Shareholding Versus Stakeholding: a critical review of ... power and ... new mode of thinking in...

242 CORPORATE GOVERNANCE

Introduction

M uch of the current debate on corporategovernance has centred on practical

issues including corporate fraud the abuse ofmanagerial power and social irresponsibil-ity In essence the debate is about how to solve these perceived problems in corporatepractice For many commentators corporate governance is about building effective mechanisms and measures either in order tosatisfy current social expectations or to satisfythe narrower expectations of shareholders Inthe UK several influential proposals havebeen produced in recent years in an attempt to settle the practical issues (Cadbury Com-mittee 1992 Greenbury Committee 1995Hampel Committee 1998 Turnbull Commit-tee 1999 Higgs 2003) In conjunction with thepractical debate sits a debate on the theoreti-cal framework and the quest for the optimalor superior theoretical model of corporate

governance The debate has touched manydeep-seated fundamental questions forexample what is the purpose of the corpora-tion In whose interest is the corporation isrun Who should control the corporationHow should they control it In general cor-porate governance is about the understandingand institutional arrangements for relation-ships among various economic actors and cor-porate participants who may have direct orindirect interests in a corporation such asshareholders directorsmanagers employeescreditors suppliers customers local commu-nities government and the general public (seeFigure 1) Different perspectives in theoryresult in different diagnoses of and solutionsto the problems of corporate governance practice

Some current perspectives on corporategovernance have been categorised into twocontrasting paradigms shareholding and stake-holding (see for example OrsquoSullivan 2000

copy Blackwell Publishing Ltd 2004 9600 Garsington Road OxfordOX4 2DQ UK and 350 Main Street Malden MA 02148 USAVolume 12 Number 3 July 2004

Shareholding Versus Stakeholding a critical review of corporategovernance

Steve Letza Xiuping Sun and James Kirkbride

The current debate and theorising on corporate governance has been polarised between ashareholder perspective and a stakeholder perspective While advocates and supporters ofeach camp attempt to justify the superiority rationality and universality of each model intheory they rarely pay attention to the age-old conceptions assumptions and presuppositionsunderpinning their perspectives which are less credible and valid in matching the continu-ally changing practice of corporate governance This paper serves as a survey and criticalreview of major current theories on corporate governance In so doing it reveals the inade-quacy of conventional approaches employed in corporate governance theorising It calls for anew mode of thinking in analysing corporate governance and concludes by outlining a newdirection of research in this field

Keywords Shareholding stakeholding corporate governance modes of thought dichotomycritical review

Address for correspondenceThe Centre for Director Education Leeds Metropoli-tan University Bronte HallBeckett Park Leeds LS6 3QS E-mail srletzalmuacuk

SHAREHOLDING VERSUS STAKEHOLDING 243

Kakabadse and Kakabadse 2001 Friedmanand Miles 2002) Such a division hinges on the purpose of the corporation and its asso-ciated structure of governance arrangementsunderstood and justified in theory On the oneside is the traditional shareholding perspec-tive which regards the corporation as a legalinstrument for shareholders to maximise theirown interests ndash investment returns A three-tier hierarchal governance structure ie theshareholder general meeting the board ofdirectors and executive managers is given incompany law in an attempt to secure share-holdersrsquo interest (it is often called the mecha-nism of ldquochecks and balancesrdquo) On the otherside is the stakeholding perspective newlyemerged in the later 20th century which posi-tions itself on the contrary to the traditionalwisdom and views the corporation as a locusin relation to wider external stakeholdersrsquointerests rather than merely shareholdersrsquowealth Employees creditors suppliers cus-tomers and the local community are majorstakeholders often mentioned and empha-sised within a broad definition of stake-holding (eg Freeman 1984) Stakeholdersrsquoparticipation in corporate decision-makingslong-term contractual associations betweenthe firm and stakeholders trust relationshipsand business ethics are the main proposals forstakeholding management

Current analyses on corporate governancedraw more attention to evaluating andjudging the superiority of either the share-holder model or stakeholder model and oftentake part in one-sided arguments sometimeswith a slight modification such as an enlight-ened shareholder model (see Gamble andKelly 2001) and an enlightened stakeholder

model (Jensen 2001) The analyses seldomstep outside the narrow confines of theirrespective interests to investigate the theoreti-cal genealogy ideology presuppositions andvalue systems behind and underpinning theperspectives or paradigms This conventionalapproach constrains their views and raisesserious questions as to the theoretical validityand credibility of these models To understandthe current fierce debate on corporate gover-nance it is important to stand back from theone-sided arguments with their taken-for-granted ideas Reflexive thinking is neededthrough critical examination of the major the-orems assumptions and origins of both per-spectives This paper serves as a survey andcritical review of both the shareholder andstakeholder perspectives on corporate gover-nance A major finding in this paper is thatalthough the current prevailing analyses mayhave some merits and insights at a particularpoint in time they are however over-abstracted and over-static in modelling andtheorising corporate governance They buildtheir ldquorationalrdquo arguments and ldquoidealrdquo modelson traditional assumptions and theories thatwere generated andor constructed in cen-turies-old societal contexts far removed fromthe current modern business environmentwhere for example the boundary of the firmhas become blurred in terms of global marketsand where physical assets are far less impor-tant than human resources knowledge andinformation They ignore the continuouschange of natural and social realities and dis-tance themselves from the dynamics of corpo-rate governance in practice The economicapproach mostly employed in their analysestends to be culture-free historically separatedand contextually unrelated We note that veryrecent studies have seriously questioned thetraditional theory of the firm and called for anew direction in building a new theory of thefirm that reflects the modern day businessenvironment (eg Zingales 2000 Rajan andZingales 2000) Other studies in law sociol-ogy politics and culture in relation to corpo-rate power and control may also offer someinsights into rethinking corporate governanceand overcome part of the shortcomings ofcurrent models It is the conventional modesof thought and associated approaches such asdualismdichotomy idealismperfectionismuniversality and permanency that endorseand justify the polarised shareholding andstakeholding models

This paper is structured as follows In thenext section current major theoretical modelsin corporate governance are summarisedbased on the mainstream typology Thesemodels are presented as examples to indicate

copy Blackwell Publishing Ltd 2004 Volume 12 Number 3 July 2004

Government

Shareholders

Creditors

Directors

Managers

Suppliers

Customers

Community

Employees

General Public

Figure 1 Relationships in corporate governance


how the two academic schools of sharehold-ing and stakeholding have been divided intoopposing camps Following this the majortheorems and arguments of the shareholdingand stakeholding perspectives are examinedrespectively from which their basic assump-tions and presuppositions are clearly ob-served Attention is given to the shiftingcharacter of the corporate reality as well as theperspectives themselves from which the superiority of both theoretical models is questioned Recent new challenges to the traditional theory of the firm and stakeholdertheory are reviewed Finally we conclude thepaper with some remarks on the limitations ofcurrent approaches particularly the conven-tional modes of thought on analysing corpo-rate governance issues and call for a new wayof thinking The conclusion of this paper isthat modes of thought do matter in under-standing corporate governance

The corporate governance debateshareholding vs stakeholding

As current analyses on corporate governanceapproach the governance issue from differentperspectives and base their views on differentassumptions and presuppositions there existquite diverse theoretical models which can beidentified in the literature Major surveysandor reviews of corporate governancemodels have been conducted by Hawley andWilliams (1996) Shleifer and Vishny (1997)Turnbull (1997b) and Keasey et al (1997)Hawley and Williams (1996) suggest fourmajor views in the corporate governancedebate in the US ie the finance model thestewardship model the stakeholder modeland the political model The dominant modelin the late 20th century is the finance view ofcorporate governance which is concernedwith a universal agency problem and how toadopt appropriate incentive systems andorthe mechanism of takeover to solve thisproblem While the finance model is focusedon shareholder rights and control in publiclyheld corporations Shleifer and Vishny (1997)extend the finance view of the firm to includenot only shareholders but also debt-holdersand bankers In contrast to the dominantfinance model the stewardship model (seeDonaldson and Davis 1994) assumes a differ-ent nature of agentmanagerial behaviour andargues that managers are trustworthy andshould be fully empowered The stakeholdermodel further extends the purpose of the corporation from maximising shareholderswealth to delivering wider outputs to a range

of stakeholders and emphasises corporate effi-ciency in a social context Departing from theprevailing economic analysis of corporategovernance the political model (eg Pound1992 1993) according to Hawley and Williams(1996) is a non-market approach for monitor-ing management such as shareholder democ-racy and negotiation In Turnbullrsquos (1997b)view such a political model focuses only onthe micro level of politics in corporations thebroader political context such as the politicaltradition ideology government intention reg-ulation and institution is considered elsewhere(eg Letza and Smallman 2001) Turnbull alsoreviews other models based on culture powerand cybernetics in addition to the above fourmodels

Based on Blairrsquos (1995) taxonomy Keasey et al (1997) also summarise four competingmodels in the current studies of corporate gov-ernance each with its own diagnosis of andsolutions for the Anglo-American governanceissues The four schools of thought are theprincipal-agent or finance model the myopicmarket model the abuse of executive powermodel and the stakeholder model Here the principal-agent or finance model and thestakeholder model are the same as those in theclassification of Hawley and Williams as men-tioned above In the view of the principal-agent or finance model (eg Manne 1965Jensen and Meckling 1976) although the sep-aration of ownership and control may providethe opportunities for managerial divergentbehaviours from maximising shareholdersrsquovalue the markets ndash particularly the capitalmarket the managerial labour market and themarket for corporate control ndash provide themost effective restraints on managerial discre-tion (note that this assumption is rejected byPound (1992 1993) for the reason that a newform of governance based on politics ratherthan finance would be more effective and lessexpensive) This school claims that corporategovernance failures are best addressed byremoving restrictions on factor markets andthe market in corporate control together with strengthening the incentive system(bonuses stock options etc) introducing avoluntary code and appointing non-executivedirectors

Though the myopic market model (egCharkham 1994 Sykes 1994 Moreland 1995)agrees with the principal-agent or financemodel that the maximisation of shareholdersrsquointerests is the focus it argues that the fundamental flaw of the Anglo-American corporate governance system is its excessiveconcern with short-term market value Certainlong-term expenditures particularly capital investment and research and development

Volume 12 Number 3 July 2004 copy Blackwell Publishing Ltd 2004


spending are systematically undervalued bythe markets because of the immediate pressureor interest from hostile takeovers The short-sighted markets thus force otherwise diligentmanagers to concentrate solely on the currentshare price and ignore the long-term value cre-ation of the firm or take decisions against thethreat of hostile takeover at the expense ofshareholders interest The solution for improv-ing corporate governance is to provide anenvironment in which shareholders (particu-larly large andor institutional shareholders)and managers are encouraged to share long-run performance horizons such as increasingshareholdersrsquo loyalty and voice reducing theshareholder exit encouraging ldquorelationshipinvestingrdquo and empowering other groups(employees suppliers etc) to have long-termrelationships with the firm

