbansen, 2011, p.6)

LEGAL ORIGIN, INCOME INEQUALITY AND SOCIAL HEALTH

Source: Collison, D.J., Cross, S., Ferguson, J., Power, D.M. & Stevenson, L.A. (2012) ‘Legal Determinants of External Finance Revisited: TheInverse Relationship between Investor Protection and Societal Well-being’ Journal of Business Ethics Vol.108, No.3, pp 393-410.

Inequality in the US

OTHER CRITICISMS OF SHAREHOLDER PRIMACYLazonick and O’Sullivan (2000,p.13) point out, US corporate strategy was historically orientated towards the retention of earnings - which were re-invested in the firm. However, with the growing market pressure that accompanied the pursuit of shareholder value, corporate strategy shifted ‘to one of downsizing of corporate labour forces and distribution of corporate earnings to shareholders’According to Dobbin and Zorn (2005: 185) this increasing emphasis on shareholder value provided justification for hostile takeovers because it ‘focused corporate attention on stock price’.As a consequence of these increasing market pressures, ‘executives and CFOs responded by trying to game the numbers’ through the use of ‘accounting gimmicks’ (Dobbin and Zorn 2005: 193; see also Levitt 1998).

OTHER CRITICISMS OF SHAREHOLDER PRIMACYTaking Enron as a case in point, Aglietta and Reberioux (2005: 227) illustrate how ‘shareholder sovereignty’ leads to inappropriate corporate strategy and accounting fraud. In particular, three accounting ‘policies’ are noted in the Enron case:

(i) off-balance sheet accounting

(ii) abuse of fair value accounting, and

(iii) manipulation of the income statement.

Aglietta and Reberioux (2005: 232, emphasis added), argue that this case exemplifies a ‘systemic crisis’ engendered by an emphasis on shareholder value and the predominance of financial markets (see also Froud et al. 2004).

Part 3 – Some alternative models of corporate governance and the firm

BERLE AND MEANS (1932) THE MODERN CORPORATION AND PRIVATE PROPERTY

1930’s – Famous exchange between Adolf A. Berle Jr and E. Merrick Dodd Jr

In this exchange, Berle argued ‘that the management of a corporation could only be held accountable to shareholders... whereas Dodd held that corporations were accountable to both the society in which they operated and their shareholders’ (Macintosh, 1999, p.139; see also, Weiner, 1964).

In many respects, the solutions proposed by these protagonists can be viewed as a precursor to the shareholder/stakeholder debate which permeates the literature today.

BERLE AND MEANS (1932) THE MODERN CORPORATION AND PRIVATE PROPERTY

Concerned with the unaccountability of management, Berle argued that thesolution lay in the strengthening of the fiduciary duties of directors toshareholders.

However, as Ireland (2001, p.149) argues, Berle's position was not motivatedby ‘reasons of principle’ but rather, ‘because he could see no other way ofpreventing managers from feathering their own nests’.

As Macintosh (1999, p.146) and Ireland (2001, p.150) point out, Berle’s positionwithin this debate shifted and he began to acknowledge the ‘validity of Dodd’sviews’.

BERLE AND MEANS (1932) THE MODERN CORPORATION AND PRIVATE PROPERTYThe concluding chapter of this text ‘quite explicitly’ asserts the interests of the communityabove the ‘passive property’ rights of the rentier. For example, Berle and Means (1932,p.313) state:

It seems almost essential if the corporate system is to survive, - that the ‘control’ of the greatcorporations should develop into a purely neutral technocracy, balancing a variety of claimsby various groups in the community and assigning to each a portion of the income streamon the basis of public policy rather than private cupidity.

Neither ‘‘the claims of ownership nor those of control can stand against the paramountinterests of the community’’. They recognize that institutional and political accommodationswill need to be fashioned, but hold that:

When a convincing system of community obligations is worked out and is generallyaccepted, in that moment the passive property right of today must yield before the largerinterests of society. (p. 312)

COLIN MEYER – “THE TRUST FIRM”Meyer (2013) develops a critique of existing models of corporate governance – invoking many of the same arguments we have encountered already.

