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Corporate Governance: Its scope, concerns & theories Shann Turnbull*Graduate School of Management Macquarie University, SydneyABSTRACT

This paper outlines the conceptual, cultural, contextual and disciplinary scope of the rapidly evolving topic of corporate governance. As a basis for improving the rigour of research and analysis, some definitions are suggested. Reasons for the diversity of viewpoints and concerns are considered. To provide an orientation for new scholars and those from specialised disciplines, recent surveys of corporate governance are reviewed from their ethnocentric, contextual, and intellectual contingencies. The prospects of developing the topic as a "science of organisation" are considered along with areas for future research.

Key words: Agency, Control, Corporations, Culture, Cybernetics, Directors, Firm, Finance, Governance, Information theory, Institutions, Ownership, Political, Power, Regulation, Self-regulation, Self-governance, Shareholders, Stakeholders, Stewardship, Theory of the firm, Transaction costs.


Journal of Economic Literature:- G3; L2

Encyclopedia of Law & Economics:- 0010; 0400; 0560; 0630; 0760; 0780; 5000; 5600; 5610; 9400.

Published in: Corporate Governance: An International Review, Blackwood, Oxford, vol. 5, no. 4, pp. 180-205,

Forthcoming, October, 1997.


*Shann Turnbull began work as an electronics engineer before becoming a corporate raider, company promoter, chief executive and chairman of publicly traded corporations in Australia. In 1975 he pioneered the study of comparative corporate governance as a foundation author of the Company Directors' Diploma Course presented throughout Australia and internationally.


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The purpose of this paper is to provide an orientation in corporate governance for both new scholars and specialists in disciplines which intersect with the topic. These disciplines include micro-economics, organizational economics, organizational theory, information theory, law, accounting, finance, management, psychology, sociology and politics. Each may view corporate governance in a different way, somewhat like the apocryphal group of blind people trying to identify an elephant through touch by each describing quite different parts of the animal.

To encompass most perspectives, an inclusive definition of corporate governance is introduced in the next section to include all types of firms and other institutional arrangements involved in productive activities. The third section considers how some some key words are used in different ways within, and between, disciplines. To assist in integrating the knowledge of the various disciplines, some common language is suggested.

A diversity of agents is shown to be involved in influencing, controlling, regulating and managing firms, productive networks and associations. Again, an inclusive approach is used to encompass the diversity of ways in which leading workers in the field define the topic of corporate governance. The next section considers the origins of the diverse viewpoints. The various perspectives are related to the discipline and professional affiliations of various writers in the field as well as to their cultural and contextual situations. We then consider how well theories of the firm fit these various contingencies and how governance practices differ between cultures.

Two surveys of corporate governance undertaken in 1996 by US scholars are then reviewed from the perspectives developed by the paper. One survey undertaken by the National Bureau of Economic Research comprehensively reviews the extensive, but narrow, financial perspective used by economists who base much of their analysis on transaction costs and agency theory. The other survey prepared for the OECD, presents four viewpoints. These are: (i) a simple finance model, (ii) stewardship theory, (iii) stakeholder theory and (iv) the politics of shareholder control at the micro level of the firm. This fourth perspective is reviewed from a macro political context which includes an historical outline of how state and federal governments in the US concerned themselves with the control and regulation of companies. The section concludes by considering some emerging political issues raised by Monks (1996) in the governance of US firms and the national economy.

Three additional approaches are suggested for analysing how productive activities are governed by social institutions. These are based on analysing respectively: (i) culture; (ii) power and (iii) their information and control (i.e. cybernetic) architecture.

Research opportunities are identified in such topics as: (i) limited life enterprises; (ii) worker ownership and control; (iii) compound boards with two, three and more tiers; (iv) information theory; (v) productive networks; (vi) holonic structures; and (vii) self-regulation and self-governance. Concluding remarks follow.


Corporate governance describes all the influences affecting the institutional processes, including those for appointing the controllers and/or regulators, involved in organizing the production and sale of goods and services. Described in this way, corporate governance includes all types of firms whether or not they are incorporated under civil law.

Firms can exist as either common or civil law companies, partnership, joint ventures, limited liability partnerships, co-operatives, mutual associations, building societies, friendly societies, trading trusts, etc. Fama & Jensen (1983b) even considered churches. However, organisations like a church, not engaged in the production and sale of goods and services, do not meet the generally accepted description of a firm.

Firms may be publicly traded, privately held, for profit, or not-for-profit. Much of the literature on corporate governance implicitly assumes that only publicly traded firms are the subject of analysis (e.g. Blair 1995:3). This would limit the topic to less than 40,000 firms world-wide and involve only a fraction of all economic activity in even the most advanced market societies (FIBV 1993; Economist 1995:116).

Restricting the study of corporate governance to publicly traded corporations would limit investigation into the most efficient institutional arrangements for undertaking productive activities. It may well turn out that privately held entities could provide the most efficacious form of enterprise. A possibility supported by Jensen's (1993:869) view of 'a proven model of governance structure' discussed later, and the outstanding record of firms found around the town of Mondragón in Spain (Turnbull 1995d).

If firms include all social institutions engaged in the production and sale of goods and services, then both public and private sector organisations such as schools, hospitals, clubs and societies, need to be included. With firms defined in this way, the scope of corporate governance includes nearly all the economic activity of a nation. It was by asking the question, 'Why is not all production carried on by one big firm?' that Coase (1937) laid the foundations for developing a 'theory of the firm'.

Coase considered the existence of a 'master and servant relationship', or an 'employer and employee relationship' as a defining feature of a firm. However, this condition would exclude activities carried out by teams, partners, joint venturers, strategic alliances, associations and networks. This led Alchian & Demsetz (1972) to ask the question 'what is meant by a firm?' They concluded that 'The term firm as commonly used is so turgid of meaning that we can not hope to explain every entity to which the name is attached in common or even technical literature'.

However, Coase (1937) also stated: 'the distinguishing mark of the firm is the supersession of the price mechanism'. This definition avoids the problem of identifying the institutional form of a firm. It does not necessarily avoid the problem of identifying the boundaries of a firm (Barney & Ouchi 1986:78). The boundary problem emerges when analysing joint ventures, strategic alliances, associations and networks which some scholars treat as 'economic entities which have a coherence, a structure, and an individuality of their own' (Mathews 1996b:116). Ambiguous boundaries are found with Mondragón firms, their relationship groups and their supra-organizational systems, as pointed out by Turnbull (1995d).

The need to identify firms and their boundaries may not be required to develop the most efficacious institutional arrangements for organising productive activities in society. The problem of defining firms or their boundaries is avoided by defining corporate governance as proposed at the beginning of this section.


The literature on the theory of the firm, corporate governance, and information theory attributes different meanings and nuances to a number of words in common usage. As words are the tools of thinking, they need to be clearly defined to provide a basis for clear communication and rigourous analysis.

Ambiguity exists in the meaning of key words such as 'control', 'regulate', 'manage' 'govern' and 'governance'. Both the ambiguities and circular dictionary definitions need to be resolved to develop rigour in the study of corporate governance.

Tannenbaum (1962) defined control as 'any process in which a person or group of persons or organization of persons determines, i.e., intentionally affects, what another person or group or organization will do'. This definition provides a word to describe a situation where no standard of performance is required. Other writers (Etzioni, 1965:650; Downs, 1967:144) use the word control in the sense of meeting some standard of performance. In these situations, the word 'regulate' will be used whether or not the 'regulator' is a manager of the organisation concerned or an external bureaucrat. Defining 'control' and 'regulate' in these ways provides a common language with the science of information and control described as 'cybernetics' (Ashby 1968). This facilitates the use of information theory in corporate governance analysis.

The word control, as defined above, infers that a person or group possess power to determine what actions are taken. Self-control then means that not all the power available is used to further the self interest of the controller(s). Self-control simply becomes the avoidance of using power in some degree, rather than meeting a given result. This is a requirement of directors, or a board, wishing to behave as 'stewards', and will be discussed later.

The word 'manage' will be used to communicate the responsibility for executive action. It could be ambiguous to mean either control or regulate. The word 'govern' is likewise ambiguous. 'Governance' will be used to describe a system of control or regulation which includes the process of appointing the controllers or regulators.

Self-regulation means that the standards of performance are established by those being regulated. Self-governance means that the system of control or regulation includes the appointment of the controllers by the governed. By this means, self-regulation can be introduced through self-governance. Self-governance involves a political process within institutions to appoint the controllers responsible for regulation. Self-governance in a political context means 'government of the people, by the people for the people'. This describes democracy. The introduction of elements of self-governance into institutions involved in productive activities would enrich democracy. There are arguments and evidence that this produces operating advantages (Turnbull 1997c,e).

In discussing systems of corporate control, economists frequently use the word 'capital' in different ways. In their 'Corporate Governance Survey', Shleifer & Vishny (1996) used the word in four different ways to indicate: (i) the means of production (p.6); (ii) an investment which may not be represented by the means of production (p.3); (iii) finance (p.2) and 'external capital' (p.6); or even (iv) just credit created by contract; ('bank debt' and 'junk bonds').

The problem introduced by such ambiguity is illustrated by their reference to 'the people who sink the capital' (p.3). It is not clear if these 'people' are: (i) investors subscribing for new shares; (ii) shareholders who purchase existing shares from others; (iii) bankers who lend money; or (iv) the managers/'entrepreneurs' who purchase the means of production or what Moulton (1935:7) describes as 'procreative assets'. The agency costs, benefits and risk, change according to the various meanings of the word capital.