Rejecting the principal-agent or financemodel the abuse of executive power model(eg Hutton 1995 Kay and Silberston 1995)claims that the purpose of a corporation is toserve the corporate interest as a whole Themajor problem with the current corporate gov-ernance arrangements is that they allow exces-sive power to executive managers who mayabuse their power in pursuit of their owninterests The supporters of this model arguethat the current institutional restraints onmanagerial behaviour based on the notions ofself-regulation and market discipline are inef-fective and inadequate They appeal for statu-tory changes in corporate governance such as a fixed four-year term for chief executiveofficers independent nomination of non-executive directors and more powers for non-executive directors

The major challenge to the principal-agentor finance model stems from the stakeholdermodel (eg Freeman 1984 Blair 1995) whichclaims that the firm should serve wider inter-ests of stakeholders rather than shareholdersonly Stakeholders such as employees credi-tors suppliers customers and local com-munities have long-term relationships (bothcontributions and risk-sharing) with the firmand affect its long-term success Their welfaremust be taken into account in corporate decision-making This model argues that thecurrent corporate governance system in theAnglo-American environment fails to en-courage stakeholder involvement with thefirm including inter-firm cooperation andemployee participation which indicates a dis-advantage of national performance and inter-national competition in comparison with thecorporate governance structures in Germanyand in Japan1

The above four models as presented inKeasey et al (1997) have explored specific

issues in corporate governance issues ie self-interest behaviour of agents short-termmarket forces the abuse of power by manage-ment and the neglect of stakeholdersrsquo involve-ment Each model offers its own diagnosis as the ldquotruerdquo cause of corporate governancedefects and based on the diagnosis each triesto search and find an optimal solution Theyconcentrate on the mechanisms of internalmonitoring or external market discipline fromwhich to prescribe peculiar recipes to treatingthe ailments While the principal-agent modelhighly values the mechanism of market gov-ernance the other three rely on non-marketmeasures such as shareholder loyalty andvoice institutional shareholdersrsquo monitoringand independent non-executive directorsrsquoempowerment and stakeholdersrsquo participa-tion in decision-making Table 1 summarisesthe main viewpoints and their contexts in thefour models

The above four models (and other main-stream models previously mentioned) are constructed as theoretical models and are primarily drawn from within the Anglo-American context They do not purposefullycover all types of companies and all societiesin the world nor do they include all corporategovernance and control studies (for moredetails on the limitations of the Hawley andWilliamsrsquo perspective see Turnbull 1997b)But what is significant is that these modelsrepresent a conventional mode of thinkingabout corporate governance which has long been underlining and dominating ourresearch ideas and governance practices and which can be found everywhere all overthe world not merely limited to the Anglo-American societies (although such a mode ofthought can be found more easily and moreexplicitly in the Anglophone context) With theconventional mode of thought all the theoret-ical models neatly fall within two opposingperspectives the shareholder perspective andthe stakeholder perspective For example theformer two models in the above belong to ashareholder perspective as they share thecommon assumption that the purpose of cor-porations is the maximisation of shareholdersrsquowealth And the latter two commonly hold astakeholder perspective since both insist on abroad sense of stakeholding welfare Such a convenient taxonomy has been used byOrsquoSullivan (2000) and Kakabadse and Kak-abadse (2001) among others It is notable thatthe separation and polarisation of sharehold-ing and stakeholding is not only popularamong scholars but also among practitionersand societies The fundamental issue behindthe approach and associated modes of thoughthas not been recognised so far in the field of




Table 1 Summary of current mainstream corporate governance models

The principal- The myopic The abuse of The stakeholderagent or finance market model executive power model

model model

Major contributor Jensen and Charkham (1994) Hutton (1995) Kay Freeman (1984)Meckling (1976) Sykes (1994) and Silberston Blair (1995)Manne (1965) (1995)

Purpose of Maximisation of Maximisation of Maximisation of Maximisation ofcorporation shareholder wealth shareholder wealth corporate wealth as stakeholdersrsquo

a whole wealthProblem of Agency problem Excessive concern Abuse of executive Absence of

governance with short-term power for their own stakeholdersrsquomarket value interests involvement

Cause Shareholders do not Ineffective market Institutional Governance failurehave enough forces arrangements leave to representcontrol excessive power to stakeholdersrsquo

management interestsBackground The separation of The takeover Managerialism Different styles of

ownership from movement in the capitalismcontrol 1980s

Assumption about Self-interest human Market dysfunction Authoritarian Traditionalthe causation behaviour governance mentality of private

ownershipRejection Any external Market governance The principal-agent The principal-agent

interventions model modelProposition Market efficiency Importance of long- Manager as Social efficiency of

term relationship trusteeship economySolution bull Removing bull Increasing bull Statutory changes bull Trust

restrictions on shareholder loyalty in governance relationships andmarkets and voice bull Fixed four-year long-term

bull Strengthening the bull Reducing the ease terms of CEO contractualincentive system of shareholder exit bull Independent associations

bull Introducing a bull Encouraging nomination of between the firmvoluntary code relationship directors and stakeholders

investing bull Greater power of bull Inter-firmbull Empowering non-executive cooperation

long-term offer directors bull Employeesrsquogroups participation

bull Business ethics

Source Based on Keasey et al (1997) Blair (1995)

corporate governance While the two mainperspectives are deliberately duplicated inmany studies the theorems origins assump-tions and theoretical contexts embedded in orbehind the perspectives are less well examinedand articulated in the literature The validityof modes of thinking is rarely questioned Ingeneral the understanding of the debate andthe models and perspectives of corporate gov-ernance are merely scratching the surface of

the subject Therefore in what follows weattempt to capture the central arguments coreassumptions and philosophies of the share-holding and stakeholding perspectives respec-tively from which the sharp differences onassumptions and presuppositions between thetwo perspectives are clearly observed Theseanalyses are necessary for our further ques-tions about the current way of theorising incorporate governance


The shareholding perspectivecorporate governance as a private matter

The mentality of individual private propertyThe shareholding perspective as an orthodoxand dominant approach to the understandingof corporate governance has its ideologicaland theoretical origin in the fundamentalmentality of individual private ownershiprights as the foundation of capitalism The tra-ditional wisdom is that private ownership isfundamental to a desirable social order and tothe development of an efficient economy andthus private ownership rights are inviolable tocorporate governance (see Gamble and Kelly2001) Underlying the notion of private own-ership is the ideology of individualism whichemerged in England in the 15th and 16th cen-turies as a result of the emerging mercantilismand the Reformation and Renaissance whichgradually broke from the old feudal societyand required a new definition of social orderand regulation Individualism initially empha-sised such conceptions as individual separa-tion (with self-confidence self-awareness and self-help) freedom (free mobility freeexchange and free competition) and autonomy(private contract self-determination and self-regulation) (Macfarlane 1978 see also Tricker2000) With the development of the capitalisteconomy during the 17th 18th and 19th cen-turies when incorporation began to emerge inEngland at first as a chartered form for over-seas trading (such as the East India Companyin 1600) and subsequently as a legislated formas a mechanism for raising capital and busi-ness expansion2 the individualist ideologywas inherited by corporate law theory ininterpreting the nature of incorporation It wasassumed that the right to incorporate is inher-ent in the right to own property and write contracts and that the corporation is a legalextension of its owners ndash shareholders (seeAllen 1992) The inherent property rightstheory also insisted that although a companyis regarded as a legal person separate from itsowners the nature of shareholders as thecompanyrsquos owners never changes and thecompany is legally obliged to serve the in-terest of its shareholders (as the corporatemembers) Corporate property should betreated as a private association which de-mands the minimum of government regu-lation and interference (see Gamble and Kelly2001)

This theory obtained further support duringa fierce debate in corporate law theory on thenature of corporate personality in the late 19th

century One side of the debate is referred toas the aggregate or ldquofictionrdquo theory advocatedby the German jurisprudent Rudolf vonJhering (1818ndash1892) and the American juris-prudent Wesley N Hohfeld (1879ndash1918) That doctrine asserts that the corporation as alegal group is simply created by the state andis no more than a private association of share-holders The new form of corporate propertyis the aggregation of individual propertyrights under a collective name united by con-tract and protected by company law Sinceshareholders are the owners of the corpora-tion the corporation has legitimate obligationsand the managers have a fiduciary duty to actin the interest of shareholders (a summary ofthe above theory is shown in Table 2) (Barker1958 Mayson et al 1994)

In the 20th century the traditional liberaland individualist approach to property andcorporate governance was further justified in neoclassical economics along with the principle of free market economic efficiencyand profit maximisation Hayek (1969) forexample argues that individuals owningprivate property and pursuing self-interestsensure the most efficient economic activitiesand outcomes The corporation owned byshareholders must aim at maximising profitsto enhance shareholders value If a corpora-tion acts for any social purpose beyond share-holdersrsquo interest it will provide opportunitiesfor managers to justify their abuse of powerand for government to intervene in corporatedecisions which will lead to the allocation ofcorporate resources in an inefficient wayFriedman (1962 1970) also asserts that thefunction of business in a society is to makeprofits in a free market for shareholderswhich should not be confused with othersocial functions performed by governmentsinstitutions and charities The request forsocial responsibility of business is harmful tothe foundations of a free society with a free-enterprise and private-property system Thusfor Friedman the only social responsibility ofbusiness is to increase its profits

A universal agency problemIn the shareholding perspective a basic issuein corporate governance is whether or notshareholdersrsquo interest can be effectively pro-tected under the current institutional arrange-ments Since shareholders have to delegatecontrol to a few directors and managers to runthe company on behalf of all the shareholdersthere is a potential risk that directors and man-agers may serve their own interests at theexpense of all the shareholders This problemwas initially identified by Adam Smith in 1776



(1937) who noted that the directors in a joint-stock company could not be expected to be as vigilant and careful with other peoplersquosmoney as they are with their own Manage-mentrsquos potential negligence and profusionalways prevail as an issue in public compa-nies This problem has become wider andmore serious since the early 20th century asthe separation of ownership and controlincreased the power of professional managersand leaves them free to pursue their own interests (Berle and Means 1932) Concernedwith this issue agency theory was built byJensen and Meckling (1976) among others inthe 1970s employed for their diagnosis of and solution to the corporate governance ailments