He further expresses doubts about stock markets, in terms of their role in assigning value and as a disciplinary mechanism

Through the exercise of voting rights (not available to non-shareholders) shareholders have ‘excessive…control… extracting cash from the corporation at the expense of other stakeholders’

For Meyer (2013) ‘a resolution of the problem requires corporate governance mechanisms that promote commitment and stronger managerial oversight’

In order to achieve this – Meyer (2013) proposes ‘The Trust Firm’

(However, it is worth noting that he cautions against a universal form of governance – and acknowledges that different models may be appropriate for different industries)

COLIN MEYER – “THE TRUST FIRM”Meyer (2013)

Trusts involve:the ‘settlor’ - the person(s) who put assets into a trust

the ‘trustee’ - the person(s) who manages the trust

the ‘beneficiary’ - the person(s) who benefits from the trust

For Meyer (2013), this model ‘differs from the agency relation of a director to a shareholder in a company, by which the director owes a fiduciary responsibility to the shareholder as the owner as well as the beneficiary of the property’

In other words, the traditional agency model casts the shareholder as both settlor and beneficiary

COLIN MEYER – “THE TRUST FIRM”Meyer (2013)

‘The trust firm is a corporation that has a board of trustees who are the guardian of the corporation’s stated values and principles’

- Examples of trusts include Indian Tata Group, ThyssenKrupp AG, Bosch

- Also, cooperatives are a form of trust

In terms of how a Trust Firm is structured – there is wide variation.

Meyer (2013) introduces a number of possibilities:

The trustees could range from a conventional corporate board appointed by the shareholders to self appointed or elected membership

The trust could be accountable to a membership restricted to shareholders or broadened to include wider stakeholders

GEORGE GOYDER

Goyder believed that the primacy accorded to shareholders in Company Law was “indefensible on the grounds of justice” (1951, p.25).

He proposed that companies extended the active participation of, and accountability towards, workers, the community and consumers

Goyder’s reforms were aimed at changing the institutional framework of industry and that “it is the business of the law to establish framework”” (1951, p.5)

“A company is self-owning”, the idea that it belongs to the shareholders is a legal “fiction” (p.23)

As a separate legal personality it “is incapable of being owned” (Short Bros case)

Goyder acknowledges that under Company Law shareholders have certain rights, however, he is quick to point out that “these rights do not constitute ownership. They are a right to participate in the residual income of the going concern and to repayment of the capital” (p.24-25)

Goyder (1951, p.17) notes that a shareholder’s risk is limited and hence ‘known in advance’, whereby the worker’s risk is often ‘unknown and unforeseeable’

GEORGE GOYDER

“Despite the absence of proprietary rights to the company's assets and the (relatively) negligible degree of risk assumed by shareholders, the ‘outworn and defective legal structure’ still enforces directors to act in the sole interest of shareholders (Goyder, 1951, p.25)

While acknowledging that the original providers of capital have a justifiable claim to a “return on their investment with profit”, he argues that “there is nothing sacrosanct about a system which makes such rights perpetual” (Goyder, 1961, p.21)

“to confer immortality on a financial obligation is to tie the hands of future generations”(1961)”

GEORGE GOYDER

1.The Company as a Trust

2.Memorandum and Articles of Association

3.Changes to Company Law

GEORGE GOYDER

1.The company as a trustCarl Zeiss and Ernst Abbe (1896)

Abbe offered “by deed of gift, the transfer of control of the Zeiss firm toitself. A "legal person" (juristische Person) to be called the Carl ZeissFoundation was to be the new owner of the Zeiss firm and of Abbe'scontrolling interest” (Mayer, 1961)

GEORGE GOYDER

1.The company as a trust

Among other things, the Foundation’s charter specified that the purpose ofZeiss should be concerned with:

(a)The economic security of the business(b)The well being of workers (c)The efficient service to consumers(d)The responsibility of the community and education(e)The distribution of surplus should be restricted to one or more of the objects above

GEORGE GOYDER

2. Memorandum and Articles of Association“The personality or essence of a company resides in its Memorandumand Articles of Association…If we can make it possible for all who workin industry to hold as their own intention, the definition of purpose setout in the company’s memorandum and articles of association, we shallhave taken a long step towards the possibility of creating satisfyinghuman relations in industry”The possibilities of using this approach have recently been considered by David Cieply (2013, p.150): “A corporate charter could make the employees the electors of the board—or place employee representatives on the board, as in Germany… without violating any of the property rights of shareholders”.