Clarity of the Shleifer & Vishny statement is fundamental for their survey as they define corporate governance as 'the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment' (p. 2). With this perspective of considering the moral and other hazards of investors obtaining satisfactory returns, Shleifer & Vishny provide a comprehensive literature review.

Confusion about the word capital can be compounded by accountants who introduce their own professional meanings which can also be ambiguous. Clear analysis and communication would be advanced with less ambiguous words, especially when the context does not make the meaning clear. In an interdisciplinary topic like corporate governance it may be safer simply not to use the word 'capital'.

However, ambiguous words can be useful. Alchian & Demsetz (1972: note 1) use the word 'meter' in the sense of both measuring and control. In other words, they are discussing regulation as defined above. Ambiguity in the words 'manage' and 'govern' can likewise be useful. However, care needs to be taken not to use ambiguous words un-necessarily. The term 'governance' is often used when the word 'control' or 'regulate' would be more appropriate or provide greater clarity of the process involved. The study by Porter (1992) rarely uses the word governance.

If the term 'management' is reserved to describe processes which involve executive action then it describes a subset of governance processes. However, the kudos perceived by some writers in corporate governance matters has resulted in the word governance being over used. Many board activities are subject to management processes such as establishing sub-committees. Greater clarity and focus would be achieved by using terms such as 'board management', 'board conduct', 'corporate management', 'corporate organisation', or 'corporate conduct', rather than the less specific, more ambiguous and ambitious phrase 'corporate governance'.

A useful definition for the word 'stakeholder' has been provided by Donaldson & Preston (1995). 'Stakeholders are identified through the actual or potential harms and benefits that they experience or anticipate experiencing as a result of the firm's actions or inactions'. In 1963, the Stanford Research Institute defined as stakeholders 'those groups without whose support the organisation would cease to exist' (Freeman 1984:31). This class of stakeholders are described by Turnbull (1997c,e,f) as 'strategic stakeholders' as strategic issues concern the ability of a firm to exist. Strategic issues transcend discounted cash flow analysis based on a relative performance measure of an 'opportunity rate of return'.

The term 'compound board' will be used to describe the existence of two or more control centres whether or not they are required by law, the constitution of the firm or are created by relationships external to the firm. Compound boards are commonly found in Anglo cultures although they may not be recognised as such. Publicly traded corporations controlled by a parent company, control group, relationship investor or family shareholder create a compound board. Two and three tiered boards may be required by law in Europe (Analytica 1992) and are found in Japanese firms where the shareholders elect 'statutory auditors' to oversee the conformance role of the board described as Kansayaku (Charkam 1994:93). A Keiretsu Council creates a third control centre.

Influences which affect the operations of firms

Firms whose securities are publicly traded generally have more external influences on their operations than other firms. One way of indicating the scope of corporate governance is to consider the more obvious influences which can affect the operations of publicly traded firms as indicated in Table 1. The influences can be either internal or external with external influences arising from either the private or public sector.

The multitude of stakeholders identified in Table 1 are consistent with the definitions of corporate governance provided by a number of authorities in the field. Demb & Neubauer (1992a) state that 'Corporate Governance is the process by which corporations are made responsive to the rights and wishes of stakeholders'. Monks & Minow (1995:1) wrote that: 'It is the relationship among various participants in determining the direction and performance of corporations'. While Tricker (1994:xi) states 'Corporate governance addresses the issues facing boards of directors, such as the interaction with top management, and relationships with the owners and others interested in the affairs of the company, including creditors, debt financiers, analysts, auditors and corporate regulators'.


Influences affecting the operations of publicly traded firms

Private sector influences

Public sector laws/regulators


Trade practices






Labour & Equal Opportunity


Arbitration courts, etc.


Fair trading

Bankers & financiers

Credit & bankruptcy



Stock Exchange rules

Federal/State/Local tax

Market for shares

Health & safety



Professional associations


Trade associations


Directors & Advisers


However, other writers like Sternberg (1996) do not accept that publicly traded corporations should be 'responsive to the rights and wishes of stakeholders' as proposed by Demb & Neubauer (1992a). Sternberg states that 'stakeholder theory is both misguided and mistaken', and that 'stakeholder theory of accountability is unjustified', it 'undermines private property, agency and wealth', 'is incompatible with business' and 'with corporate governance'.

Even before the contribution by Sternberg, the diversity of views about corporate governance led Pound (1993b) to state: 'The lack of a broad defining paradigm has created a sense of intellectual vertigo in the increasingly intense debate over corporate governance reforms'. An objective of this paper is to provide some orientation for debate and research.

Differences in viewpoints

One reason why diverse views can exist is that different scholars investigate firms from different viewpoints. Donaldson & Preston (1995) point out that a firm was viewed by Adam Smith (1937) and by contemporary investors as an organisation which obtained resources from its investors, employees and suppliers to produce goods and services for its customers. Marxists, financial economists, and Sternberg, view a firm as an organisation which obtains resources from its employees and suppliers, with cashflows contributed by its customers to service its owners. In other words, Marxists and others view firms as servicing their owners rather than their customers, employees and suppliers.

The stakeholder view of a firm is different again. It considers that investors, employees, suppliers, customers and stakeholders generally both contribute and receive benefits from a firm. In addition, other parties may be involved in relationships such as unions, trade associations, government and even political groups (Donaldson & Preston 1995).

The various views on corporate governance can also be related to different cultural contexts, intellectual backgrounds and interests of scholars. Workers in the field come from different academic disciplines. There is often little, or incomplete, integration between the various disciplines. The overlap of corporate governance with other disciplines is rarely articulated or even recognised. To indicate how different viewpoints arise, and to provide an overview of the topic, some examples are considered.

'The phrase corporate governance is often applied narrowly to questions about the structure and functioning of boards of directors' (Blair 1995:3). This view is found amongst some business school scholars and management consultants. Lex Donaldson (1990:376), defined corporate governance as 'the structure whereby managers at the organizational apex are controlled through the board of directors, its associated structures, executive incentive, and other schemes of monitoring and bonding'. This view was reflected by his colleague, a former McKinsey consultant, in Strictly Boardroom (Hilmer 1993).

The definition of corporate governance quoted above by Tricker (1994) is focussed on the board room but extends the scope to include 'owners and others interested in the affairs of the company, including creditors, debt financiers, analysts, auditors and corporate regulators'. Such wider concerns reflect the audience for company financial reports, consistent with both Trickers' accounting background and the target audience for his publication.

Monks & Minow (1995) have an interest in 'relationship investing' as described by Monks (1994). Their definition of corporate governance is based on 'relationships' as quoted earlier. Monks & Minow formed a commercial mutual fund which they called 'Lens' to focus on under-performing corporations. As active shareholders they seek to add value to companies by relating to the boards of their investee companies as owners.

In making recommendations to change the pattern of ownership and control of US firms to make them more competitive, Porter (1992) targeted policy makers, investors, and corporations. He identified the need to involve strategic stakeholders such as employees, customers, suppliers and members of the host community, in the ownership and control of corporations, to make them internationally competitive.

The rejection by Sternberg (1996) of such stakeholder involvement was made in the context of the author being based in England where intense political interest arose in the nature of a 'Stakeholder Economy' which was raised by the leader of the parliamentary opposition party (Tony Blair 1996) one year before a general election. As a former electronics engineer, and motivated by being a founder and former President of the Australian Employee Ownership Association, Turnbull (1997f) utilised information theory to provide counter arguments to Sternberg based on his re-interpretation of the theory of a firm (1994a,d).


Subjects of analysis and variables relating to corporate governance

Authors (date order)

Subject of analysis


Simon 1962


Managing complexity

Turnbull 1975b & 1993b

Directors' responsibilities

Managing conflicts

Jensen & Meckling, 1976

Agency costs

Financial structure

Williamson 1985

Transaction costs

Industrial organization

Hollingsworth & Lindberg 1985

Four modes of governance

Social organization

Monks & Minow 1991;1995;1996

Board accountability

Relationship investing

Demb & Neubauer 1992a


Firm responsiveness

Cadbury 1992

Financial aspects

Board conformance

Porter 1992

Nature of ownership

Firm competitiveness

Hilmer 1993


Firm performance

Pound 1993b

Politics of ownership

Economic efficiency

Jensen 1993

Publicly traded firms

Failure in control systems

Bosch 1995; AIMA 1995

Directors' duties

Code of conduct

Sternberg 1996

Stakeholder appropriation

Shareholder value

Hawley & Williams 1996

Fiduciary capitalism

Corporate performance

Shleifer & Vishny, 1996

Moral hazards

Investment returns

Persson, et. al. 1996

Separation of powers

Welfare of stakeholders

Turnbull 1997c,e,f

Cybernetic architecture

Operating advantages

Table 2 indicates some of the diversity in corporate governance analysis and concerns. The interests of each of the scholars listed could be far greater than those particularly noted. The scope of the inquiry into 'The Financial Aspects of Corporate Governance' was limited by the terms of reference of the committee chaired by Sir Adrian Cadbury (1992). The committee was established as a 'damage control' initiative by the City of London following some high profile failures of publicly traded corporations. Similar failures occurred in Australia during the 1980's when Henry Bosch (1995) chaired the National Corporations and Securities Commission. The contribution by Shann Turnbull (1975b) was part of the first educational qualification for company directors and arose from concern over earlier corporate failures in Australia and from activities as a corporate raider, company promoter and chairman of publicly traded companies. Corporate failures in the US during the 1980's led Michael Jensen (1993) to analyse 'the failure of corporate internal control systems', John Pound (1992; 1993a,b) to review the politics of corporate control, and Michael Porter (1992) to compare the US system of corporate governance with those found in Japan and Germany.

