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The moral arguments associated with justice, fairness and communitarianism have rejected the exclusivity of costbenefit analysis in corporate governance. Particularly, the percepts of new governance (NG) have included
distributive aspects in efficiency models focused on maximizing profits.
While corporate directors were only assigned to look after the return of
investment within the traditional framework of corporate governance (CG),
NG has created the scope for them to look beyond the set of contractual
liabilities. This article explores how and how far NG notions have contributed to the devolution of CG to create internal strategies focusing on actors,
ethics and accountability in corporate self-regulation.
keywords Corporate governance, new governance, shareholder primacy,
enlightened shareholder primacy, corporate social responsibility
Introduction
Over the last two decades, the dominant mode of firm governance has been under
considerable scrutiny. Argument rages between scholars and practitioners as to what
the best practice should be in the corporate governance framework, as control of such
governance rests with the shareholders who may not be orientated towards public
policy goals. Two vital reasons that compel changes in the nature of governance are,
first, that it becomes difficult for public agencies alone to raise the compliance level
in companies (Freeman, 1997) and, second, that the state alone does not possess
adequate resources to sufficiently encourage private actors to comply, to enforce the
law or to monitor and update rules in light of experience (Solomon, 2007).
Against this background, new governance (NG) is an emerging form of governance
that contributes to changes in corporate governance (CG). The basic concept of NG
is that it proposes various types of stakeholder and strategy to reach an optimal
welfare level. In other words, this concept argues for collaborative governance, in
which stakeholder groups, public agencies and private parties work together to define
and revise standards to reach a mutually acceptable objective (Bradley et al., 1999;
Winkler, 2004). NG is a rapidly growing concept (Sabel & Simon, 2006: 395; Walker
The University of Hertfordshire Business School
and W. S. Maney & Son Ltd 2012
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& Burca, 2006; Trubek & Trubek, 2007) and, like many new paradigms, it defines
itself in large part appositionally. NG potentially is relevant to almost all areas of
governance in both public and private sectors. The kinds of regulation included in
NG tend to be less prescriptive and less top-down than CG, and more focused on
learning through monitoring than compliance with fixed rules. NG also provides
scope for using a provisional and quasi-legislative framework that helps to set the
terms of diffuse groups of stakeholders to elaborate in particular applications, which
will then be reviewed at the centre with an eye toward revision of the frameworks
(Sabel & Simon, 2006: 399).
The NG approach has contributed to a devolution in CG frameworks. The main
feature of such devolution has been that, along with a functional economic focus, a
public policy approach that seeks to protect investors as well as non-shareholder
stakeholders has become recognized in CG (Rahim, 2011). This devolution has also
contributed to changes in the socio-legal view of corporate regulation.1 In this form
of governance, the role of regulation is to catalyze a process of deliberation that
ensures that different actors contribute to governance and learn from the results of
each others contributions.
This article reviews the intricacies of NG approaches to devolution into CG. The
second section discusses NG, CG and their nexus. The third discusses the impact of
this nexus on traditional patterns of CG. It discusses enlightened shareholder primacy and its impact on the devolution of the dominant frameworks in CG. Finally,
the section concludes that NG has contributed to the rise of enlightened shareholder
primacy, this assisting devolution in the traditional format of CG.
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such structures can and should be designed to rely less on single-party dictated
preferences and more on stakeholder collaboration, flexibility and pragmatism
(Karkkainen, 2004; Rahim, 2012a, 2012b). Empirical evidence suggests that corporations are more willing to consider effective ways of enforcing compliance standards
and processes, as well as sharing more information, when they operate in a collaborative climate that allows them to perform their own monitoring (Coglianese & Lazer,
2003). Studies have shown that enforcing environmental protections through nonconventional regulatory tactics may also enhance corporate compliance with financial
and workplace protections (Parker & Nielsen, 2006).