Beginning with the aged assumption of thenature of self-interest human behaviourwhich intrinsically underpins individualismand classical and neoclassical economicsagency theorists assert that the agencyproblem can occur in all cooperative effortswhere there exist principal-agent relation-ships namely in all organisations and at everylevel of management in organisations (Jensenand Meckling 1976 p 309) This implies thatmanagers as agents may naturally use the delegated power in their hands to maximisetheir own utility instead of shareholdersprincipalsrsquo welfare Therefore managers arebasically untrustworthy and must be fullymonitored There are two issues occurring inthe agency relationship with which agencytheory is concerned The first is that because itis difficult or expensive for the principal toknow the performance of the agent the prin-cipal cannot verify that the agent has behaved

appropriately The second issue is that theprincipal and the agent may prefer differentactions because of the different attitudestoward risk (Eisenhardt 1989 p 58) Thosetwo problems incur a particular type of man-agement cost ndash ldquoagency costrdquo ndash as principalsowners attempt to ensure that agentsmanagers act in the principalsrsquo interests(Jensen and Meckling 1976) The best solutionto those problems is to determine the most efficient contract governing the principal-agent relationship and an optimal incentivescheme to align the behaviour of the managerswith the interest of owners

The concept of contract is the most favouredmetaphor used in agency theory It believesthat all social relations in economic interactionare reducible to a set of contracts betweenprincipals and agents The role of contractsserves as a vehicle for voluntary exchange(Alchian and Demsetz 1972) The firm can bebest viewed as a ldquonexus of contractsrdquo and con-tractual relations exist not only between share-holders but also with all other stakeholders(Jensen and Meckling 1976) But only share-holders have profit incentive and investment-risk awareness to ensure the most efficient andeffective governance arrangements to protecttheir interests (see Dallas 1988 p 24) To alignthe interest of the agent with that of the prin-cipal a complete contract containing specifi-cations of the agent duties rewards and therights of the principal to monitor their perfor-mance is required (see Fligstein and Freeland1995 p 26) According to the proponents ofprincipal-agent theory adopting appropriateincentive systems to reward managers is a keysolution to the agency problem


Table 2 Contrasting views in the 19th centuryrsquos debate on corporate governance

Major theories Inherent property rights theory Social entity theory(also the fiction theory) (also the organic theory)

Nature of corporation Association of shareholders Independent legal personPurpose Shareholdersrsquo interest Socialcorporate interestObjective Profit maximisation Long-term growthOwnership Private propertyindividual rights Corporate propertycollective

rightsLegal instrument Contract LawRegulation Self-regulation Legislationstate interveneGovernance structure Internal monitoring managers as Internal monitoring managers as

agents with fiduciary duty and organsrepresentatives withaccountability loyalty authority and social

responsibilityLegal system Anglo-American legal system Continent-European legal system

Source Based on Allen (1992) Mayson et al (1994)


The focus of agency theory is on determin-ing the most efficient contract governing the principal-agent relationship An optimalchoice between a behaviour-oriented contract(eg salaries hierarchical governance) and anoutcome-oriented contract (eg commissionsstock options transfer of property rights)becomes critical (Eisenhardt 1989 p 58) Itultimately depends on the trade-off calcula-tion between the cost of measuring behaviour(through purchasing complete informationand rewarding hard-working behaviours) andthe cost of measuring outcomes (eg prof-itability) and transferring risk to the agent(Eisenhardt 1985 p 136)

While agency theory focuses on writingcomplete contracts and implementing effec-tive monitoring to secure shareholdersrsquo inter-est it also views the managerial labour marketas a disciplinary tool on managerial misbe-haviour There exists both external manageriallabour market (each managerrsquos outside oppor-tunity wage is determined by the performanceof the firm) and internal managerial labourmarket (top managers in a firm compete tobecome the boss of the bosses) which caneffectively discipline managers who may haveincentive to expropriate shareholders wealth(Fama 1980)

Market efficiency and market governanceWithin the shareholding camp there is anargument on how to solve the agencyproblem Like all bureaucratic organisations ahierarchical check and balance mechanismwas designed in company law which includesthe three-tier structure ndash the shareholdersrsquogeneral meeting the board of directors andexecutive managers However in the 20thcentury with the increasing separation ofownership and control within the Anglo-American culture shareholdersrsquo internal monitoring became less effective Under thesecircumstances many financial economistsadvocate that market governance is the mosteffective mechanism because the pressure ofcapital markets and takeovers can heavily dis-cipline managerial discretion of deviatingfrom shareholders value of profit maximisa-tion (Alchian and Kessel 1962 Manne 1965)The rationale behind the finance model of cor-porate governance is a theorem prevailing infinancial economics which assumes that theshare price today fully reflects the marketvalue of all future profits and growth that willaccrue to the company Thus the advocates ofthe ldquomarket for corporate controlrdquo hold thatshareholders wealth is best served by max-imising share price unfortunately this tendstowards the short run The share price is an

indicator of corporate performance and thestock market is the only objective evaluationof management performance If a firm under-performs its share price will drop which pro-vides a chance for outsiders to purchase thefirmrsquos stock at a lower price and run the firmmore efficiently in order to obtain a greaterreward The threat of a takeover forces man-agement to make efforts for better perfor-mance and maximise shareholdersrsquo return inorder to prevent takeover

Supporters of the finance model argue thatcorporate governance failure can be bestaddressed by removing restrictions on factormarkets and the market for corporate control(Fama 1980) Shareholdersrsquo voting rights ontakeover should be enhanced Any externalinterventions and additional obligationsimposed on corporations may distort freemarket mechanisms and thus should beavoided (Hart 1995) Self-regulation as wellas some additional measures without compul-sion such as a voluntary code (Cadbury Committee 1992) is more efficient than anylegislative change

Controvertible marketisationThe market solution to corporate governanceproblems is however rejected by anotherschool of thought the myopic market model(Blair 1995 Keasey et al 1997) Sharing thecommon position of the shareholding per-spective the myopic market model argues that the Anglo-American model of corporategovernance is fundamentally flawed by an over concern with short-termism due tohuge market pressures ndash short-term return on investment short-term corporate profitsshort-term management performance short-term stock market prices and short-termexpenditures Thus the most serious problemwith corporate governance is that the currentinstitutional arrangement encourages man-agers to focus on short-term profit return(even less than half a year) by sacrificing long-term value (eg RampD investment) and com-petitive capacity of the corporation (eg Hayesand Abernathy 1980 Charkham 1994 Sykes1994 Moreland 1995) It is argued that thestock market is not a good indicator of corpo-rate performance because it is unable to copewith uncertainty and often misprices assetsThe share prices can change without any cor-responding change in corporate fundamentalvalues and may simply result from guessesabout the behaviour and psychology ofmarket participants and the changing moodsand prejudices of investors (Keynes 1936Shiller 1989) Therefore the market for corpo-rate control is not an efficient disciplinary



mechanism The threat of hostile takeover maydistort and distract from true value creation asmanagers may be forced to act against hostiletakeover at the expense of corporate wealth

The myopic market model turns back tointernal mechanisms rather than externalmarkets for effective corporate governance bystressing long-term economic relationshipsand long-run corporate performance horizonsshared by shareholders and managers Share-holdersrsquo loyalty and voice rather than exitshould be encouraged The takeover processand shareholdersrsquo voting rights for short-termreturn should be restricted (see Keasey et al1997)

The stakeholding perspectivestakeholder interest as end or means

The corporation as a social entityStakeholder theory has been categorised intothree aspects ie normative instrumental anddescriptive based on their different researchapproaches (Donaldson and Preston 1995)Two types of main stakeholder theory can beidentified ndash the normative stakeholder theoryand the instrumental stakeholder theoryWhile the former emphasises ldquointrinsic valuerdquoin stakeholding and views stakeholders asldquoendrdquo the latter is only interested in howstakeholdersrsquo value can be used for improvingcorporate performance and efficiency andregards stakeholders as ldquomeansrdquo In corporategovernance the normative stakeholder theoryhas its origin in the social entity conception ofthe corporation as developed in the later partof the 19th century It was observed that themodern corporation had large scale and scopethat required distinctive professional manage-ment expertise and a great amount of capitalinvestments Through stock markets shareownership in a corporation become dispersedand fragmented and shareholders are morelike investors rather than owners Since cor-porations are involved in many aspects ofsocial life and affect many people in bothwelfare and potential risks a public corpora-tion should be conscious of its social obliga-tions such as fairness social justice andprotection of employees In this regard cor-porations became more like independent entities with their own purpose their ownproperties and their own duties (see Allen1992)

This view is strongly supported by corpo-rate law theory in which the corporation isdefined as a legal person separate from itsmembers3 In the debate against the aggregateor ldquofictionrdquo theory as mentioned previously

there emerged a ldquonature-entityrdquo or ldquoorganicrdquotheory which is particularly associated withthe German legal historian Otto von Gierke(1841ndash1921) This theory asserts that an asso-ciation of persons has a real personality that isnot fictionally created by the state or law butreally existent and recognised by the group inthe process of incorporation The law simplyfound the existence of the group or associationand endowed it with a corporate personalitywith legal powers Thus the corporation as areal rather than an artificial person is not theaggregation of its members and individualrights It has a distinctive mindwill andcapacity to act has its own rights and dutiesand is responsible for its own actions and their consequences Individuals in the corpo-ration carry out duties and other activities and as such are not acting as independentpersons but as organs of the corporate person(for a summary of the above theory see Table2) (see Barker 1958 Arthur 1987 Mayson etal 1994)

Based on the grounds of fundamental valueand moral order of the community the socialentity theory views the corporation as a socialinstitution in society As Sacks (1997) positsour attachments and affiliations loyalties andloves are both moral and fundamental ldquotheyenter into our identity our understanding ofthe specific person we arerdquo and ldquothey cannotbe reduced to contractual alliances for thetemporary pursuit of gainrdquo (quoted in Warren2000 p 130) The justification of ldquointrinsicvaluerdquo as good or morally right and ideal doesnot necessarily depend on factual reasons butrather on an emotional faith and social belief(Campbell 1997 p 446 Stoney and Winstan-ley 2001 p 608) It is argued that corporationsare granted by the state not only as an eco-nomic entity for a commercial purpose butmore importantly as a social entity for generalcommunity needs such as ldquohonouring indi-vidual dignity and promoting overall welfarerdquo(Sullivan and Conlon 1997 p 713) The cor-poration has a collective rather than individ-ual identity and executives are representativesand guardians of all corporate stakeholdersrsquointerests (Hall 1989) To resolve disputes andconflicts of interests and overcome market failures and transaction costs legal interven-tion within a public law framework and animproved system of checks and balances arenecessary (Millon 1990 Allen 1995)

In recent years several concepts or perspec-tives advocated are linked to the social entityconception of the corporation such as eco-nomic democracy promoted by democraticpolitical theorist Robert Dahl (1985) associa-tionalism by Paul Hirst (1994) and communi-tarian notion of property by Jonathan Boswell



(1990) (see Warren 2000 pp 130ndash142) Therecent resurgence of the normative or moralaspect of stakeholder perspectives (egHandy 1993 1997 Carroll 1991 1996) has ingeneral reflected the social entity conceptionof the corporation