Cultural specificities in theories and practice

Research into the theory and practice of corporate governance has been heavily focussed on English speaking countries and the US in particular. All scholars listed in Table 26 are from 'Anglo' countries. 'Most of the available empirical evidence in the English language comes from the the United States' (Shleifer and Vishny 1996:6). Hollingsworth, Schmitter & Streeck (1994:4) state: 'In the 1950s and 1960s, hardly anyone disagreed with the assumption that the more traditional and, therefore, backward economies like Japan, Germany, or Europe as a whole would have to adopt American patterns of industrial organisation'. The lack of research in comparing different systems of corporate control was only recognised in the US in the 1990's. This neglect was explained by Gilson (1994:132) who noted that 'the American system seemed to represent the evolutionary pinnacle of corporate governance, so other systems were either less far along the Darwinist path, or evolutionary deadends; neither lagards nor neanderthals made interesting objects of study'.

This view was exacerbated by the US being the most powerful economy in the world, the 'citadel of capitalism', and a widely recognised role model for other countries seeking to better themselves. The importance of Porter's (1992) study is that it provided a counter view for academics and policy makers. The US has also dominated the development of the theory of the firm which was based on the assumption, some might say paradigm, that 'in the beginning there were markets' (Williamson 1975:20) and that firms exist because markets fail, i.e.. 'suppression of the price mechanism' (Coase 1937).

US scholars developed the theory of the firm during the height of the ideological contest between capitalism and communism. It would have been unpatriotic to entertain the possibility that markets were not the natural order of a free society. The failure of communism has reinforced the hegemony of market ideology with widespread political interest in privatisation based on the US model of a firm. The problems of using this model in the US are identified by Jensen (1993), in Russia by Blasi & Gasaway (1993) and in Australia by Turnbull (1993a; 1995a,c,f). The problems of the US model in either the US or former socialist economies are outlined by Shleifer & Vishny (1996). However, faith by political ideologues in replicating the dominant, but flawed US governance model, has so far been little inhibited by scholarly research, empirical evidence or the competitive success of other approaches.

The assumption that in the beginning there were markets is not supported by the evidence of history as noted by Ben Porath (1978), North (1985:558), Turnbull (1978b:52;1994d:328) and others. In the beginning, economic transactions were governed by social relationships rather than by markets, hierarchy or even what Williamson (1990:x) refers to as 'hybrid modes of organisation' combining both markets and hierarchy. Sociologists, Hollingsworth & Lindberg, (1985:221/2) state that there are 'four distinctive forms of governance .... market, hierarchies, the clan or community and associations'. Each form relies on a different type of information and control channel as set out in a typology described by Turnbull (1978b:6; 1994d:328). Two of the these additional forms of governance are outside the discipline of economics and so beyond the field of vision and analysis by economists.

This means that Coase (1937), trained as an economist, was asking and answering the wrong question. Instead of inquiring why economic transactions are organised through the 'authority system' of a firm rather than through the market, he should have asked when are economic transactions organised by any combination of the four different ways in which transactions can be governed.

Each of these four institutional modes for integrating human activities have 'a separate logic of collective action and social order' as described by Streeck & Schmitter (1985:11). The existence of four rather than two institutional modes of organising human co-operation means that existing theories of the firm are incomplete (Turnbull 1994a). This does not necessarily mean that existing theories of the firm are incorrect, only that they may have limited application, in an a way analogous to Newtonian 'laws of motion' providing correct answers when the effects of relativity are not present. In other words, the theory of the firm becomes most relevant in cultures committed to competition with strong anti-trust laws and large scale impersonal publicly traded firms without related party transactions, and are not strongly bonded through cultural, clan, trade, industry, vocational or other associations, including strong interlocking directorships. This describes the US economy.

The US based theory of the firm becomes less relevant when economic transactions are mediated by cultural priorities, business related associations, trade, vocational, family, social and political networks. These are more prominent in continental Europe, Japan and other Asian countries (Hollingsworth & Lindberg 1985; Analytica 1992; Hollingsworth, Schmitter & Streeck 1994; Hollingsworth & Boyer 1997). However, 'the social governance of markets' in the US is not insignificant, as detailed by Bruyn (1991). The operating advantages of a greater reliance on associations and networks in the governance of firms has been reported by Franks & Mayer (1993), Gilson & Roe (1993), Kester (1992), and Turnbull (1995d). Blair (1995), Fukao (1995:74,77,78), and Porter (1992:16-17) also recommend that the US firms establish stakeholder associations and networks.

While Street and Schmitter (1985:1), Hollingsworth & Lindberg (1985:221) and Turnbull (1994a:325-8,d) have outlined a possible theoretical framework for analysing governance systems between cultures, their work has not yet been used by corporate governance scholars. Hollingsworth, Schmitter & Streeck (1994:5) state that 'Contemporary mainstream economics postulates essentially two mechanisms of governance: markets and corporate hierarchies.' They go on to say: 'In the limited institutional repertory envisaged by mainstream economics, corporate hierarchies are the preferred, and in fact the only "economic", alternative to markets'.

Failure by many economists to recognise that there are modes of organising transactions outside markets and hierarchy, and the hegemony of market ideology, has resulted in there being 'no accepted theoretical framework for comparing systems of corporate governance within or between cultures' (Demb & Neubauer 1992a). Radner (1992) goes further to state 'I know no theoretical research to date that compares the relative efficiency of hierarchical and non-hierarchical organizations within a common model'. More generally, Jensen (1993:873) observed that 'we're facing the problem of developing a viable theory of organizations'. This problem has been identified by a number of other leading workers in the field.

Coase (1991b:72) saw the need for 'a more comprehensive theory' and stated that 'theory is outrunning our knowledge of the facts in the study of industrial organization and that more empirical work is required if we are to make progress' (1991a:451). North (1985:572) noted that there is an 'additional dimension currently missing in the discipline of economics'. Williamson (1990:xi) sees the need for 'observing the phenomena at a higher level of resolution'. Williamson (1991:10) noted that 'In Demsetz's judgment, however, recent work—of team theory (Alchian and Demsetz, 1972), agency theory (Jensen and Meckling, 1976) and transaction cost kinds—has not gone far enough'. Demsetz (1991:159) stated that 'a more complete theory of the firm must give greater weight to information cost than is given either in Coase's theory or in theories based on shirking and opportunism which have not gone far enough'. To meet these concerns, a theory of the firm based on economising information rather than just costs has been proposed by Turnbull (1994a), and is considered later.

The lack of a framework for comparing different systems of corporate governance has resulted in comparative corporate governance research being principally empirical. Notable contributions to this relatively recent field have come from scholars outside the US such as those of Analytica (1992), Demb & Neubauer (1992b), Franks & Mayer (1993), Isaksson & Skog (1994), Charkham (1994), Gönenç (1994), Tricker (1994), Wymeersch (1994), Garrett (1996) and Turnbull (1975b; 1995a,b,c,d,f; 1997e,f). US contributions have focused on Japan or Germany such as those by Kester (1991; 1992), Porter (1992), Roe (1993), Gilson & Roe (1993) and Aoki (1993), with other countries considered by Black & Coffee (1993), Blasi & Gasaway (1993), Monks & Minow (1995), Fukao (1995) and Preston (1996).

Theories relevant to corporate governance

Hawley & Williams (1996) undertook a literature review of corporate governance in the US as a background paper for the Organization for Economic Cooperation and Development (OECD). They identified four models of corporate control: 1. The Simple Finance Model; 2. The Stewardship Model; 3. The Stakeholder Model; and 4. The Political Model. While the Survey of Corporate Governance by Shleifer & Vishny (1996) for the National Bureau of Economic Research was not restricted to the US, its scope was limited to the finance model consistent with the specialised definition of corporate governance adopted by the authors quoted earlier. Three additional ways of analysing corporate governance will be suggested in the next section.

The two corporate governance surveys referred to above were written by US scholars. Both surveys contain some unstated culturally determined boundary conditions and assume that the US context provides a universal reference. Shleifer & Vishny (1996:6) explicitly state that 'while we pay some attention to cooperatives, we do not focus on a broad variety of non-capitalist ownership patterns, such as worker ownership and non-profit organizations'. Nor are these types of firms considered by Hawley & Williams who do not state their boundary conditions.

Tricker (1996:31) states:

Stewardship theory, stakeholder theory and agency theory are all essentially ethnocentric. Although the underlying ideological paradigms are seldom articulated, the essential ideas are derived from Western thought, with its perceptions and expectations of the respective roles of individual, enterprise and the state and of the relationships between them.