GEORGE GOYDER

2. Memorandum and Articles of Association

(a)General Objects

(b)Articles

I. Workers rights to membershipII.Representation on Board of DirectorsIII.PromotionIV.Chain of responsibility

(c) Profits and Dividends

GEORGE GOYDER

3. Changes to Company Law

(a) Workers to become members(b) Compulsory capital redemption (50 years)(c) Compulsory General Objects Clause

GEORGE GOYDER

Goyder’s ideas inspired “Ernest Bader, one of the few entrepreneursever to have given away his company, transferred his plastics resinbusiness, Scott Bader Ltd., to a company limited by guarantee (the ScottBader Commonwealth Ltd.) under a scheme inspired by Goyder. In turnBader’s pioneering work provided one of several models from which E.F.Schumacher… developed his ideas about ‘intermediate technology’based on smaller working units, communal ownership, and regionalwork-places” (Jeremy, 1990, p.207; see also Marinetto, 1999).

GEORGE GOYDER

SCOTT BADER & COErnst Bader established Scott Bader Commonwealth and vested the ownershipof the firm – influenced by George Goyder

Members of the commonwealth established a constitution on distribution ofpowers

Restrictions

• Firm of limited size• Ratio of highest to lowest paid not to exceed 7:1• Members of the commonwealth are partners (not employees)• Board of Directors accountable to the commonwealth

40% profits to commonwealth (20% for bonus and 20% charity); 60% for tax andretained earnings

The merit of Scott Bader & Co “lies precisely in the attainmentof objectives which are generally assigned a second place oraltogether neglected by ordinary commercial practice. In otherwords, the Bader “system” overcomes the reductionism of theprivate ownership system and uses industrial organisation as aservant of man, instead of allowing it to use men simply asmeans to the enrichment of the owners of capital”(Schumacher, 1975, p.233).

PARKINSON (1993)Widen fiduciary duties to non-shareholder groups

Disclosure and reporting requirement - Social audit and The Corporate Report

Consultation and the composition of the board

Smaller scale production

Employee participation

CO-OPERATIVES“A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise”.

Co Ops

Ed Mayo

Co-op Principles1.Voluntary and open membership2.Democratic member control3.Member economic participation4.Autonomy and independence5.Education, training and information6.Co-operation amongst co-operatives7.Concern for community

All* co-ops subscribe to these principles – firm ethical foundation

QUESTIONS?

Part 4 – Corporate Governance in a Global Context

CORPORATE GOVERNANCE & CSR IN A GLOBAL CONTEXTScherer and Palazzo (2011), “The new political role of business in a globalized world…”, Journal of Management Studies, 48(4), pp.899-931

In the context of globalization, distinction between the state (as political actors) and private business (as economic actors) no longer holds

In assessing the literature, Scherer and Palazzo (2011) point to studies which highlight how:

• Many corporations assume social and political responsibilities – they engage in public health, education, social security and protection of human rights

• Many corporations fulfill the functions of protecting, enabling and implementing citizenship rights

i.e. corporations assume a state-like role.

CSR IN A GLOBAL CONTEXTNation states and international institutions are no longer able to sufficiently regulate the global economy

Global governance is now polycentric and multi-lateral involving government, international institutions, NGOs, corporations, etc

Given these issues – existing theorization of corporate governance and CSR needs to be reconsidered and needs to integrate an understanding of the political role of business

GLOBALIZATION AND “POSTNATIONALCONSTELLATION”

Globalization – intensification of cross-border social interaction

Process facilitated and accelerated by political decisions – removal of barriers to trade, foreign direct investment, privatisation, technology, migration, etc

Results in transnational interdependence of economic and social actors

‘Post-Westphalian’ order

• States have reduced “steering capacity” or ability to exercise state authority• Less homogenized national cultures• “Blurring lines” between public and private sphere