The instrumentality of stakeholdingThe most popular perspective in stakeholdertheory is the instrumental stakeholder theorypromoted by economists and others (egCadbury Committee 1992 Parkinson 1995Campbell 1997 Plender 1997 Centre forTomorrowrsquos Corporation 1998 Slinger 1998)It holds the same claim as the social entitytheory that a corporation should serve multi-ple interests of stakeholders rather than share-holder interest alone in order to make thecorporation more legitimate Unlike socialentity theory that justifies stakeholder inter-ests on the basis of moral value and funda-mental human rights the instrumentalstakeholder theory legitimises stakeholdervalue on the grounds of stakeholding as aneffective means to improve efficiency prof-itability competition and economic successAs Campbell explicitly posits ldquoI supportstakeholder theory not from some left wingreason of equity but because I believe it to befundamental to understanding how to makemoney in businessrdquo (1997 p 446) Freemanrsquos(1984) initiative on stakeholder managementas a business strategy also has an instrumen-tal orientation He argues that as the forces of stakeholder groups such as stockholderslenders customers employees suppliers andmanagement are increasingly and vitallyaffecting business success and corporate sur-vival corporate strategy must sensitise thischange and ensure that stakeholder interestsare incorporated into rather than ignored incorporate strategy In recent years stakeholdertheory has been associated with a politicalposition such as New Left (Stoney and Win-stanley 2001) and has tended to be seen as areconciliation of the competing claims of eco-nomic efficiency and social justice (OrsquoSullivan2000) However the final end of justification isstill instrumental For example in the bookStakeholder Capitalism edited by Kelly et alstakeholder theory is based on the groundsthat

Individuals well endowed with economic andsocial capabilities will be more productive com-panies which draw on the experience of all oftheir stakeholders will be more efficient whilesocial cohesion within a nation is increasinglyseen as a requirement for international compet-itiveness (Kelly et al 1997 p 244)

This line of stakeholding theory views itsinstrumentality as ldquointrinsic valuerdquo which is more attuned to the traditional Anglo-American corporate governance mentality ofprivate ownership (Gamble and Kelly 2001) Itsuggests that corporate governance should notdepart from ownership rights but that suchrights should not be solely claimed by andthus concentrated in shareholders ownershiprights can also be claimed by other stakehold-ers particularly employees Turnbull (19941997a 1998) for example advocates stake-holder ownership and governance in line witha property rights analysis He suggests that a perpetual shareholder ownership permitsinvestors to be overpaid which ldquois inconsis-tent with either economic efficiency or socialequityrdquo (1997a pp 11ndash12) He also supportsstakeholder theory from a cybernetic perspec-tive and claims that stakeholder participationin corporate governance can generate moreaccurate and unbiased information for busi-ness operation and management and thusimprove governing efficiency and effective-ness (1997a 2002) For Blair and others (egBlair 1995 Kelly and Parkinson 1998) stake-holders who make firm specific investmentsand contributions and bear risks in the corpo-ration should have residual claims and shouldparticipate in the corporate decision-makingsto enhance corporate efficiency In Blairrsquos viewin the case of firm-specific investments ldquocom-petitive markets are of little use in deter-mining how to allocate the rents and riskassociated with those investmentsrdquo (Blair1995 pp 267) Thus stakeholding governanceis better exercised through internal controlmechanisms rather than external marketssuch as corporate boards acting as representa-tives of stakeholders in the corporation Cor-porate governance systems and contractualarrangements ldquoshould be devised to assigncontrol rights rewards and responsibilities tothe appropriate stakeholders ndash the parties thatcontribute specialised inputsrdquo (Blair 1995 p274)

Managerial trusteeshipThe economic approach in conventional cor-porate governance analysis (such as the share-holding perspective and the instrumentalstakeholder theory as indicated above) typi-cally presupposes a taken-for-granted humannature as ldquoself-interestedrdquo and therefore con-cludes that managers as agents cannot betrusted (note that agency relationship is alsoassumed in stakeholder theory Hill and Jones(1992) for example assert a stakeholder-agency theory) However the assumption ofuntrustworthy managers is rejected in the



management literature (eg Marris 1964Nichols 1969 Etzioni 1975) As a contrast itis suggested that managers are good stewardsof the corporation and diligently work for themaximisation of corporate profit and share-holder returns The stewardship theory arguesthat managers have a wide range of motivesbeyond self-interest such as the need forachievement and recognition the intrinsic sat-isfaction of good performance and successrespect for authority the work ethic and soforth Thus managers as stewards are trust-worthy and a professional management isbeneficial for corporate performance andshareholder wealth (Donaldson and Davis1994)

While stewardship theory is mostly consis-tent with a shareholder perspective (but froma different assumption of human nature) atrusteeship model is proposed by Kay and Sil-berston (1995) in connection with the stake-holder perspective They start their argumentby describing the current practical state of apublicly held corporation that shareholders donot actually possess the ownership of a cor-poration and are not interested in running corporate business Further they suggest thatcompany law does not explicitly grant share-holders ownership of corporations since thecorporation is an independent legal personwith its own ownership separated from itsshareholding members and shareholders aremerely the ldquoresidual claimantsrdquo of the corpo-ration (see also Deakin and Slinger 1997Warren 2000 p 18) Thus Kay and Silberstonreject the idea that directorsmanagers areagents of shareholders and argue that man-agers are trustees of the corporation Tricker(1996) also notes that in company law behindthe idea of directors having a fiduciary duty isa philosophy of directors as trustees They areprincipals rather than agents (Dallas 1988)Sympathising with the assumption made bythe earlier organic theory in company lawwhich is more prevalent in continentalEurope Kay and Silberston (1995) suggest thatthe corporation is not simply created byprivate contract but by the company law andthe corporation is a social institution with acorporate personality which has its own assetsand rights and duties its own will capacityand responsibilities for its actions Hencedirectors as trustees should not serve thefinancial interest of shareholders alone butpromote the broader interests of the corpora-tion as a whole For this reason statutorychange in corporate governance is needed(such as the amendment of company law) tochange the current statutory duties of thedirectors from maximising shareholder inter-est to pursuing the long-term value of the

whole corporation Empowering independentdirectors and fixing CEOsrsquo term of office to amaximum of four years are also necessary forthe corporation as a social institution

Shareholding vs stakeholding do they map the territory

The current fierce debate between the share-holding and stakeholding perspectives (for therecent arguments see Sternberg 1998 2000Vinten 2001 Turnbull 1997a 2002 for asurvey of the recent dispute and tendency inthe UK see Gamble and Kelly 2001) repre-sents two extreme positions and a polarisedapproach in understanding corporate gover-nance (Prabhaker 1998 Friedman and Miles2002) Underlining the argument are two con-flicting and competing ideologies culturesand value judgements within capitalism Asexamined in the last two sections at one endis the traditional dominant wisdom of ldquoindi-vidualismrdquo ndash private property and individualliberty and thus the justification of maximis-ing shareholdersrsquo value as the sole purpose ofthe firm At the other end is the communitar-ian notion of property and social institutionalconception of the firm and the idea of ldquojusticefor allrdquo and thus the legitimisation of accom-modating all stakeholdersrsquo interests by a firmOn the surface the instrumental stakeholdertheory seems to bridge the two ends but infact it either falls within a shareholder purposeof the firm or claims for stakeholder intrinsicvalue in forming business strategy Thesepolarised conceptualisations insist on theirown ideologies and paradigms as apparentlyuniversally valid and unchangeable andexclude the possibility of incorporating ideasand assumptions from other or even oppositepositions While both perspectives of share-holding and stakeholding presuppose a fixednotion of social reality as ideal or optimumreality itself does not have such a fixed natureand property Nor does it hold some enduringand universal form and principles of gover-nance Rather there has been a continu-ous shift of paradigms and mindsets fromshareholding to stakeholding in the Anglo-American setting

The paradigmatic shift from the shareholdermodel to the stakeholder model was mostlyobservable in the late 20th century The stakeholder model employed in practice canbe traced to the 1930srsquo Depression when theGeneral Electric Company promoted stake-holdersrsquo interests such as shareholders em-ployees customers and the general public in order to survive the economic crisis



(Preston and Sapienza 1990) This stakehold-ing notion was followed by Robert E Woodthen CEO of Sears in the 1950s who sug-gested that shareholdersrsquo long-run profitcould be enhanced by satisfying the needs andexpectations of other stakeholders (Hummels1998) From the 1960s through to the 1980s the stakeholder concept was popular amongconsumerists environmentalists and socialactivists It was also used by corporate execu-tives to defend against takeovers in the 1980sIt was nevertheless in the 1990s that the stake-holding perspective began to be widely usedin the corporate governance debate (Blair1995) The change of mindsets in practice wasfirst signified by the Delaware Chancery Courtat the end of the 1980s In the case of Para-mount Communications v Time Inc in 1989 theChancery allowed Timersquos directors to rejectParamountrsquos takeover offer even though thatoffer maximised shareholdersrsquo financial valueThat was a very influential case in which thetraditional shareholder model was denied Inthe case of Credit Lyonnais Bank NV v PatheCommunications Corp (1991) the Chanceryfurther promoted a stakeholder model on thebasis that directors do not owe duties to anysingle interest group but to the corporation asa whole and ldquothe community of interests thatthe corporation representsrdquo (quoted in Sulli-van and Conlon 1997) Since then the newperspective has been so influential that up to2000 25 states of the USA had amended theirGeneral Corporation Laws to incorporate thestakeholder concept while most of the stateshad expressly permitted directors to take intoaccount the interests of stakeholders in theirdecision-making (Stoney and Winstanley2001 Van der Weide 1996) In the UK asimilar paradigmatic shift has been experi-enced since the early 1990s (Dine 2000) It isnot only perceived by judiciaries academicsand politicians but also by corporate practi-tioners and managers A longitudinal study ofBritish managerial mindsets between 1980 and2000 (Poole et al 2001) indicates a sharpincrease (20 per cent on average) of mana-gerial emphasis on stakeholder interests and adrop (10 per cent) of emphasis on shareholdervalue in 2000 compared with those in 1990Most of the managers (nearly 80 per cent onaverage) attach importance to stakeholders in2000 compared with only 50 per cent in 1980In the USA 75 per cent of managers are nowfamiliar with the term stakeholder (Vinten2001)