Neither Shleifer & Vishny or Hawley & Williams define the type of 'capitalistic' firms subject to their survey, the basis, if any, that their securities are publicly traded and the characteristics of the securities which exert some controlling influence on the firm. In the tradition of US scholarly corporate governance research, the US legal/political/regulatory system and the division of power between directors and shareholders, as set out in corporate constitutions, is mostly implicitly accepted as the given 'state of the world'. There are, however, important variations between US States (Monks 1996; Gordon 1993), between Anglo cultures (Black & Coffee 1993) and between other cultures (Analytica 1992, Porter 1992, Fukao 1995, and Charkham 1994).

For example, publicly traded firms in Europe may have two or three tiered boards (Analytica, 1992). Between and within Europe and the US there are different ways of publicly trading the securities of a firm. Different stock exchanges have different rules governing the powers of directors in relation to their shareholders. These introduce different regulatory regimes to produce significant differences in the management discretions of the firm, e.g. the requirement to have audit, remuneration and nomination committees; methods of electing or appointing directors; shareholder approval to pay directors, new share issues, establishing employee share plans, changing auditors, merging with another firm or changing the corporate charter or place of incorporation, etc. The voting rights of shares and the percentage required to achieve changes in control, capitalisation or corporate charters may also vary according to each firm, stock exchange, place of incorporation or national laws and regulations.

The Hawley & Williams survey is implicitly limited to corporations which have their shares publicly traded and explicitly limited to US based firms. Not being limited to either US firms or the 'simple finance model' of Hawley & Williams, Shleifer & Vishny consider additional dimensions of the finance model. Consistent with their concern of how financiers 'assure themselves of getting a return on their investment' they also survey how corporate control is influenced by debt securities and bankers.

Implicit assumptions of both surveys seems to be that all publicly traded firms have: 1. rights of perpetual succession; 2. limited liability; 3. unitary boards; 4. management hierarchies without related party transactions, strategic alliances or networks as found in non Anglo firms; and 5. unambiguous boundaries.

To provide a perspective of the relative importance of publicly traded firms, it is interesting to note that around 75% of the 40,000 publicly traded corporations in the world are found in cultures which have adopted Anglo corporate concepts (FIBV 1993; Economist 1995:116). The only non–Anglo countries with more than 1,000 publicly traded corporations (excluding investment funds) are Japan (2,953), Germany (1,297) and Brazil (1,129). France and Italy all have less than 1,000 listed companies. The Fédération Internationale des Bourses de Valeurs (FIBV) records four Anglo countries with more than 1,000 listed companies: the US (10,546), Canada (3,079), United Kingdom (2,412), and Australia (1,107). India has around 7,000 listed companies (Economist 1995:116) not included in the FIBV statistics .

1. The simple finance model

'In the finance view, the central problem in corporate governance is to construct rules and incentives (that is, implicit or explicit 'contracts') to effectively align the behaviour of managers (agents) with the desires of principals (owners)', (Hawley & Williams 1996:21). However, the 'rules' and 'incentives' considered, are generally only those within the existing US system of publicly traded firms with unitary boards.

The rules and incentives in the finance model refer to those established by the firm rather than to the legal/political/regulatory system and culture of the host economy or the nature of the owners. The finance view represents a sub-section of the political model of corporate governance. The political model interacts with the 'cultural', 'power' and 'cybernetic' models raised in the following section.

It is the nature of the owners which exacerbates corporate control problems found in Anglo countries like the US, Canada, UK and Australia. In each of these countries, institutional investors own the majority of the shares in most of the largest publicly traded firms unlike in continental Europe and Japan (Analytica 1992). Institutional investors, such as pension and mutual funds, collectively owned more than 57% of the top US 1,000 firms in 1994 (Hawley & Williams 1996:8). The problem with institutional ownership is that their investment managers are fiduciary agents of the beneficial owners and so the situation is created of agents representing agents. Hence the term 'Fiduciary Capitalism' or what Peter Drucker (1976) more provocatively described as 'Pension Fund Socialism'.

The problem of agents being responsible to agents is that it compounds the agency costs identified by Jensen & Meckling (1976). A basic assumption is that managers will act opportunisticly to further their own interests before shareholders. Jensen and Meckling showed how investors in publicly traded corporations incur costs in monitoring and bonding managers in best serving shareholders. They defined agency costs as being the sum of the cost of: monitoring management (the agent); bonding the agent to the principal (stockholder/'residual claimant'); and residual losses. Their analysis showed amongst other things: why firms use a mixture of debt and equity; why it is rational for managers not to maximise the value of a firm; why it is still possible to raise equity; why accounting reports are provided voluntarily and auditors employed by the company; and why monitoring by security analysts can be productive even if they do not increase portfolio returns to investors.

A basic conclusion of agency theory is that the value of a firm cannot be maximised because managers possess discretions which allow them to expropriate value to themselves. In an ideal world, managers would sign a complete contract that specifies exactly what they could do under all states of the world and how profits would be allocated. 'The problem is that most future contingencies are too hard to describe and foresee, and as a result, complete contracts are technologically unfeasible' ( Shleifer & Vishny 1996).

As a result, managers obtain the right to make decisions which are not defined or anticipated in the contract under which debt or equity finance is contributed (Grossman & Hart 1986; Hart & Moore 1990). This raises the 'principal's problem' (Ross 1973) and 'agency problem' (Fama & Jensen 1983a,b). How can publicly traded firms with such incomplete contracts with their managers be effective in efficiently raising funds?

The 'agency problem' is particularily acute in Anglo cultures with dispersed ownership where corporations do not have a supervisory board or what Monks (1994) describes as a 'relationship investor'. When all shareholders own small minority interests to create diverse ownership it is not rational for any investor to spend time and incur costs to supervise management as this provides a 'free ride' for other investors. In any event, small shareholders may lack the power and influence to extract information which could reveal expropriation or mismanagement.

In many Anglo countries, the law may limit the ability of shareholders to become associated together to form a voting block to influence or change management unless they make a public offer to all shareholders. Insider trading laws may also inhibit or prohibit shareholders from obtaining the necessary information to monitor and supervise management. Monks (1996), an Assistant Secretary of Labour in the Reagan Administration, describes how US managers have influenced law making to protect themselves from shareholder interventions.

2. The stewardship model

In the stewardship model, 'managers are good stewards of the corporations and diligently work to attain high levels of corporate profit and shareholders returns' (Donaldson & Davis 1994). Both Lex Donaldson and Davis teach in business schools. Their arguments supports the investment of business schools and their students in the development of management skills and knowledge. It also reinforces the social and professional kudos of being a manager.

Donaldson & Davis note that 'Managers are principally motivated by achievement and responsibility needs' and 'given the needs of managers for responsible, self-directed work, organizations may be better served to free managers from subservience to non-executive director dominated boards'. According to Donaldson & Davis, 'most researchers into boards have had as their prior belief the notion that independent boards are good' and 'so eventually produce the expected findings'. There are influential and powerful sources who recommend the need for independent non-executive directors such as the Council of Institutional Investors in the US, Cadbury (1992) in the UK, Australian Institutional investors (AIMA 1995), existing professional directors, and all those would like to become non-executive directors.

However, supporting stewarship theory are the individuals who contribute their own money and other resources to non-profit organisations to become a director. In analysing the welfare distributed to stakeholders through introducing a division of powers, Persson, Roland & Tabellini (1996) made provision in their equations to include the welfare contributed by controllers.

In commenting on stewardship theory, Hawley & Williams (1996:29) state that 'The logical extension is either towards an executive-dominated board or towards no board at all'. Donaldson & Davis point out: 'the non-executive board of directors is, by its design, an ineffective control device' and cite evidence to support the view that 'the whole rationale for having a board becomes suspect'. Brewer (1996) reported that 'One of Canada's best-known business leaders suggested last month that boards of directors should be abolished and replaced by a formal committee of advisors'. This view arose from the businessman in question being sued as a director of an insurance company for over a billion dollars from actions taken by management.

Boards can become redundant when there is a dominant active shareholder, especially when the major shareholder is a family or government. One could speculate that some boards are established from cultural habit, blind faith in their efficacy, or to make government or family firms look 'more business like'.

However, research by Pfeffer (1972) has shown that the value of external directors is not so much how they influence managers but how they influence constitutencies of the firm. He found that the more regulated an industry then the more outsiders were present on the board to reassure the regulators, bankers, and other interest groups.

Tricker (1996:29) points out: 'underpining company law is the requirement that directors show a fiduciary duty towards the shareholders of the company'. Inherent in the idea of directors having a fiduciary duty is that they can be trusted and will act as stewards over the resources of the company. Thus in Anglo law, directors duties are based on stewardship theory. This duty is higher than that of an agent as the person must act as if he or she were the principal rather than a representative.

Many writers, and especially the proponents of stewardship and agency theory, see each theory contradicting the other. Donaldson & Davis raise the possibility that there is some deficiency in the methodologies of the numerous studies they cite which provide support for both theories. Some possibilities are that the studies did not separate out the affect of firms being in a regulated industry as analysed by Pfeffer (1972) or possessing a dominant shareholder acting as a supervisory board or 'relationship investor'. The existence of an influential supervisory investor is not uncommon in Anglo cultures and it is the rule rather than the exception in other cultures (Analytica 1992; Tricker 1994; Turnbull 1995c,d,f).

