Home > Corporate Governance Theory, Uncategorized > Overview of the main Corporate Governance topics

Overview of the main Corporate Governance topics

Included as a preface in their forthcoming book “Understanding the company: Corporate Governance and Theory”, Barnali Choudhury and Martin Petrin offer a brief summary (1) of academic debates on the topic, mainly regarding:

  • The nature of the firm. A debate that started at the Roman times and gained intensity in the XIXth century. Although scholars and courts have given up in their effort to define the “nature of the firm”, two opposite views dominate the debate; on the one hand, the nexus of contracts model describes the firm as a set of contracts between different constituencies which so aim to produce goods and services, and thus constitute a firm. The Director Primacy theory extends this view, defining the firm not as a nexus of contracts but having a central nexus, the board of directors. Corporate law consequently intends to reduce the cost of negotiating, settling the concepts and basis for it. The nexus of contracts theory is connected with the Shareholder Primacy theory and the idea that shareholders´ interest should precede other constituencies´ones, and that corporations have no social or moral duties. (A recent decision by Google based on moral or social reasons recently generated some criticism as for the possibility that shareholders could sue directors for having breached their fiduciary duties, (2)).

On the other hand, the Stakeholder theory states that other constituencies´ interests must be considered, with a non-unified reasoning, (considering the firm as a social institution, introducing moral categories, introducing the social welfare concept, or simply the need to avoid harms being inflicted to stakeholders).

Not all theories have a perfect fit in these two categories, such as the Team Production theory which considers that stakeholders having made a specific investment need to be taken care of. Also the “enlightened shareholder value” theory derives from the stakeholder theory, although introducing a priority right for shareholders, (we will see that in other post, but we can here refer to (3)).

  • The influence of the different theories is relevant; they determine the role and end we think firms have, the way they can be regulated, their rights and duties, or the allocation of decision-making power.
  • Corporate rights and duties. Somehow the above mentioned theories are the base over which law and tribunals allocate rights to corporate entities and decide about criminal responsibilities imposed on them. Traditionally in the USA the fiction that companies could be held liable dominated, but the “real entity theory” starts to change that, so that companies are held liable through their managing minds. The nexus of contracts theory can`t really be used to determine rights or obligations in connection to third parties. CSR for instance is difficult to explain with it. A certain notion that we need different and complementary theories thus emerges. Also some alternative theories can be used, as the use of the externality concept to justify the existence of moral or economic duties with society or other constituencies.
  • The means and ends of Corporate Governance. Two questions arise: (i) Who should have the decision-making power? Otherwise, how do stakeholders divide power or act as a system of checks and balances? (ii) Who should the company benefit? Or to whom should the company or its board be accountable? Both questions are at the center of many of the debates engendered by the recent crisis, and somehow a bigger shareholder power has been the aim of new regulations. Nevertheless, a certain distance is being introduced recently by scholars from the shareholder value maximization goal of the corporation.

Their forthcoming book will certainly contribute to clarify some of the doubts raised in the previous comments.

 

 

 

(1) Petrin, Martin and Choudhury, Barnali, Understanding the Company: Corporate Governance and Theory (Introduction) (April 1, 2016). ‘Understanding the Company: Corporate Governance and Theory’, Barnali Choudhury & Martin Petrin, eds. (Cambridge University Press, Forthcoming). Available at SSRN: http://ssrn.com/abstract=2770971

(2) http://www.professorbainbridge.com/professorbainbridgecom/2016/05/can-shareholders-sue-google-over-its-decision-to-refuse-payday-loan-ads-csr-in-court.html

(3) “Enlightened Shareholder Value: Corporate Governance Beyond the Shareholder-Stakeholder Divide” byVirginia Harper Ho*

https://kuscholarworks.ku.edu/bitstream/handle/1808/7164/JCL_36_2010_Ho%20FINAL.pdf?sequence=1

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