Arguably such a paradigmatic shift doesnot necessarily represent a true dominance ofstakeholder forces since the 1980s or a realmanagerial consideration of intrinsic moralvalue in business operation as the stakeholder

theorists often claim For example in Rail-track a privatised railway infrastructurecompany in the UK in the 1990s stakeholderinterests were explicitly emphasised by itsmanagement and in its annual reports But inthe firmrsquos decision-making customer servicesand safety remained secondary to short-termshareholder value maximisation RailtrackrsquosChairman publicly admitted that there was aconflict between profit and safety betweenshareholder value and stakeholder interest(for more details see Wolmar 2001 Murray2001) Evidence also shows that in the UK thereal demand of stakeholder groups on caringabout corporate reports and performance didnot increase but actually decreased betweenthe 1970s and the early 1990s (Letza and Small-man 2001) Large empirical investigationsalso suggest that corporate social performancedoes not necessarily result in positive corpo-rate financial performance In a meta-analysisof 51 studies within 25 years from the 1970s tothe 1990s Griffin and Mahon (1997) find that33 research results support while 18 do notsupport the correlation between corporatesocial performance and corporate financialperformance In fact the massive media cov-erage largely influenced the socially perceivedimportance of stakeholdersrsquo interests in the1990s due to academic and political concernsabout the issues of corporate social irrespon-sibility short-termism and the negative con-sequences of the takeover movement in the1980s (see Berglof 1997 Gamble and Kelly2001) Media politicians and scholars mayrepresent part of indirect stakeholders andexert influences at a time but the true forcesand powers of direct stakeholders of a firm arestill unclear They are dynamic and fluctuatedbecause they do not merely follow any pureeconomic principle and rationality such as effi-ciency but also are affected by many factorssuch as politics ideology culture social con-ventions and modes of thought Shareholdingand stakeholding are socially constructedrather than pre-given and taken-for-grantedSocial crisis and political power are two majorstimulators for social changes (Fligstein 1990)

Therefore it is obvious that as social realityitself (including corporate practices and soci-etal mindsets) is completely flowing andchanging the assumed extremity and thusendurability and universality of corporategovernance models are less valid and cred-itable What is fixed is the artificial conceptionand the entrenched position of either share-holding or stakeholding insisted by advocatesas pre-given and taken-for-granted The para-digmatic shift between the shareholding and stakeholding perspectives also impliesthat historically even theorising or ideal-



construction itself is transformable and unfix-able At one time we may give priority toshareholder interest and at other times wemay emphasise stakeholder interests due topractical and social reasons or simplybeliefsfaiths Ideal social conditions are neveravailable in practice nor capable of being rep-resented in theory as permanent as once-and-for-ever Only process and change is absoluteFor example while the dominant shareholdermodel subscribes to a single optimal form ofgovernance such as internal monitoring ormarket discipline for efficiency considerationsit is hard to find evidence that either the hier-archical or market form is totally effectiveQuite on the contrary both types of gover-nance structures and mechanisms have failedin practice (eg Bishop 1994 Hart 1995Hawley and Williams 1996 Latham 1999) AsWolf (1988) points out we do not have aperfect choice between market and hierarchywe only have a choice between imperfectmarkets and imperfect hierarchies as well asimperfect combinations of both Fligstein andFreeland note that there is no universal gover-nance structure ever found throughout theworld and ldquothere is also little evidence thatrelations between firms are converging towardmarkets hierarchies networks or strategicalliances as the dominant form of governancerdquo(1995 p 39) Governance practices reflect thepriorities preoccupations political inclina-tions and local conditions of a particular com-munity Mueller (1995) also argues thatgovernance structure cannot be pre-designedas optimal or ldquoappropriaterdquo It must emergethrough a dynamic process in which there arecontinuous interactions between choices madeand their complex contexts It is hard to find areliable structural solution to the governanceissue especially when working across culturalboundaries and historical periods

Recent challenges to theunderstanding of corporate governance

Very recent studies of the theory of the firmand corporate governance may help in part tounderstand the static limitations of both share-holding and stakeholding models Currentanalysis of corporate governance relies verymuch on an old conception of the firm whichwas characterised as asset intensive and verti-cally integrated in the late 19th and early 20thcenturies (Chandler 1977 1990) In companylaw the modern corporation is defined as anindependent and permanent entity with clear-cut boundaries and with direct control over its

employees suppliers and distribution systemThe concept of ownership is traditionally per-ceived as the ownership of physical assetssuch as capital and the means of productionPower and authority and residual claims areall based on the source of ownership ThusBerle and Means (1932) framed corporate gov-ernance as the determination of ownership ofthe firm and whether the true owners canexercise their rights adequately and effectively(see Zingales 2000) With this underlyingtheory of the firm both the traditional share-holder model and the challenging stakeholdermodel make their basic assumptions and theorems seemingly justifiable For examplewith the conventional sense of ownership andthe firm as a clearly bounded entity the share-holder perspective enjoys its theorising of corporate governance upon the notions orassumptions of private property the nexus of contract self-interest human behaviour theprincipal-agent relationship self-regulationand the optimum of market governance Thestakeholder perspective also legitimises itsclaims for stakeholder involvement in corpo-rate governance based on the assumption ofthe firm as a solid and permanent social entityand some universal principles such as moralvalue social justice mutual trust andor own-ership rights as naturally produced All thosejustifications implicitly presuppose that theconventional theory of the firm is as pre-givenand unchangeable

Zingales and others (eg Zingales 2000Rajan and Zingales 2000) suggest that the tra-ditional definition of ownership and the firmcould be valuable in a society where intensiveassets is far more significant for the exploita-tion of economics of scale and scope such asthat during the industrial revolution How-ever business reality is not fixed and ldquoThenature of the firm is changingrdquo (Zingales 2000 p 1624) Several important features ofcorporate change are notable here Large con-glomerates have been broken up into severalsmaller and independent companies Verti-cally integrated manufacturers have changedtheir direct control over suppliers into loosercollaborations Financing in capital market ismuch easier and physical assets are easilyreplaceable and less unique to business development In the era of the knowledge economy and with the increase of global com-petition the demand for process innovationand quality improvement is much higher andtherefore the human resource base becomesmuch more vital to a firmrsquos survival anddevelopment The global markets offer manyemployment opportunities and make humancapital more independent enabling individ-uals to build their own business All these



changes as Zingales points out make theboundaries of the firms unfixable and con-stantly floating

The change nature of the firm forces us toabandon the illusion that firmsrsquo boundaries areclear cut and remain unchanged when wechange the capital structure or the governancestructure (Zingales 2000 p 1644)

If the firm is not perceived and conceived as asolid and enduring entity and a pre-given andfixed object of study the consequence wouldbe that the current analysis of corporate gov-ernance based on the static conception of thefirm and its ownership structure is less con-vincing and reliable Indeed we need to rede-fine the concept of ownership to include notonly physical assets but also human capitaland social capital In addition to traditionalphysical assets a range of resources are be-coming increasingly important to todayrsquosbusiness such as creative knowledge ideasand unique skills professional control socialrelationships and corporate reputation Finan-cial capital human capital and social capitalare all crucial (but always dynamic andcontext-dependent) for a corporation The tra-ditional analysis of corporate governance thatrelies on a fixed boundary of the corporation(such as the assumptions of a physical entitya natural entity or a social entity as previouslymentioned) is unrealistic The split of share-holding and stakeholding as universallyapplicable is not reliable in matching to reality

While the inadequacy of the shareholderand stakeholder models is easily found fromthe above analysis the limits of the stake-holder perspective can be further displayedhere In addition to the earlier critiques of thestakeholder model such as the stakeholderidentity problem (Donaldson 1989) no clearyardstick for judging corporate performance(Bishop 1994) and no clear guidance for stakeholding application to managerial prac-tice (Blair 1995) more fundamental issuesremain within the stakeholder paradigm Forexample Friedman and Miles (2002) amongothers note that the stakeholder theory pre-sumes a clear-cut stable and homogeneousboundary among stakeholding groups be-tween stakeholder legitimacy and illegiti-macy and in managerial perception ofstakeholderndashcorporation relationships How-ever in practice stakeholder interests are sodiverse and conflicting that not only may it be incompatible between different stake-holder groups but also within a single groupFor example individual employees or sup-pliers or even shareholders always have dif-ferent as well as changeable attitudes towardinterests in and relationships with a particular

corporation over time Managerial percep-tions of stakeholder-corporation relationships actual power possessed by stakeholders andstakeholding legitimacy and urgency aretotally dynamic (Mitchell et al 1997) In dif-ferent organisational life cycle stages certain stakeholders may be perceived to be moreimportant than others to satisfy critical or-ganisational needs (Jawahar and Mclaughlin2001) Friedman and Miles (2002) suggest thatorganisationndashstakeholder relations alwayschange not necessarily materially but alsoideologically and their relations may changein any direction The triggers of such a change could be from institutional supportchanges contingent factors emerging sets ofideas held and changed by stakeholders and organisations and material interestschanged from stakeholders and organisa-tions They argue that ldquothe weakness of stake-holder theory lies in the underspecification ofthe organisationstakeholder relation itselfrdquo(Friedman and Miles 2002 p 15)

Some concluding remarks

Current mainstream schools of corporate gov-ernance rest their ideas and assumptions on atheory of the firm and associated ideologieswhich were created and constructed by com-pany law theory and classical economics in the 18th and 19th centuries Under this con-ventional wisdom physical assets are per-ceived to be more important than humanresources Corporate power and authority islegitimately built on the exclusive possessionof financial capital raw materials and themeans of production Free market exchangeand vertically integrated bureaucracy are jus-tified as ideal and universal principles for effi-ciency reasons The corporation is regarded asa solid and enduring entity or the aggregationof individual entities with a clear divisionbetween inside and outside the corporationand its environment and with a fixable iden-tity of shareholders and stakeholders Theseideal-constructions as argued above mighthave been acceptable in earlier times andunder certain conditions and contexts If weaccept that our society and environments arecontinually fluxing with an uncertain futurewe must critically scrutinise whether or notthe conventional wisdom and assumptions arestill compatible with current situations of corporate practice and societal development(including social expectations) The splitbetween shareholding and stakeholding incurrent theorising of corporate governance isless valuable since both material conditionsand ideological perceptions have changed sig-



nificantly in recent times making the polarisa-tion of shareholding and stakeholding nowsomewhat redundant

In order to make their theories universallyjustifiable both the shareholding and stake-holding perspectives attempt to generaliseand simplify their theories even though cor-porate governance practice is very dynamicand complex For example the universal principal-agent relationship self-interestedhuman behaviour the inherent individualproperty rights and the uninterruptible self-regulation mechanism underpinning theshareholder model and the pre-given moralvalue trusteeship and other social principlesand the single and simple identity of stake-holder groups underpinning the stakeholdermodel All those assumptions and presuppo-sitions tend to abstract and fix reality andignore or neglect the flux and heterogeneity ofcorporate governance in practice In so doinghowever the advocates seem rather puzzledabout the lack of evidence in support of theirtheoretical models