Ghosal & Moran (1996:14) raise the possibility that the assumption of opportunism on which agency theory is based, 'can become a self-fulfilling prophecy whereby opportunistic behaviour will increase with the sanctions and incentives imposed to curtail it, thus creating the need for even stronger and more elaborate sanctions and incentives'. Likewise, stewardship theory could also become a self-fulling. This would appear to be the situation in firms around Mondragón which have no independent directors. All board members are either executives or stakeholders (Turnbull 1995d). However, each firm and each group of firms in the Mondragón system is controlled by three or more boards/councils or control centres which introduces a division of power with checks and balances.

The inclination of individuals to act as stewards or self-seeking agents may be contingent upon the institutional context. If this is the case, then both theories can be valid as indicated by the empirical evidence. Stewardship theory, like agency theory, would then be seen as sub-set of political and other broader models of corporate governance. Psychological analysis supports both theories. Waring (1973), a professor of psychology, states that: 'differences between individuals are significant and important'; the need for money and approval, etc. is 'determined and limited by the necessity of maintaining the organism in a state of dynamic equilibrium'; people stand 'in an interactive cybernetic relationship to his/her community and environment, and is changed as a result of any interaction' and individuals are 'sometimes competitive, sometimes collaborative: usually both'.

The inclination of individuals to act as selfless stewards may be culturally contingent. The 'company man' in Japan may place his employer before family. The voluntary resignation of executives is not uncommon when a firm is disgraced and instances of suicide are still reported.

3. The stakeholder model

In defining 'Stakeholder Theory' Clarkson (1994) states: '"The firm" is a system of stake holders operating within the larger system of the host society that provides the necessary legal and market infrastructure for the firm's activities. The purpose of the firm is to create wealth or value for its stake holders by converting their stakes into goods and services'. This view is supported by Blair (1995:322) who proposes:

... the goal of directors and management should be maximizing total wealth creation by the firm. The key to achieving this is to enhance the voice of and provide ownership-like incentives to those participants in the firm who contribute or control critical, specialized inputs (firm specific human capital) and to align the interests of these critical stakeholders with the interests of outside, passive shareholders.

Consistent with this view by Blair to provide 'voice' and 'ownership-like incentives' to 'critical stakeholders', Porter (1992:16-17) recommended to US policy makers that they should 'encourage long-term employee ownership' and 'encourage board representation by significant customers, suppliers, financial advisers, employees, and community representatives'. Porter (1992:17) also recommended that corporations 'seek long-term owners and give them a direct voice in governance' (i.e. relationship investors) and to 'nominate significant owners, customers, suppliers, employees, and community representatives to the board of directors'.

All these recommendations would help establish the sort of business alliances, trade related networks and strategic associations which Hollingsworth and Lindberg (1985) noted had not evolved as much in the US as they had in continental Europe and Japan. In other words, Porter is suggesting that competitiveness can be improved by using all four institutional modes for governing transactions rather than just markets and hierarchy. This supports the need to expand the theory of the firm as suggested by Turnbull (1994a).

However, the recommendations of Porter to have various stakeholder constituencies appoint representatives to a unitary board would be counter-productive for the reasons identified by Williamson (1985:300), Guthrie & Turnbull (1995) and Turnbull (1994e;1995e). Williamson (1985:308) states: 'Membership of the board, if it occurs at all, should be restricted to informational participation'. Such information participation is achieved in Japan through a Keiretsu Council and in continental Europe through works council and supervisory boards. These provide the model for establishing 'stakeholder councils' as described by Guthrie & Turnbull (1995) and Turnbull (1994d; 1997c,e,f).

Hill & Jones (1992) have built on the work of Jensen & Meckling (1976) to recognise both the implicit and explicit contractual relationships in a firm to develop 'Stakeholder–Agency Theory'. The interdependence between a firm and its strategic stakeholders is recognised by the American Law Institute (1992) which states: 'The modern corporation by its nature creates interdependences with a variety of groups with whom the corporation has a legitimate concern, such as employee, customers, suppliers, and members of the communities in which the corporation operates'.

Both stakeholder voice and ownership, as suggested by Porter and Blair, could be provided by 're-inventing' the concept of a firm as proposed by Turnbull (1973, 1975a, 1991a, 1994d, 1997f). The proposal is based on tax incentives providing higher short term profits to investors in exchange for them gradually relinquishing their property rights in favour of strategic stakeholders. Control of the firm is likewise shared between investors and stakeholders through multiple boards to remove conflicts of interest and so agency costs in a manner similar to that found in continental Europe and especially in Mondragón.

4. The political model

The political model recognises that the allocation of corporate power, privileges and profits between owners, managers and other stakeholders is determined by how governments favour their various constituencies. The ability of corporate stakeholders to influence allocations between themselves at the micro level is subject to the macro framework, which is interactively subjected to the influence of the corporate sector.

According to Hawley & Williams (1996:29): 'the political model of corporate governance has had immense influence on corporate governance developments in the last five to seven years'. However, Hawley & Williams focus their discussion only on the micro aspects of how shareholders can influence firms. Firms have also been influential in moulding the US political/legal/regulatory system over the last few centuries. According to Justice Felix Frankfurter of the US Supreme Court, the history of US constitutional law is 'the history of the impact of the modern corporation upon the American scene', quoted in Miller (1968:1).

Roe (1994) provides an elaboration of the historical evolution of the political model and like Black (1990) and others, argues that the finance model's nearly exclusive reliance on the market for corporate control, was primarily the result of the political traditions of federalism/decentralisation dating back to the American Revolution. However, these traditions have been subject to substantial changes.

After the Revolution, there was concern that newly won political freedoms could be lost through foreigners gaining control of corporations (Grossman & Adams 1993:6). As a result, the life of all corporate charters were limited to 50 years or less up until after the Civil War. Nor did these charters provide limited liability for the owners. Most states adopted a ten year sunset clause for bank charters and sometimes they were as short as three years. 'Early state legislators wrote charter laws and actual charters to limit corporate authority, and to ensure that when a corporation caused harm, they could revoke the charter' (p. 1). However, 'During the late 19th century, corporations subverted state governments' (p:1) and according to Friedman (1973:456), corporations 'bought and sold governments'.

In 1886 the US Supreme Court ruled that a private corporation was a natural person under the US constitution, sheltered by the Bill of Rights and the 14th Amendment. 'Led by new Jersey and Delaware, legislators watered down or removed citizen authority clauses. They limited the liability of corporate owners and managers, then started handing out charters that literally lasted forever' (Grossman & Adams 1993:21). 'Political power began flowing to absentee owners intent upon dominating people and and nature' (p.15). Grossman & Adams (1993:26) went on to say: 'No corporation should exist forever'.

As a reaction to the corporate power extant at the end of the 19th century, a number states introduced cumulative voting to allow minority interests to elect directors (Gordon 1993). Gordon describes how this initiative was subverted by competition between states to attract corporate registrations or what Nader (1976:44) describes as 'chartermongering'. Monks (1996) describes this as 'the race to the bottom' and explains how contemporary corporations are influencing the determination of accounting and legal doctrines and promoting a management friendly political/legal/regulatory environment. Monks (1996) states that 'The hegemony of the BRT (Business Round Table) is not a sustainable basis for corporate governance in America'.

During the beginning of the 20th century, at the federal level, laws were introduced in the US to limit bank ownership of corporations and related party transactions between corporations. This forced both the pattern of ownership and control of US firms and the pattern of trading relationships to diverge from that found in continental Europe and Japan. Kester (1992) describes the latter patterns as 'contractual governance' as analysed by Coase and Williamson while limiting the term corporate governance to the problem of co-ordination and control as analysed by Jensen & Meckling (1976) and Berle and Means (1932).

Hawley & Williams (1996:29) focused on the micro level of the political model as articulated by Gundfest (1990) and Pound. Pound (1993b) defined the 'political model of governance' as an approach, '... in which active investors seek to change corporate policy by developing voting support from dispersed shareholders, rather than by simply purchasing voting power or control...'. Pound (1992:83) states: 'this new form of governance based on politics rather than finance will provide a means of oversight that is both far more effective and far less expensive than the takeovers of the 1980's'.

Gundfest (1993) points out that 'an understanding of the political marketplace is essential to appreciate the role that capital-market mechanisms can... play in corporate governance'. For example, Gordon & Pound (1991) showed that corporations with fewer anti-takeover provisions in their constitutions out performed those with anti-takeover measures in place.

While the political form of governance is new to many US scholars, the importance of 'political procedures' (Jensen & Meckling 1979:481) have been recognised in worker-governed firms by Berstein (1980), Turnbull (1978a:100), and many others, with stakeholder-controlled firms analysed by Turnbull (1995d).

While recognising the cultural and contextual contingencies of the US system, the current political model focuses on contemporary issues such as the US proclivity for market liquidity over institutional control (Coffee 1991). The political model is also concerned with the related issue of trading off investor voice to investment exit, and institutional agents monitoring corporate agent, i.e. Watching the Watchers (Monks & Minow 1996). All these issues are influenced by government laws and regulations and so subject of public policy debate for changes and reform. Black & Coffee (1993) state that:

According to a new 'political' theory of corporate governance, financial institutions in the U.S. are not naturally apathetic, but rather have been regulated into submission by legal rules that—sometimes intentionally, sometimes inadvertently—hobble American institutions and raise the costs of participation in corporate governance.

Bhide (1994) develops details of this position. Hawley & Williams (1996:32) state:


The political model of corporate governance (whether Pound's or Gundfest's version) places severe limits on the traditional economic analysis of the corporate governance problem, and locates the performance-governance issue squarely in a broader political context. Political does not mean necessarily imply a government role, merely that it is non-market.