GLOBALIZATION AND “POSTNATIONALCONSTELLATION”

• Worth noting that, in this context, international institutions may lack enforcement mechanisms

• As business operations shift to locations which are beyond the reach of enforcement mechanisms, corporations may attempt to voluntarily address governance gaps through self regulation

• Hence, fulfilling roles which are not being addressed by governments

LIMITATIONS OF EXISTING THEORIES OF CORPORATE GOVERNANCE & CSR

• The economic view of CSR (i.e. CSR is permissible only if it adds value to firm)

• The economic view assumes (i) a separation between the state and business , and (ii) that managers have a fiduciary duty to shareholders

• Such a view might work in a context where state institutions play a strong role and can formulate regulations and enforce legal rules

LIMITATIONS OF EXISTING THEORIES OF CORPORATE GOVERNANCE & CSR

• However, Scherer and Palazzo (2011) note that modern society is more complex, and that state apparatus has imperfections

• Even more problematic in Global context – limits of nation state to regulate global business activity; corporations operating in jurisdictions with weak regulation/enforcement mechanisms

CORPORATE GOVERNANCE & CSR IN GLOBALIZED MARKETS1. The emerging global institutional context for Corporate Governance and

CSR: from national to global governanceNational governments have less power to control MNCs

New governance mechanisms emerging which rely on network relationships –often transnational

Not only international institutions (UN, ILO, OECD), but a host of other private-public initiatives

For example, international accounting regulation is developed by a private body (IASB), but implemented and supported by a network of other actors including –the state (through Company Law), stock-market listing requirements, corporate governance codes, etc

NGOs and private business play a role in this new governance environment

CORPORATE GOVERNANCE & CSR IN GLOBALIZED MARKETS2. CSR as self-regulation: From hard law to soft lawNew forms of regulation – soft law, which operates without government power to enforce rulesIn a global context, many corporations can effectively operate in a “legal vacuum” Given the difficulty of enforcing national law beyond national territory – a “mixed administration” of private actors and governments have developed regulatory instrumentsOften in the form of soft-law – i.e. delegation of authority to non-state actors (again, for example, international accounting standards); soft law often characterized as ‘voluntary’, Examples of soft-law mechanisms in CSR include supply chain audits, certification schemes, etc

3. The expanding scope of CSR: From liability to social connectednessMost concepts of CSR characterized by ‘liability logic’ – i.e. (i) derived from legal reasoning to find guilt or harm, and (ii) based on an interaction between two actors (corporation and another stakeholder)

However, such a view is untenable in context of globalization

For example, the ideas of “complicity” and “sphere of influence” extend the expectations of corporations beyond their immediate interactions

Corporations may have responsibility for “structural injustice” (for example, human rights issues which are systemic in supply chain)

CORPORATE GOVERNANCE & CSR IN GLOBALIZED MARKETS

4. The changing conditions of corporate legitimacy: From cognitive and pragmatic legitimacy to moral legitimacy.

Suchman (1995) suggests that legitimacy can be based on three different sources. (1) When the behaviour of the organization is (unconsciously) perceived as inevitable

and if acceptance is based on some broadly shared taken-for-granted assumptions (cognitive legitimacy).

(2) Based on the calculations of self-interested individuals who will ascribe legitimacy to the behaviour of organizations as long as they are convinced that they themselves benefit from the results of corporate behaviour (pragmatic legitimacy).

(3) Moral legitimacy, by contrast, is based on moral judgments and an exchange of arguments on whether an individual, an institution, or an action can be considered socially acceptable.

The economic theory of the firm and traditional theories of CSR are based on cognitive and pragmatic legitimacy


4. The changing conditions of corporate legitimacy: From cognitive and pragmatic legitimacy to moral legitimacy.

Continued…

For example, the idea that firms should conform with the basic rules of society (for example, as outlined by Friedman), or derive responsibilities from social expectations both express a cognitive view

Pragmatic legitimacy is expressed in the Governance & CSR literature through the “win-win” view – i.e. doing well by doing good

However, in global context – adaption to external, taken-for-granted, expectations is difficult – given the plurality of legal and moral contexts. Further, there has been a loss in the cognitive legitimacy of capitalism (in light of financial crisis)

Corporations now often required to establish moral legitimacy – consisting of “moral judgments about the corporation’s output, procedures, structures, and leaders”.