The most popular approach in corporategovernance research is economic analysisThis is manifested in both the shareholdermodel and stakeholder model Underpinningboth models is the continuous search for theoptimal governance structure which purport-edly lies in the most efficient form Further themodels claim that there exists a rationalprocess of selecting more efficient governancestructures and mechanisms either through theldquoinvisiblerdquo hand of the market or the ldquovisiblerdquohand of managers or stakeholders (seeSolomon and Higgins 1996 Roy 1997)Although the shareholder and stakeholderperspectives are different common to bothmodels are the notions of profit maximisationan increasing market value and economicrationality and efficiency The economic ratio-nale employed in the governance debateignores the basic fact that corporate gover-nance is a social process which cannot be isolated from social and other non-economicconditions and factors such as power legisla-tion social relationships and institutional contexts (Roy 1997) Theories grounded oneconomic rationality tend to neglect or marginalise the importance of irrationalityemotion value belief and ideology whichoften play a significant role in the process ofdecision-making and governance (see forexample Welcomer et al 2000 Jawahar andMclaughlin 2001) Consequently the limita-tions of the economic approach are obvious asGrundfest posits

There is no reason to believe that corporateagency problems can be resolved in an econom-

ically rational manner or that the corporategovernance process will over time tend towardgreater economic efficiency (Grundfest 1990quoted in Hawley and Williams 1996 part II)

Indeed corporate governance is not sciencebut an art4 as William Allen (2001) the formerChancellor of Delaware Chancery Court in theUS suggests For Allen good corporate gov-ernance may have good effects on long-termcorporate financial performance But the defi-nition of good standards of governance cannotbe measured by scientific precision ldquoCorpo-rate governance functions only throughhuman action which itself is affected by a highnumber of changing interacting variablesrdquo(Allen 2001 p 2) Any single model and struc-ture of corporate governance cannot workwell for all firms at all times Corporate gov-ernance needs to be flexible adaptable andinnovative Therefore for theoretical modelsto be workable and explicable in practice weneed to develop approaches and modelswhich better explain the idiosyncratic work-ings of local corporate governance rather thantry to force-fit reality into the establishedabstracted templates We need a new mode ofthinking in the analysis of corporate gover-nance which goes beyond the conventionalstatic approaches A new mode of thinkingthat would explain some important phenom-ena in corporate governance contrary to the conventional theoretical assumptions Forexample

Whereas the shareholder perspectiveregards the corporation as the extension ofindividual private property and a nexus offree exchange corporate legal relationshipsshow that the corporation is actually an inde-pendent organisation with its own rights andliabilities separate from its membersshare-holders The traditional rationale of privateownership has been transformed The processof incorporation (for both public and privatecompanies) can no longer be viewed as apurely private ownership matter in the traditional sense Shareholders do not haveindividual free rights and claims on the corporation They bear only very limited lia-bility and risk The entire liability and risk ofthe corporation are shared by many stake-holders including shareholders bondholderscreditors employees suppliers the govern-ment and the public at large In this sense allcompanies have some public character Thenature of incorporation cannot be explainedby the current shareholder perspective based on a purely economic and financialanalysis that totally ignores corporate legalrelationships



Whilst the stakeholder perspective mightjustify its rationale based on the 19th centuryrsquosconception of social entity or natural entity it neglects to acknowledge that companies are not the same as other social institutions As business operators companies are duty-bound with economic and profit-making func-tions for societyrsquos survival and developmentFurthermore there has long been an argumentin corporation law theory about whether ornot the corporation as a legal person is a realperson or an artificial person (Mayson et al1994) The current stakeholder model regardsthe corporation as a discrete social entity andis compatible with the ldquoreal personalityrdquoassertion This logically supposes that the cor-poration is a real person independent of itsmembers and draws the image of an emptyentity where all stakeholders are external toand influential on the corporation This simplyignores the actual process of incorporationwhere the corporation is a constituent of itsmembers Without its members no corpora-tion can exist in law (throughout the world acorporation must have at least one member)In company law the corporation is seen as acomplex rather than a simple phenomenonwhere it is seen as both the association of itsmembers and a legal person separate from its members A simple stakeholding modelignores this complexity

Both the shareholding and stakeholding perspectives present the corporation in terms of ldquoentityrdquo (either individual entity or socialentity) However the corporation as a socialand legal product is not so entitative and solidin practice over time For example Zingales(2000) realises that whereas in physical-asset-intensive firms their boundaries might be stableand corporate governance could rely on ldquoshare-holder ownershiprdquo (note that this assumption isalso problematic in company law theory asmentioned above) in human-capital-intensivefirms their boundaries become diffused andgovernance under the traditional approachbecomes more problematic Indeed neo-classical economics regards the firm as a legalfiction a nexus of contracts But in so doingeconomists do not question the notion of indi-vidualistic entity behind their assumptionssuch as a fixed shareholder ownership perma-nent interest and group homogeneity They talkabout agency problem in corporate governancebut neglect the principle problem such asshareholders being reluctant less interestedlegally restrained or mutually conflicting inmonitoring agentsrsquo performance It is thosedynamic practices that challenge the assumedboundary and fixed entity of a corporation

While both shareholder and stakeholdermodels suggest either a hierarchical form of

governance or market governance as anoptimal governance mechanism in practicegoverning forms may vary Hollingsworthand Lindberg (1985) for example identifyfour distinctive forms of governance includ-ing hierarchies market the clan or communityand associations Whilst economists onlyrecognise the former two forms the latter twoforms may offer more value in corporate gov-ernance in non-Anglo cultures such as inAsian countries (Tricker 1990 Porta et al1997) Even within the Anglo-American envi-ronment network forms of governance basedon mutual trust friendships reputationshared ideology and reciprocity have alsoattracted attention in business practices sincethe 1980s (Powell 1990) Thus Turnbull (1997)suggests that economists such as Coase (1937)and Williamson (1975 1985) ask the wrongquestion why are economic transactionsorganised through hierarchy rather thanthrough markets They ldquoshould have askedwhen are economic transaction organised byany combination of the four different ways (asmentioned above) in which transactions canbe governedrdquo (Turnbull 1997b p 186 empha-sis added)

Both shareholder and stakeholder perspec-tives claim superiority of their models respec-tively however in reality we have seen adynamic shift with both models becomingincreasingly mutually attractive all over theworld in the last two decades This paradig-matic shift has been a major theme in thispaper For example evidence shows that evenGermany and Japan which traditionally pre-ferred a stakeholder-committed model haverecently changed towards a more shareholder-valued and market-based model due to thepressure of globalisation and world-widecompetition (Stoney and Winstanley 2001 p 618 Schilling 2001) All this implies that the so-called superiority and priority of anymodel is not permanent and universal butrather temporary and contextual The staticconceptualisation of shareholding and stake-holding is less compatible with the fluidityand diversity of practical reality

The current dichotomised and static theo-retical approach used in corporate governanceresearch which presupposes two extreme andopposite ideal models cannot fully explain thecomplexity and heterogeneity of corporatereality Instead we call for a more inventiveand flexible approach to the understanding ofcorporate governance practice and the searchfor effective and efficient governance Whatwould be involved with such an approach

It is a processual rather than a staticapproach This approach explains the tempo-rary transient and emergent patterns of cor-



porate governance on a historical and con-textual interface in any society Corporate governance is completely changeable andtransformable and there is no permanent oruniversal principle which covers all societiescultures and business situations It acknowl-edges that corporate governance modelsaround the world have developed from theirown unique cultural historical and social cir-cumstances It also acknowledges that eachmodel will continue to evolve For exam-ple actors in the Anglo-American and theGermanndashJapanese governance environmentswill learn from each other each taking aspectsof the otherrsquos model in order to compete moreeffectively in a globalised market in an erawhere information is increasingly becomingmore freely available Learning is a continuousprocess it never stops and has no end

It is a balanced approach which neverassumes that any extreme model such as pureshareholding or pure stakeholding can workperfectly in practice A firm is neither a purelyprivate nor a purely public affair A firm doesnot just consistent of physical assets but alsoof human beings and shareholders and otherstakeholders In todayrsquos civilised societyhuman beings should not be treated as assetsmachines or any form of instrument (egHandy 1993) Also governance forms shouldnot be polarised into either ldquohierarchyrdquo orldquomarketrdquo Other forms of governance such asnetworks may have much value

It is a relational approach which views thereality as fundamentally interconnected andinterdependent and mutually influential Inorder to learn business relationships mustthink about corporate interrelationships andsocial interactions Thus shareholder interestis not independent of stakeholder interestsand vice verse A firm is not independent of its constituents Any externalised views thatseparate and isolate the corporation and itsstakeholders or shareholders and stake-holder indeed over-simplify and make thesocial reality artificial Dichotomy approachesor binary values are less applicable to thecomplex real world A ldquofuzzy logicrdquo is more valuable in understanding corporate relationships

It is a pluralist approach which suggeststhat corporate governance is not only condi-tioned to the economic logic such as economicrationality and efficiency but also shaped andinfluenced by politics ideologies philoso-phies legal systems social conventions cul-tures modes of thought methodologies etc Apurely economic and financial analysis of cor-porate governance is too narrow We havealready seen some research in this field basedon politics culture power and cybernetics (for

a useful review see Turnbull 1997b) whichmay offer insightful views from differentangles and quite distinct from the mainstreamanalysis

It is a dynamic and flexible approach whichcontinually weighs and adjusts the method ofgoverning in practice It cannot design andspecify any ideal model in advance and cannotbe fixed as a ldquoonce-and-for-everrdquo solution It isa principle of collibration that is the designand management of institutions throughexplicitly juxtaposing rival viewpoints in aconstant process of dynamic tension with nopre-set equilibrium (Hood and Jones 1996)

It is an enlightening approach that attemptsto transcend our habitual inertial static andstagnant ways of thinking about corporategovernance As Morgan (1997) notes peopleare easily trapped by favoured ways of think-ing that serve specific sets of interests and con-sequently our conventional modes of thoughtmay in turn bind and control our views Weneed to think outside of the current polarisedmodels framework We need to understanddeeply what corporate reality is how and whywe have constructed it both collectively inhistory and in different contexts and whattrends and patterns could be most likely toemerge in the uncertain future Certainly weneed more radical research in this area

Notes

1 There are two disputes in the literature onwhether or not the German and Japanese gover-nance style is a stakeholding model and whetheror not their governance model is more advanta-geous in international competition It seems thatmany scholars tend to recognise that there aretwo different governance styles of capitalismone is the Anglo-American style and the other isthe continental European-Asian style While theformer tends to adopt a shareholder interestmaximisation and market governance the latteris less shareholder-focused and more stake-holder-oriented and does not rely primarily onstock market control over the large corporationsSome scholars also argue that whilst the Anglo-American style dominates the world theGermanndashJapanese model appeared to be moreefficient more equitable and more successful inthe 1980s (for more details see Albert 1993Charkham 1994 Kay and Silberston 1995 Hirst1998 Weimer and Pape 1999)