In other words, the analysis of economists needs to be truncated and integrated into the insights of Ben-Porath (1978) and Hollingsworth & Lindberg (1985) to understand how both economic transactions and their co-ordinating institutions are governed. An aspect also neglected by economists is that national income can be distributed without work or welfare by spreading corporate ownership directly to individuals rather than through institutional intermediaries (Kelso & Adler 1958; Kelso & Hetter 1967, 1986; Turnbull 1975a, 1988, 1991b, 1994b).

5. Emerging political issues

On the suggestion of Louis Kelso, Senator Russell Long began introducing tax and other incentives into the US Congress from 1974 onwards to promote universal share ownership. Largely as a result of these incentives, 'of the approximately 7,000 companies listed on American stock exchanges, about 1,000 firms are at least 10% employee held' (Tseo, 1996:66). Blasi (1988) documents the growing spread and size of employee ownership in both private and publicly traded companies in the US. Ironically, the extent of employee ownership in publicly traded firms in Russia is higher (Blasi & Gasaway 1993). 'In 1988, more than 90% of all firms listed on Japanese stock markets had an ESOP' (Jones & Kato 1993). The Confederation of British Industry (CBI 1990:7) found that '60 fund managers could determine the ownership of British companies' and concluded that 'concentration of power in any democracy is to be discouraged'.

Without universal individual ownership, problems arise from 'universal owners' as pointed out by Monks (1996). A 'universal owner' is an institution which effectively owns a small proportion of the entire economy. The raises the problem of the same owners participating in the governance of competing firms. It also raises the possibility that universal owners may seek to maximise profits in their corporations through transferring the costs of maintaining the environment, education and health care to the taxpayers whom they also represent.

Universal ownership avoids the problems of universal owners. There is also much evidence that ownership by individual stakeholders can improve performance (Turnbull 1997e,f). Employee ownership, in particular, is supported by corporate governance scholars such as Blair (1995), Monks (1996), Porter (1992), and Denham & Porter (1995). Porter (1992) recommended that all strategic stakeholders participate in ownership and control. Turnbull (1973, 1975a, 1991a, 1994d, 1997e,f) describes alternative mechanisms to those proposed by Kelso for achieving this objective to promote what Porter refers to as 'expanded ownership'. Turnbull (1993a,b; 1994c; 1997c,e,f) describes how Porter's proposals could be implemented to provide operating advantages and a basis for improving corporate self-governance.

Other ways of analysing corporate governance

There are other models of corporate governance to consider based on culture, power and cybernetics. A synthesis of all models may be required if we are to efficiently develop, construct, test and implement new approaches.

1. Culture

Hollingsworth, Schmitter & Streeck (1994:6) provide an example of a cultural persective:

...transactions are conducted on the basis of mutual trust and confidence sustained by stable, preferential, particularistic, mutually obligated, and legally non–enforceable relationships. They may be kept together either by value consensus or resource dependency—that is, through 'culture' and 'community' - or through dominant units imposing dependence on others.

This statement was made in the context of transactions being governed by networks at the 'mesolevel (e.g., the intermediate location between the microlevel of the firm and the macrolevel of the whole economy)' rather than of the firm (p.9). However, it is also relevant within firms, and in this way it would subsume elements of the stewardship model.

Porta, Lopez-de-Silanes, Shleifer, & Vishny, (1997) found that the type of dominant religion in a culture can affect trust and hence the ability of strangers in large organizations to co-operate. In particular, they found that trust in large organizations increases as the proportion of the population involved in hierarchical religions, like Catholicism, decreases. While Japan showed an above average degree of trust is was not as high as Nordic countries and China. Some scholars have speculated that the Japanese commitment to employee participation and the forming of strategic alliances between firms arises from their embedded belief in the inter-dependency of their many Gods. It might be interesting to research if Christian economists and managers, or other types of monotheists, have an embedded belief in hierarchies rather than alliances and networks.

Williamson (1975:38) noted the short-comings of economic analysis in neglecting 'the exchange process itself as an object of value'. He identified the concept of 'atmosphere' to 'raise such systems issues: supplying a satisfying exchange relation is made part of the economic problem, broadly construed'. However, this insight is not mentioned or used in Williamson (1985) or in many of his later writings.

The need to consider the cultural context or 'atmosphere' of transactions within and between firms has been analysed by Maruyama (1991). Mondragón illustrates the importance of culture as it provides 'an environment where there is no perceived threat of opportunism, even from opportunists!', to use the words of Ghoshal and Moran (1996:26) in another context. 'Mondragón makes it clear that market or planning decisions are value decisions' (Morrison 1991:98). This is seen as an advantage by economists Bradley & Gelb (1983:30) from the World Bank. They favourably compare Mondragón with the 'enriched employment relationship extending far beyond the cash nexus' of Japanese firms and X-inefficiency (Leibenstein, 1987) found with 'Western' practices.

The importance of culture is evident from the view in Mondragón that social adaptability is the most critical condition in converting a firm owned by an entrepreneur to a co-operative (Whyte & Whyte (1988:86). 'Mondragón is unlikely to undertake a conversion if the prospects of resocializing managers and workers appear poor.' In this regard, the Catholic influence in Mondragón is at odds with the findings of Porta et. al. (1997). Morrison (1991:111) quotes the founder of Mondragón, Father Arizmendi as saying: 'A company cannot and must not lose any of its efficiency just because human values are considered more important than purely economic or material resources within the company; on the contrary such a consideration should help efficiency and quality'.

Contrary to the concerns of Ghoshal & Moran, Williamson (1979:104) accepted that trust can transcend opportunism when he stated:

Additional transactions-specific savings can accrue at the interface between supplier and buyer as contracts are successively adapted to unfolding events, and as periodic contract-renewal agreements are reached. Familiarity here permits communication economies to be realized: specialized language develops as experience accumulates and nuances are signaled and received in a sensitive way. Both institutional and personal trust relations evolve.

The reference to 'communication economies' will be taken up below. However, there is obviously need to integrate culture into the research calculus of firm structure and performance as undertaken by Berger (1976) in evaluating economic development.

2. The power perspective of corporate governance,

From this perspective, it is the ability of individuals or groups to take action which is the over-riding concern. The related viewpoint of 'resource dependency' was developed by Pfeffer (1972); Pfeffer & Leong (1977) and Pfeffer & Salancik (1978). However, the explict use of power seems to be neglected topic. Even when shareholders, directors, management or any other stakeholder have the knowledge and will to act, this is of no avail unless they also possess the power to act.

The power of shareholders to act is part of the political model of corporate governance. Hawley & Williams (1996:57-60) identify various inhibitions on the power of shareholders to act arising from security laws, agenda setting by management at general meetings, proxy procedures, voting arrangements and the corporate by-laws.

The power of directors to control management is dependent upon there being a sufficient number of directors who also have the knowledge and will to act to form a board majority. Even if independent directors have the knowledge to act, they may not have the will and power to act because they are loyal or obligated to management and/or hold their board position at the grace and favour of management. Directors are unlikely to act against mangement unless they are supported by shareholders. However, many institutional shareholders lack the will to act. This was found to be a major problem for US firms in a report into their competitiveness by Regan (1993). Hawley & Williams (1996:65) noted that management controlled 'the information that does reach the board. The result can be a board knowing too little, too late and, even if it is willing to act to confront a growing problem or crisis, it is often unable to do so'.

An appropriate separation of powers to create checks and balances provides a way to increase the welfare of stakeholders according to Persson, Roland & Tabillini (1996). Persson, Roland & Tabillini make the point that negative welfare may result if the division of power is not 'appropriate'. An analysis of appropriate division of powers has been made by Bernstein (1980) and Turnbull (1978a:100;1993b; 1997c).

Calls by reformers for greater disclosure and transparency as a way to control firms are made on the assumption that there are shareholders who possess both the will and power to act. The validity of this implicit assumption is largely ignored. While disclosure is a necessary condition for regulation, self-regulation and self-governance, it is not sufficient unless there also exists both the power and will to act.

All suggestions for reform of corporate governance processes need to consider the power of agents to act, or be subject to a veto, when there is a compound board. Pound (1993a) makes the points: 'always have an opposition view' and 'there must be an opposition party and the prospect of insurgency'. However, Pound does not consider the principle of a division of power in his political model of corporate governance, even though he participated as co-chair of the shareholders' committee estabished at USX for this purpose (Pound 1992). While the power model of the firm may be but a part of the political model, it should never be neglected because without the power to take corrective action, no action can take place.

For any action to be appropriate, the actors also need information which is accurate, timely, sufficient and yet manageable. While Pound (1993a) talks about 'feedback' it is from institutional investors who do not, cannot, and should not, have firm specific inside expert information. This leads us to consider the cybernetic approach to corporate governance.

3. Cybernetic analysis

Cybernetic analysis in social institutions is concerned with their information and control architecture. As control is dependent upon power, a cybernetic investigation is dependent upon an analysis of power.

Cybernetics is based on the mathematics of information theory where the basic unit of analysis is described as a 'bit'. A bit can be thought of as a letter in a language with eight bits creating what can be considered to be word, described as 'byte'. The ability of computers to store, process or transmit information is measured in thousands or millions of bytes described respectively as kilobytes and megabytes.