Establishing moral legitimacy requires active engagement with, and consideration of, the arguments and interests of a range of constituencies.


5. The changing societal foundation of CSR: From liberal democracy to deliberative democracy.

Basic characteristic of liberal capitalist societies is the separation of political and economic realms

“In the liberal conception the citizen is conceptualized only as a private person (bourgeois) who will pursue his or her private interest both in the private and in the public sphere. The political order delivers the legal and administrative context of private business so that private property and contracts are respected and individual freedom is protected vis-à-vis the state and the fellow citizens”

According to the liberal conception, the legitimacy of the corporation is derived from the legitimacy of the political system


5. The changing societal foundation of Corporate Governance & CSR: From liberal democracy to deliberative democracy.

As noted, this assumption is problematic in context of globalization

Separation of the political and economic system no longer holds

According to Scherer and Palazzo (2011) a deliberative conception is more appropriate

“A key assumption of the deliberative model of democracy is the idea that politics does not exclusively take place in the official governmental institutions but starts already at the level of deliberating civil society associations. Regulatory activities of governments should be connected to those processes of public will formation”


CORPORATE GOVERNANCESome readings that informed the lectures for this part of the module:

Berle, A.A. and Means, G. (1932), The modern corporation and private property(New York: Macmillan).

Berle, A.A. (1931), ‘Corporate powers as powers in trust’, Harvard Law Review, 44 (7): 1049-1074.

Cioffi, J. (2000), “Governing Globalization? The State, Law, and Structural Change in Corporate Governance”, Journal of Law and Society, 27(4)

Collison, D.J., Ferguson, J., Power, D.M. & Stevenson, L.A. (2011) Shareholder Primacy in UK Corporate Law and Culture: An Exploration of the Rationale and Evidence, ACCA, London

Deakin, S. (2012), ‘The Corporation as Commons: Rethinking Property Rights, Governance and Sustainability in the Business Enterprise’, Queens Law Journal.


Dodd. M. (1932), ‘For whom are corporate managers trustees?’ Harvard Law Review, 45 (7): 1145-1163.

Fama, E.F. (1980). ‘Agency Problem and the theory of the firm’, Journal of Political Economy, 88 (2): 288-307.

Goyder, G.A. (1951), The Future of Private Enterprise (Oxford: Blackwell).

Ireland, P. (1999), ‘Company Law and the Myth of Shareholder Ownership’, Modern Law Review, 62 (1): 32-57.

Jensen, M. and Meckling, W. (1976), ‘Theory of the Firm: Managerial Behavior Agency Costs and Ownership Structure’, The Journal of Financial Economics, 3(4): 305–360.

Krippner, G. (2005), ‘The Financialization of the American Economy’, Socio-Economic Review, 3(2): 173-208.


Mcdonald, K and Mcdonald, T. (2010), “Democracy in a Pluralist Global Order: Corporate Power and Stakeholder Representation”, Ethics & International Affairs; 24, 1

Parkinson, J. (1993), Corporate Power and Responsibility: Issues in the Theory of Company Law (Oxford: Oxford University Press).

Parkinson, J (2003), “Models of the Company and the Employment Relationship”, British Journal of Industrial Relations, Vol. 41, pp. 481-509.

Ruggie, J.G. (2004), “Reconstituting the Global Public Domain — Issues, Actors, and Practices”, European Journal of International Relations, 10(4): 499–531 Scherer, A., Palazzo, G. and Baumann, D. (2006), “Global Rules and Private Actors: Toward a New Role of the Transnational Corporation in Global Governance”, Business Ethics Quarterly, 16(4), 505–532

Stout, L. (2002), “Bad and Not-So-Bad Arguments For Shareholder Primacy”, Southern California Law Review, Vol. 75, p. 1189, 2002. Available at SSRN: http://ssrn.com/abstract=331464

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