2 A Joint-Stock Companies Act was passed by Parliament in 1844 and an Act for limiting the liability of a corporationrsquos members passed in1855 Both legislations laid down the foundationof modern corporations For more details seeTricker (2000)

3 In corporate law theory members of a corpora-tion refer to its shareholders But in the 19th



century there was a German view of the corpo-ration which regarded the employees ratherthan the shareholders as the members of a cor-poration (Pejovich 1990)

4 However some scholars suggest the oppositethat corporate governance is a science not an artTurnbull (2002) argues that corporate gover-nance could be grounded in the science of infor-mation and control (ie cybernetics) and thus acompound board has a cybernetic advantageover the unitary board We do accept that infor-mation is an important issue in corporate gover-nance however we doubt the assumptionunderpinning the science of governance thatinformation is the main issue of governance andinformation itself is a natural phenomenon Infact the information problem is far beyond anissue of human ability of dealing with informa-tion overload or natural bias and errors Thereare a variety of social cultural legal politicaland psychological factors influencing and dis-torting the process of information Furthermorehuman beings are unlike computers that can beprecisely and relatively easily controlled

References

Albert M (1993) Capitalism against CapitalismLondon Whurr

Alchian A A and Demsetz H (1972) ProductionInformation Costs and Economic OrganisationAmerican Economic Review 62 777ndash795

Alchian A A and Kessel R A (1962) Competitionmonopoly and the pursuit of pecuniary gain InAspects of Labour Economics Princeton NationalBureau of Economic Research

Allen W T (1992) Our Schizophrenic Conceptionof the Business Corporation Cardozo Law Review14 261ndash281

Allen W T (1995) The Evolution of CorporateBoards Corporate Board JulyndashAugust 1ndash4

Allen W T (2001) The Mysterious Art of CorporateGovernance Corporate Board 22 130 1ndash5

Arthur E E (1987) The Ethics of Corporate Gover-nance Journal of Business Ethics 6 59ndash70

Barker E (1958) Introduction In O Gierke NaturalLaw and the Theory of Society 1500 to 1800 transE Barker Cambridge Cambridge UniversityPress

Berglof E (1997) Reforming Corporate Gover-nance Redirecting the European Agenda Eco-nomic Policy 12 91ndash123

Berle A A and Means G C (1932) The Modern Corporation and Private Property New York TheMacmillan Corporation

Bishop M (1994) Corporate Governance The Econ-omist 29 January 3ndash18 (in survey section)

Blair M M (1995) Ownership and Control Rethink-ing Corporate Governance for the Twenty-firstCentury Washington DC Brookings Institution

Boswell J (1990) Community and the Economy TheTheory of Public Co-operation London Routledge

Cadbury Committee (1992) Report of the Committeeon the Financial Aspects of Corporate GovernanceLondon Gee

Campbell A (1997) Stakeholders the Case inFavour Long Range Planning 30 446ndash449

Carroll A B (1991) The Pyramid of CorporateSocial Responsibility Toward the Moral Man-agement of Organisational Stakeholders BusinessHorizons 34 39ndash48

Carroll A B (1996) Business and Society Ethics andStakeholder Management 3rd edn CincinnatiSouth-Western

Centre for Tomorrowrsquos Corporation (CTC) (1998)The Inclusive Approach and Business Success theResearch Evidence London CTC

Chandler A D (1977) The Visible Hand The Man-agerial Revolution in American Business Cam-bridge The Belknap Press of Harvard UniversityPress

Chandler A D (1990) Managerial hierarchies In DS Pugh (ed) Organisation Theory Selected Read-ings London Penguin Books 89ndash105

Charkham J (1994) Keeping Good Corporation AStudy of Corporate Governance in Five CountriesOxford Clarendon

Coase R H (1937) The Nature of the Firm Eco-nomica 4 386ndash405

Dahl R A (1985) A Preface to Economic DemocracyBerkeley University of California Press

Dallas L L (1988) Two Models of Corporate Gov-ernance Beyond Berle and Means Journal of LawReform 22 19ndash116

Deakin S and Slinger G (1997) Hostile TakeoversCorporate Law and the Theory of the FirmJournal of Law and Society 24 124ndash151

Dine J (2000) The Governance of Corporate GroupsCambridge Cambridge University Press

Donaldson T (1989) The Ethics of International Busi-ness New York Oxford University Press

Donaldson T and Davis J H (1994) Boards andCorporation Performance ndash Research Challengesthe Conventional Wisdom Corporate Governance2 151ndash160

Donaldson T and Preston L E (1995) The Stake-holder Theory of the Corporation Concepts Evi-dence and Implications Academy of ManagementReview 20 65ndash91

Eisenhardt K M (1985) Control Organisationaland Economic Approaches Management Science31 134ndash149

Eisenhardt K M (1989) Agency Theory An Assess-ment and Review Academy of Management Review14 57ndash74

Etzioni A (1975) A Comparative Analysis of ComplexOrganisations New York Free Press

Fama E (1980) Agency Problems and the Theory of the Firm Journal of Political Economy 88288ndash309

Fligstein N (1990) The Transformation of CorporateControl Cambridge Harvard University Press

Fligstein N and Freeland R (1995) Theoretical andComparative Perspectives on Corporate Organi-sation Annual Review of Sociology 21 21ndash43

Freeman R E (1984) Strategic Management A Stake-holder Approach Boston Pitman

Friedman A and Miles S (2002) Developing Stake-holder Theory Journal of Management Studies 391ndash21

Friedman M (1962) Capitalism and FreedomChicago Chicago University Press



Friedman M (1970) The Social Responsibility ofBusiness is to Increase its Profits New York TimesMagazine 13 September 32ndash33 122 124 126

Gamble A and Kelly G (2001) Shareholder Valueand the Stakeholder Debate in the UK CorporateGovernance 9 110ndash117

Greenbury Committee (1995) Directorsrsquo Remunera-tion Report of A Study Group London Gee

Griffin J and Mahon J F (1997) The CorporateSocial Performance and Corporate Financial Performance Debate Business and Society 365ndash32

Grundfest J A (1990) Subordination of AmericanCapital Journal of Financial Economist 27 89ndash114

Hall K L (1989) The Magic Mirror Law in AmericanHistory New York Oxford University Press

Hampel Committee (1998) Committee on CorporateGovernance Final Report London Gee

Handy C (1993) What is a Corporation for Corpo-rate Governance 1 14ndash16

Handy C (1997) The Hungry Spirit LondonHutchinson

Hart O (1995) Corporate Governance SomeTheory and Implications The Economic Journal105 678ndash689

Hawley J P and Williams A T (1996) Corporategovernance in the United States The rise of fidu-ciary capitalism ndash A review of the literature Thefirst prize of Lens 1996 Corporate GovernancePaper Competition (available on-line at httpwwwlens-librarycominfocompetitionhtml)

Hayek F A (1969) The Corporation in a democra-tic society In whose interest ought it and will itbe run In H I Ansoff (ed) Business StrategyHarmondsworth Penguin 124ndash146

Hayes R H and Abernathy W J (1980) ManagingOur Way to Economic Decline Harvard BusinessReview 58 67ndash77

Higgs D (2003) Review of the role and effec-tiveness of non-executive directors (httpwwwdtigovukcldnon_exec_reviewpdfshiggsreportpdf)

Hill C W L and Jones T M (1992) Stakeholder-Agency Theory The Journal of ManagementStudies 19 131ndash154

Hirst P (1994) Associative Democracy New Forms ofEconomic and Social Governance London PolityPress

Hirst P (1998) Ownership and Democracy ThePolitical Quarterly 6 354ndash364

Hollingsworth J R and Lindberg L N (1985) Thegovernance of the American economy The roleof markets clans hierarchies and associativebehaviour In W Streeck and P C Schmitter (eds)Private Interest Government Beyond Market andStake London Sage

Hood C and Jones D (1996) Accident and DesignContemporary Debates in Risk ManagementLondon UCL Press

Hummels H (1998) Organising Ethics A Stake-holder Debate Journal of Business Ethics 171403ndash1419

Hutton W (1995) The State Wersquore In LondonJonathan Cape

Jawahar I M and Mclaughlin G L (2001) Towarda Descriptive Stakeholder Theory An Organisa-

tional Life Cycle Approach Academy of Manage-ment Review 26 397ndash415

Jensen M C (2001) Value Maximisation Stakeholder Theory and the Corporate ObjectiveFunction European Financial Management 7297ndash317

Jensen M C and Meckling W H (1976) Theory ofthe Firm Managerial Behaviour Agency Costsand Ownership Structure Journal of Financial Eco-nomics 3 305ndash360

Johnson J Daily C and Ellstrand A (1996) Boardsof Directors A Review and Research AgendaJournal of Management 22 409ndash439

Kakabadse A and Kakabadse N (2001) The Geopol-itics of Governance Hampshire Palgrave

Kay J and Silberston A (1995) Corporate Gover-nance National Institute Economic Review 84August 84ndash97

Keasey K Thompson S and Wright M (1997)Introduction The corporate governance problemndash Competing diagnoses and solutions In KKeasey S Thompson and M Wright (eds) Corpo-rate Governance Economic and Financial IssuesOxford Oxford University Press 10ndash15

Kelly G and Parkinson J (1998) The ConceptualFoundations of the Corporation A PluralistApproach Corporation Financial and InsolvencyLaw Review 2 174ndash197

Kelly G Kelly D and Gamble A (1997) Stake-holder capitalism In G Kelly D Kelly and AGamble (eds) Stakeholder Capitalism LondonMacmillan

Keynes J M (1936) The General Theory of Employ-ment Interest and Money London Macmillan

Latham M (1999) The Corporate Monitoring FirmCorporate Governance 7 12ndash20

Letza S and Smallman C (2001) In Pure WaterThere is a Pleasure Begrudged by None OnOwnership Accountability and Control in a Pri-vatised Utility Critical Perspectives on Accounting12 65ndash85

Macfarlane A (1978) The Origins of English Individu-alism The Family Property and Social TransitionOxford Blackwell

Manne H G (1965) Mergers and the Market forCorporate Control Journal of Political Economy 75110ndash126

Marris R (1964) The Economic Theory of ldquoManager-ialrdquo Capitalism London Macmillan

Mayson S W French D and Ryan C L (1994)Corporation Law London Blackstone Press

Michell R K Agle B R and Wood D J (1997)Toward a Theory of Stakeholder Identificationand Salience Defining the Principle of How andWhat Really Counts Academy of ManagementReview 22 853ndash886

Millon D (1990) Theories of the Corporation DukeLaw Journal 201ndash262

Moreland P W (1995) Alternative DisciplinaryMechanisms in Different Corporate SystemsJournal of Economic Behaviour and Organisation 2617ndash34