Like computers, humans have physical limitations on their ability to receive, store, process and transmit information. Williamson (1979:99) recognised that 'the efficient processing of information is an important and related concept' to transaction costs and stated in note 4, 'but for the limited ability of human agents to receive, store, retrieve, and process data, interesting economic problems vanish'. Wearing (1973) observed that an individual has 'limited information processing capacity so prefers slow rates of change, i.e. nearly stable systems,' and 'reduces, condenses, summarises (and thus necessarily loses) information, in addition, an "imperfect" communications network in the environment also restricts and attenuates the flow of information'.

Another reason for economising information is to reduce the problem of 'bounded rationality' which refers to human behaviour that is 'intendedly rational but only limitedly so' (Simon, 1961:xxiv). According to Williamson (1975:21), 'Bounded rationality involves neurophysiological limits on the one hand and language limits on the others'. Williamson (1975:45-6) notes that 'a change in organizational structure may be indicated' when individuals are exposed to information overload.

To undertake tasks which exceed the capacity of one computer, two or more computers can be connected together in the same way humans solve more demanding tasks by working in teams, groups, alliances and networks. Cybernetics considerations cannot be ignored in understanding or designing teams, divisions, the need for one or more boards and their structure, or the architecture of external alliances with stakeholders.

The cybernetic perspective provides a basis for evaluating the integrity of corporate governance information and control systems from a number of aspects. Evaluating the integrity of information channels was investigated by Shannon, a founder of information theory. Shannon (1949) showed that reliable information can be obtained from unreliable channels if they are used in parallel. In other words, boards need to obtain information from strategic stakeholders as well as from management to avoid bias, distortion or errors as discussed by Turnbull (1993a; 1997c,e,f). The errors and distortions in management hierarchies have been reported by Downs (1967:116-118), Williamson (1975:122), and Demb & Neubauer (1992b).

Another important insight of cybernetics is the 'law of requisite variety' which states that to counter any variable the organisation must have matching responses. In other words, complexity can only be managed through complexity (Ashby 1968:202). Complex organisations, and/or those operating in a complex dynamic environment require complex control systems. This might be reflected in a compound board and/or a network of firms (Craven, Piercy & Shipp, 1996) and/or by involving strategic stakeholders in the control of a firm as proposed by Blair (1995), Fukao (1995), Porter(1992) and Turnbull (1994d;1995a,b,e;1997c,e,f).

The cybernetic concept of 'feedback' is a condition precedent for self-regulation or self-governance (Ashby 1968:53). If a firm is not to affect adversely its stakeholders through its 'actions or inactions' (Donaldson & Preston 1995) it will require governance processes which allow its stakeholders to participate in establishing performance standards. Such arrangements are commonly established in quality assurance programs. However, for stakeholders to have the will to act, they need a power base independent of management to protect them from being treated as whistle blowers.

Independently elected Stakeholder Councils would represent the 'opposition party' sought by Pound. As strategic stakeholders would possess inside, expert information, they provide a way to inform management and their monitors, of any operational shortcommings as sought by Pound. The design of such arrangements would require the use of both the power and cyberneic perspective of corporate governance. An example of this approach is provided by Guthrie & Turnbull (1995) and Turnbull (1997c,e,f).

Research opportunities

1. Limited life.

The governance implications of limited life corporate shares and limited life firms is a neglected area. The periodic review of managers by owners is an intrinsic feature of firms which have limited life charters as commonly exists in joint ventures and in limited liability partnerships. In the US, limited liability partnerships are formed for six years. They are commonly used for Research & Development syndication, property development joint ventures, theatrical and other types of media financing. Longer term limited life enterprises are frequently formed with international joint ventures, especially those in former socialist economies.

The need to periodically establish a successor organisation allows all contractual arrangements to be re-negotiated. In this way management is made accountable in a similar fashion to those subject to a take-over of a publicly traded enterprise. Dispersed ownership in this situation increases rather than decreases the bargaining power of owners in the same way it does for creditors as investigated by Gerner & Scharfstein (1991) and Bolton & Scharfstein (1996). If the owners do not have confidence in management they need not re-invest their money. This forces managers to provide both adequate information and cash distributions to retain investor confidence.

Limited life equities and firms were the rule rather than the exception up until the middle of the last century, except in England where a few hundred firms obtained charters with the rights of perpetual succession (Turnbull 1997b; 1998). Limited life firms have particular value when the business is not large enough to have its shares publicly traded. The need to periodically re-recapitalise the firm provides liquidity and so an exit opportunity for investors. It also provides a programmed exit for firms with declining business as sought by Jensen (1993:847). There appears to be little research into this topic.

2. Worker ownership and control

Researchers from English speaking (Anglo) cultures have not only neglected the study of corporate governance found in other cultures but the governance of firms in their own cultures which do not have publicly traded securities. These include worker controlled firms. While employee controlled firms may not contribute significant value to modern economies, closed or private corporations add more value to their host economy than publicly traded firms.

As noted earlier, employees are becoming the largest voting block in many US publicly traded corporations. The same situation is developing in Australia (Turnbull 1997a). While firms which are 100% employee owned and controlled may have small practical significance, the influence of employee ownership is steadily increasing and it raise two important issues for developing a theory of organisations.

Firstly, the four temporary and eight permanent assumptions of agency theory (Jensen & Meckling 1976) lose relevance. All 'agents' are also 'principals', so there is little or no separation of ownership and control.

Secondly, no worker controlled firm in an international survey undertaken by Bernstein (1980) had a unitary board, even if this was the dominant form in its host culture. According to Jensen & Meckling (1979), 'We do not have a theory that will tell us how supervisory boards will behave'. Empirical research is required to discover if the increased conflicts of interests created in a unitary board with employee ownership provides the reason why such firms do not survive. Empirical research is also required to investigate the relevance of the power, cybernetic or other perspective in explaining the operations of firms which are employee owned or influenced.

3. Compound boards

The existence of two or more boards is not only of interest to employee owned firms but in understanding corporate governance in continental Europe where two or three boards may be required by law. Similar laws could be adopted by members of the European Union, so this topic has immediate practical interest.

Many publicly traded Asian firms are family controlled (Tricker 1994) and so are governed by a compound board as are firms controlled by venture capital funds and Leveraged Buy Out (LBO) Associations. Evidence 'that LBOs are efficient organizations' is cited by Shleifer & Vishny (1996:45) while Jensen (1993:869) states:

LBO associations and venture capital funds provide a blueprint for managers and boards who wish to revamp their top-level control systems to make them more efficient. LBOs and venture capital funds are, of course, the pre-eminent examples of active investors in recent US history, and they serve as excellent models that can be emulated in part or in total by virtually any corporation. The two have similar governance structures, and have been successful in resolving the governance problems of both slow growth or declining firms (LBO associations) and high growth entrepreneurial firms (venture capital funds).

The theoretical significance of compound boards is currently being overlooked in an analogous way as Multi-divisional (M) form firms were overlooked by scholars for over 30 years until analysed by Chandler (1962:382-83). Compound boards permit decomposition in information processing and decision making in a similar way to firms which change from a Unitary (U) form structure to M form.

While a number of empirical surveys document the existence and operations of two or more tiered boards (Analytica 1992; Charkham 1994; Fukao 1995; Francis 1997), little analytical attention has been given to them except by Bernstein (1980); Tricker (1980); Hatherly (1994); Guthrie & Turnbull (1995), Turnbull (1993a,b; 1994c,d; 1995a,b,c,d,e; 1997c,e,f) and Bancaire (1996). Jensen (1993:863) states 'The reasons for the failure of the [unitary] board are not completely understood'.

While Williamson (1985:302) and Pejovich (1990:69-71) note the existence of co-determination in Germany, only Pejovich provides some cursory analysis. He asserts that co-determination must increase rather than decrease the cost of funds because the participation of labour in the control of corporations 'abrogates the property rights of investors'. This is the issue taken up by Sternberg (1996).

However, the assertion of Pejovich is inconsistent with the analysis by Persson, Roland & Tabellini (1996) who pioneered the first formal theoretical framework for analysing the separation of powers in the context of political institutions. The need for the separation of powers in corporate boards has been noted by Tricker (1980; 1994:6, 45-6, 75, 78, 156, 247-8; ) and Hatherly (1994). The writer has proven the ability of two tiered boards to reduce the cost of equity in two start up enterprises. In the second venture, a 'Corporate Senate'was established as a shareholder watchdog committee as reported by Turnbull (1993b), Monks & Minow (1995:317) and Tricker (1996:75-6). Much more empirical research is required into these issues.

4. Information theory

Stafford Beer (1959; 1966a; 1966b; 1979; 1981;1985) has been a prolific writer as the founder of management cybernetics and a proponent of using cybernetics in economic management. However, Beer advised the author in 1996 that to his knowledge, information theory had not been applied to evaluate corporate governance or the operations of compound boards. The utilisation of information theory in the theory of the firm arises because transaction costs are largely, if not entirely, made up of information.

Firms exist because of the cost of 'discovering what the relevant prices are' (Coase 1937). By economising information, costs are economised. However, while costs are a social construct, information must always be represented in some way which can be physically detected and measured. As a physical manifestation, all information processing, storage, and transmission is subject to the laws of physics. Transactions costs, and economics in general, are not so constrained as they are based on the social construct of cost which is in turn based on the social constructs of money and value which are not now defined in terms of physical units.