CG
CG is an umbrella term. In its narrower sense, it describes the formal system of
accountability of corporate directors to the owners of companies. In its broader sense,
the concept includes the entire network of formal and informal relationships involving the corporate sector and the consequences of these relationships on society in
general (Keasey et al., 1997: 2). These two senses are not contradictory, but rather
complementary. CG has been described as the way in which suppliers of finance to
corporations assure themselves of getting a return on their investment (Shleifer &
Vishny, 1997). However, it may also allude to the whole set of legal, cultural and
institutional arrangements that determine what publicly traded corporations can do,
who controls them, how that control is exercised and how the risks and returns
from the activities they undertake are allocated (Blair, 1995: 3). Taking both of these
senses in conjunction, CG is not merely about maximizing stock value.
Within the CG framework in general, the roles, rights and responsibilities of
corporate directors are crucial (Farrar, 2008: 69146). In particular, the board of
directors is the most appropriate body to design policies and to allow corporate
management to fulfil its responsibilities to society (Mitchell, 2007: 280). In most
cases, this board is the sole body that communicates corporate performance to corporate owners. Eisenberg describes this as the board as manager (1982: 209210).
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Conclusion
The dominant position of shareholder primacy has been minimized within the CG
framework whereby issues related to companies public policy and social responsibilities are now significant. Ethical norms and the need for accountability have been
two of the driving sources of CG, and, with the stakeholder notion being increasingly adopted in existing business practices, the potential convergence between CG
and NG has come to the foreground. This convergence in the face of regulatory,
business and social changes in global markets has somewhat decreased the controversy over both the potential and limitations of corporate accountability mechanisms.
Changes to the dominant position of shareholder primacy and the rise of stakeholder
pluralism arguments have resulted in the development of the enlightened shareholder
approach in CG. This enlightenment is the source of the changes to the traditional
precepts in CG. While corporate directors were only assigned to look after the return
of investment within the traditional framework of CG, NG has created the scope
for them to look beyond the set of contractual liabilities. It has rendered scope for
corporate directors to create internal strategies focusing on pluralization of actors,
ethics and accountability in corporate self-regulation.
Whereas previously there were two separate mechanisms of CG, one catering
to profit centric corporate decision making and the other to socially responsible,
people-friendly business strategies, NG precepts have contributed to the development
of a more hybridized and synthesized body of governance and norms that regulate
corporate practices. This has helped enlightened shareholders to explore how the
traditional notion of CG may be reformed.
Notes
1
The recent major corporate scandals have contributed to CG gaining attention as a public policy
topic. These incidents have prompted legislators
and businesses to allow greater scrutiny over
accounting manoeuvres and towards greater transparency to prevent managers from engaging in
fraud. After the Enron crisis, the US president
announced his Ten Point Plan to Improve Corporate Responsibility and to Protect Americas
shareholders, focusing on CG reform in the US.
Afterwards, the SarbanesOxley Act was passed.
This Act has introduced comprehensive accounting
reform for public companies and severe penalties for
failure to comply. It has divided pro-business and
pro-regulation advocates over the value of these
reformative approaches and their political effects.
For details, see The Presidents Leadership in Combating Corporate Fraud, at: <http://georgewbushwhitehouse.archives gov/infocus/corporateresponsibility/>; Public Company Accounting Reform and
Investor Protection Act of 2002, at: <http://www.jbradford-delong.net/movabletype/refs/2002-07-25sarbanes.html>; Harshbarger and Jois (2007).
There are some models that describe the strategies
for incorporating stakeholders in corporate regulation.
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Notes on contributor
Dr Mia Mahmudur Rahim is a Casual Academic Staff member in the Macquarie Law
School at Macquarie University. He completed his LLB with Honours and LLM at
Dhaka University; LLM in International Economic Law at Warwick University as
a Chevening Scholar; MPA at LKY School of Public Policy with a NUS Graduate
Scholarship and PhD at Macquarie University with a Macquarie University Research
Excellence Scholarship. Before starting his doctoral research at Macquarie Law
School, he was a Deputy District and Session Judge in Bangladesh. He also worked
for the Bangladesh Law Commission and the Supreme Court of Bangladesh. He is an
Associate Member of the Center for Legal Governance of Macquarie University.
Correspondence to: Mia Mahmudur Rahim, Room 541, Building W3A, Macquarie
University, Australia. Email: mia.rahim@mq.edu.au; miamahmud@hotmail.com
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