Morgan G (1997) Images of Organisation 2nd ednCalifornia Sage

Mueller F (1995) Organisational Governance andEmployee Cooperation Can We Learn from Eco-nomics Human Relations 48 1217ndash1235



Murray A (2001) Off the Rails London VersoNichols T (1969) Ownership Control and Ideology

London Allen and UnwinOrsquoSullivan M A (2000) Contests for Corporate

Control Oxford Oxford University PressParkinson J (1995) The role of ldquoexitrdquo and ldquovoicerdquo

in corporate governance In S Sheikh and WRees (eds) Corporate Governance and CorporateControl London Cavendish

Pejovich S (1990) The Economics of Property RightsTowards a Theory of Comparative Systems Dor-drecht Kluwer

Plender J (1997) A Stakeholder in the Future the Stakeholding Solution London Nicholas Brearley

Poole M Mansfield R and Mendes P (2001) TwoDecades of Management London Institute of Management

Porta R L Lopez-de-Silanes F Shleifer A andVishny R W (1997) Trust in large organizationsNational Bureau of Economics Research workingpaper no 5864 Cambridge MA

Pound J (1992) Beyond Takeovers Politics Comesto Corporate Control Harvard Business ReviewMarchndashApril 83ndash93

Pound J (1993) The Rise of the Political Model ofCorporate Governance and Corporate ControlNew York University Law Review 68 November1003ndash1071

Powell W W (1990) Neither Market nor HierarchyNetwork Forms of Organisation Research inOrganisational Behaviour 12 295ndash336

Prabhaker S (1998) Governance and StakeholdingNew Economy 5 119ndash122

Preston L E and Sapienza H J (1990) StakeholderManagement and Corporate Performance TheJournal of Behavioural Economics 19 361ndash375

Rajan R G and Zingales L (1999) The firm as adedicated hierarchy A theory of the origins andgrowth of firms Working paper University ofChicago Graduate School of Business

Roy W G (1997) Socialising Capital PrincetonPrinceton University Press

Sacks J (1997) The Politics of Hope LondonJonathan Cape

Schilling F (2001) Corporate Governance inGermany The Move to Shareholder Value Cor-porate Governance 9 148ndash151

Shiller R J (1989) Do stock prices move too muchto be justified by subsequent changes in divi-dends In R J Shiller (ed) Market Volatility Cam-bridge The MIT Press

Shleifer A and Vishny R W (1997) A Survey ofCorporate Governance The Journal of Finance LII727ndash783

Slinger G (1998) Spanning the gap The theoreticalprinciples that connect stakeholder policies tobusiness performance Working paper 111 ESRCCentre for Business Research

Smith A (1937) The Wealth of Nations New YorkRandom House

Solomon R C and Higgins K M (1996) A ShortHistory of Philosophy New York Oxford Univer-sity Press

Sternberg E (1998) Corporate Governance Account-ability in the Marketplace London The Institute ofEconomic Affairs

Sternberg E (2000) The Defects of StakeholderTheory Corporate Governance 5 3ndash10

Stiglitz J E (2000) The Contributions of the Economics of Information to Twentieth CenturyEconomics The Quarterly Journal of EconomicsNovember 1441ndash1478

Stoney C and Winstanley D (2001) StakeholdingConfusion or Utopia Mapping the ConceptualTerrain Journal of Management Studies 38 603ndash626

Sullivan D P and Conlon D E (1997) Crisis andTransition in Corporate Governance Paradigmsthe Role of the Chancery Court of Delaware Lawand Society Review 31 713ndash763

Sykes A (1994) Proposals for Internationally Com-petitive Corporate Governance in Britain andAmerica Corporate Governance 2 187ndash195

Tricker R I (1990) The Corporate ConceptRedesigning a Successful System Human SystemsManagement 9 65ndash76

Tricker R I (1996) Pocket Director London TheEconomist Books

Tricker R I (2000) The evolution of the corporationIn R I Tricker (ed) Corporate Governance Alder-shot AshgateDartmouth 20ndash28

Turnbull Committee (1999) Internal Control Guidance for Directors on the Combined CodeLondon The Institute of Chartered Accountantsin England and Wales

Turnbull S (1994) Stakeholder DemocracyRedesigning the Governance of Firms andBureaucracies Journal of Socio-Economics 23321ndash361

Turnbull S (1997a) Stakeholder Governance ACybernetic and Property Rights Analysis Corpo-rate Governance 5 11ndash23

Turnbull S (1997b) Corporate Governance ItsScope Concerns and Theories Corporate Gover-nance 5 180ndash205

Turnbull S (1998) Should Ownership Last ForeverJournal of Socio-Economics 27 341ndash364

Turnbull S (2002) The Science of Corporate Governance Corporate Governance 10 261ndash277

Van der Weide M E (1996) Delawarersquos NewMandate in Class Action Settlements Expand-ing the Scope and Intensity of Settlement ReviewDelaware Journal of Corporate Law 20 496ndash534

Vinten G (2001) Shareholder versus Stakeholder ndashIs There a Governance Dilemma Corporate Gov-ernance 9 36ndash47

Warren R C (2000) Corporate Governance andAccountability Bromborough Liverpool Acade-mic Press

Weimer J and Pape J C (1999) A Taxonomy ofSystems of Corporate Governance Corporate Gov-ernance 7 152ndash166

Welcomer S A Gioia D A and Kilduff M (2000)Resisting the Discourse of Modernity Rationalityversus Emotion in Hazardous Waste SitingHuman Relations 53 1175ndash1205

Williamson O E (1975) Markets and HierarchiesAnalysis and Antitrust Implications New YorkFree Press

Williamson O E (1985) The Economic Institutions ofCapitalism Firms Markets Relational ContractingNew York Free Press



Wolf C (1988) Markets and Governments Cam-bridge The MIT Press

Wolmar C (2001) Broken Rails 2nd edn LondonAurum

Zingales L (1998) Corporate governance In PNewman (ed) The New Palgrave Dictionary of Eco-nomics and the Law London Stockton Press36ndash49

Zingales L (2000) In Search of New FoundationsThe Journal of Finance LV 1623ndash1653

Steve Letza is Professor of Corporate Gover-nance and Director of Law at Leeds Metro-politan University England His PhD is fromthe University of Bradford England His re-

search interests include corporate governancerisk and corporate reportingXiuping Sun is lecturer in Strategy at LeedsBusiness School Leeds Metropolitan Univer-sity His PhD is from Leeds Metropolitan University England His research interestsinclude corporate governance regulation andphilosophyJames Kirkbride is Dean of the Faculty ofBusiness and Law at Liverpool John MooresUniversity and Professor of International Busi-ness Law His PhD is from Leeds MetropolitanUniversity England His research interestsinclude corporate law and governance regu-lation and competition controls


ldquo[Having a non-executive chair is] about having somebody to take a lot of responsibilityfor the governance of the company and information flow and discussion flow Itrsquos a deci-sion based on improved governancerdquo Michael Eisner In ldquoCorporate Governance AllianceDigestrdquo March 2004 wwwcorporategovernancealliancecom


Kakabadse and Kakabadse 2001 Friedmanand Miles 2002) Such a division hinges on the purpose of the corporation and its asso-ciated structure of governance arrangementsunderstood and justified in theory On the oneside is the traditional shareholding perspec-tive which regards the corporation as a legalinstrument for shareholders to maximise theirown interests ndash investment returns A three-tier hierarchal governance structure ie theshareholder general meeting the board ofdirectors and executive managers is given incompany law in an attempt to secure share-holdersrsquo interest (it is often called the mecha-nism of ldquochecks and balancesrdquo) On the otherside is the stakeholding perspective newlyemerged in the later 20th century which posi-tions itself on the contrary to the traditionalwisdom and views the corporation as a locusin relation to wider external stakeholdersrsquointerests rather than merely shareholdersrsquowealth Employees creditors suppliers cus-tomers and the local community are majorstakeholders often mentioned and empha-sised within a broad definition of stake-holding (eg Freeman 1984) Stakeholdersrsquoparticipation in corporate decision-makingslong-term contractual associations betweenthe firm and stakeholders trust relationshipsand business ethics are the main proposals forstakeholding management

Current analyses on corporate governancedraw more attention to evaluating andjudging the superiority of either the share-holder model or stakeholder model and oftentake part in one-sided arguments sometimeswith a slight modification such as an enlight-ened shareholder model (see Gamble andKelly 2001) and an enlightened stakeholder

model (Jensen 2001) The analyses seldomstep outside the narrow confines of theirrespective interests to investigate the theoreti-cal genealogy ideology presuppositions andvalue systems behind and underpinning theperspectives or paradigms This conventionalapproach constrains their views and raisesserious questions as to the theoretical validityand credibility of these models To understandthe current fierce debate on corporate gover-nance it is important to stand back from theone-sided arguments with their taken-for-granted ideas Reflexive thinking is neededthrough critical examination of the major the-orems assumptions and origins of both per-spectives This paper serves as a survey andcritical review of both the shareholder andstakeholder perspectives on corporate gover-nance A major finding in this paper is thatalthough the current prevailing analyses mayhave some merits and insights at a particularpoint in time they are however over-abstracted and over-static in modelling andtheorising corporate governance They buildtheir ldquorationalrdquo arguments and ldquoidealrdquo modelson traditional assumptions and theories thatwere generated andor constructed in cen-turies-old societal contexts far removed fromthe current modern business environmentwhere for example the boundary of the firmhas become blurred in terms of global marketsand where physical assets are far less impor-tant than human resources knowledge andinformation They ignore the continuouschange of natural and social realities and dis-tance themselves from the dynamics of corpo-rate governance in practice The economicapproach mostly employed in their analysestends to be culture-free historically separatedand contextually unrelated We note that veryrecent studies have seriously questioned thetraditional theory of the firm and called for anew direction in building a new theory of thefirm that reflects the modern day businessenvironment (eg Zingales 2000 Rajan andZingales 2000) Other studies in law sociol-ogy politics and culture in relation to corpo-rate power and control may also offer someinsights into rethinking corporate governanceand overcome part of the shortcomings ofcurrent models It is the conventional modesof thought and associated approaches such asdualismdichotomy idealismperfectionismuniversality and permanency that endorseand justify the polarised shareholding andstakeholding models

This paper is structured as follows In thenext section current major theoretical modelsin corporate governance are summarisedbased on the mainstream typology Thesemodels are presented as examples to indicate


Government

Shareholders

Creditors

Directors

Managers

Suppliers

Customers

Community

Employees

General Public

Figure 1 Relationships in corporate governance





















model model



























































































































Notes








References
































































































































































model model



























































































































Notes








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Notes








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Shareholding Versus Stakeholding: a critical review of ... power and ... new mode of thinking in...

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