The use of physical units such as bits or bytes in the analysis of organisations provide a way for developing a science of organisation which is based on the laws of nature. Bits or bytes provide a way 'for observing the phenomena at a higher level of resolution' as sought by Williamson (1990:xi). Williamson (1991:12) later went on to say:

There is growing agreement, moreover, with the need to engage data of a much more micro-analytic kind than was hitherto thought to be necessary. Indeed, there is reason to believe that the elusive 'science of organization' to which Chester Barnard made reference fifty years ago (1938:290) may take shape during the 1990s.

As the cost of organising economic transactions is based on the volume of information required, then transactions costs are economised by economising information. The need to consider 'information richness' in organizational design has already been considered by organizational theorists such as Daft & Lengel (1984). The capacity of communications channels needs to match the information richness required to govern productive activities. Markets are efficient because price is not information rich and very narrow communications channels can be used. However, markets fail because price signals are not sufficiently information rich to communicate the qualitative aspects governing a transaction.

From a cybernetic perspective, TCE becomes a special case of information theory when costs are relevant. Transactions costs are minimised when the information required to activate or reject a transaction are minimised. Minimising bits rather than costs allows many of the findings of TCE to be extended to transactions and institutional arrangements where cost may be less important, such as in quality assurance programs, non-profit organisations and social institutions in general. In this way, the cybernetic approach can be used to integrate the viewpoints of other disciplines to provide a common framework which was noted as missing by Radner (1992), Demb and Neubauer (1992a). It could also provides a way to develop a theory of compound boards as sought by Jensen & Meckling (1979:503). Some thoughts towards this objective are presented in Turnbull (1997c) but much more work needs to be undertaken.

5. Networks

There is a substantial literature on the design of organizations, but it is based on the assumption that they are ultimately centrally controlled. There exists the need to understand decentralised organizations which are accountable to a number of separate constituencies. For example, Galbraith (1973), Egelhoff, (1982, 1988), Daft and Lengel, (1984) focussed on the idea that organizational structures develop to fit information-processing needs. This approach needs to be extended to entertain decentralised organizations and networks of firms.

As a network or association of firms may itself be considered a firm (Mathews 1996b:116), or 'as organizational wholes' (Richter 1994:24), there is a need to consider the architecture of networks in the same way theorists have analysed the structure of firms. When a compound board is created within a firm it represents a network of information processing and control centres. Networks can then exist both on a intra-firm basis and on an inter-firm basis. Both exist together in Mondragón and both types of networks need investigating to understand how they may best be used.

The ownership and control structure of firms has been extensively analysed by such scholars as Grossman & Hart (1982; 1986), Hart & Moore (1990), Hart (1993;1995) and Williamson (1975; 1985). But in the traditions of US research, their work assumed organisations were centrally controlled through a unitary board. Investment risks of related parties could be signifcantly modified by ownership and control structures which utilised compound boards to share and manage risk. There is a need to re-visit existing work from the network perspective of Craven, Piercy and Shipp (1996).

6. Holonic structures

Holons represent an organisational structure identified by Smuts (1926). They have intriguing characteristics which suggest that they could make a contribution in understanding the most efficient way of governing complex productive activities. This suggests they deserve investigation in regards to firms, networks of firms, communities, and the governance of society at higher levels.

Simon (1962) describes what Smuts called holons, as 'sub-assemblies' or 'stable intermediate forms' to create 'nearly decomposable systems, in which the interactions among the subsystems are weak, but not negligible'. Examples of weak holons are divisions in a 'M-form' firm, 'autonomous manufacturing cells' (Mathews 1996a), and firms as a 'hierarchy of teams' (Conti & Warner 1996). Mondragón firms, groups and system illustrate a strong holonic structure or 'holarchy' (Koestler 1967). They are a strong form, because the component firms and groups ('sub-assemblies') can exist independently of the whole ('hol'), i.e. 'able to maintain a separate existance' to represent a 'viable system' (Beer 1985:1).

Williamson (1985:281) uses an 'information processing interpretation' to explain the operating advantages of the M type of architecture. The same advantages arise in holons because 'the reduction in data transmission, and in data complexity, achieved by the holonic architecture, is prodigious,' (Mathews 1996a:30). Both this insight and that of Williamson (1975:21) concerning the 'neurological limits' of individuals provide a basis for understanding how compound boards, networks of firms or organisations, and alliances, can provide operating advantages.

There are many examples in computer programming where the efficient management of complexity is achieved through holonic architecture as cited by Mathews (1996a) and described as 'ultra-structure' by Long & Denning (1995). Williamson (1985:383) noted that 'the problem of organization is precisely one of decomposing the entire enterprise in efficient information processing aspects'. Holonic architecture provides a way to introduce efficient decomposition to allow ordinary people to achieve extraordinary results.

Coase (1937) noted that firms exist because markets fail to efficiently communicate information. Ashby (1960) pointed out that, 'prices represent second order information' dependent on first order qualitative description of what is being transacted. Prices may also represent inefficient communications because they may lack credibility as analysed by Akerlof (1970). These considerations explain the advantages of using non-market methods for governing transactions as identified by Hollingsworth & Lindberg (1985). The introduction of holonic organisations may provide a way to increase the efficiency of governing productive activities by reducing transaction costs and costs arising from 'bounded rationality'. Inceasing the informational efficiency of organisations would reduce the role and so need for markets.

7. Self-regulation and self-governance

The theory and practice of self-regulation and self-governance has been used since governors were used in the 19th century to control the speed of steam engines. However, little of this knowledge appears to have been researched, let alone applied to social institutions or to the role of government. The Vice President of the US suggested that the reason for this gap in the application of knowledge of the 'information age' is that only nine of the 535 members of Congress have any professional education in technology (Gore 1996). Another reason could be that social scientists are not sufficiently familiar with the theory and practice of self-regulation to understand why it cannot work with the dominant form of institutions in advanced economies. This dominant form is based on centralised information and control without checks and balances.

Ignorance in the theory and practice of self-regulation is so widespread among social commentators and scientists that they assert that it cannot work for institutions in a market economy. Ironically, many of the same people support a market system because they believe that it is self-regulating. Design guidelines for establishing a 'self-managing self-correcting power structure', without markets, for Aboriginal firms are suggested by Turnbull (1978a:100).

The need for government bureaucracies to intercede as corporate regulators arises because those adversely affected by a firm may not have the information, power and will to correct the problem. Stakeholder participation in governance provide a way of reducing this deficiency. If the interests of the participating stakeholders are not sufficiently wide to reflect the concerns of the host society, some government interventions will still be required. However, stakeholder participation may also be required in government bureaucracies to allow policies to be mediated to suit local conditions and performance standards established and evaluated by those affected (Turnbull 1994d, 1995b).

There are arguments and evidence to suggest that self-regulation and self-governance provide operating advantages for social institutions generally and competitive advantages for firms (Turnbull 1997c,e). This is a topic which requires much more investigation and research.

Concluding remarks

Sociologists have identified four distinctive institutional processes for governing productive activities. Economic theories of the firm based on only markets and hierarchy provide a limited basis for understanding corporate governance. However, by re-interpreting theories of the firm, based on minimising transaction information rather than transaction costs, many insights developed by economists can be applied to governance process, even when costs may have little relevance.

The use of information, which must have a physical manifestation, has the advantage of providing a commmon unit of analsyis to: (i) integrate the various disciplines involved with corporate governance; (ii) ground corporate governance in the knowledge of pure and applied sciences; and (iii) allow the mathematical rigour of information theory to provide a basis for establishing a science of organisation. Corporate governance might then develop as a part of a more general theory of social construction. This should offer practical benefits for improving the design of social institutions in the private or public sector, be they for profit or for welfare.

To this end, corporate governance scholars would need to accept the possibility of people behaving both as opportunistic self-serving agents and selfless stewards. No one theory or model of society is likely to be sufficient for understanding, evaluating or designing governance structures. There are many pieces to the puzzle which this paper has tried to encompass. If there is a lesson to consider, it is that reliance on just one perspective is unlikely to be rewarding in practical terms for improving corporate governance systems. An interdisciplinary holistic approach is required.

The complexity of the universe is created through holonic structures which create the means for living things to manage complexity. The survival of civilisation may be dependent upon society adopting the governances systems of nature. The ability of holonic structures to introduce a prodigious reduction in information processing indicates that they could present a way to govern society with far less reliance on the second order information communicated by markets. Prices are dependent on first order information which describes the qualitative aspects of the goods and services being exchanged. Markets are also dependent upon knowledge of the terms and conditions of the exchange and the trustworthiness of the parties involved in the exchange. Might it be that markets exists because organizations fail to utilise holonic structures? This would reverses Coases' (1937) view that organizations exist because markets fail.

Information theory offers the prospect of establishing design criteria and limits for improving governance systems at both the micro and macro level of society. It provide a basis to design guide-lines for improving regulation, self-regulation and governance in either the private or public sector. This offers the prospect of identifying opportunities for partially privatising state regulation to reduce the size, scope, burden and cost of government to improve the quality of democracy. It also provides design criteria for developing self-governing social institutions and systems as indicated by Turnbull (1978a:100;1997c). In this way the study of corporate governance could provide a basis for building a self-governing sustainable global society that 'nature can live with' (Marston 1992).


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