The origins of the word governance can be found in the Latin ‘gubernare’ meaning to rule or to steer, and the Greek Κυβερυησις which means . . . (steering, eds.). Norbert Wiener used the Greek root as the basis for cybernetics - the science of control in man and machine. The idea of steersman - the person at the helm - is a particularly helpful insight into the reality of governance.
Source: Tricker (1984:9).
According to Cochran and Wartick (1988), corporate governance is an umbrella term that covers many aspects related to concepts, theories and practices of boards of directors and their executive and non?executive directors. It is a field that concentrates on the relationship between boards, stockholders, top management, regulators, auditors and other stakeholders. A related definition of corporate governance comes from Monks and Minow (1995). These authors state: “What is corporate governance? It is the relationship among various participants in determining the direction and performance of corporations” (Monks and Minow, 1995:1).
In this definition, the group of participants includes shareholders, management, members of board of directors, employees, customers, suppliers, creditors and other interest groups. The World Bank states: “Corporate governance refers to that blend of law, regulation and appropriate voluntary private sector practices which enable the corporation to attract financial and human capital, perform efficiently, and thereby perpetuate itself by generating long-term economic value for its shareholders, while respecting the interests of stakeholders and society as a whole. The principal characteristics of effective corporate governance are: transparency (disclosure of relevant financial and operational information and internal processes of management oversight and control); protection and enforceability of the rights and prerogatives of all shareholders; and, directors capable of independently approving the corporation's strategy and major business plans and decisions, and of independently hiring management, monitoring management's performance and integrity, and replacing management when necessary” (www.worldbank.org, Jan 1999).
Sheridan and Kendall (1992), suggest that “ . . . different countries have different ideas as to what constitutes good corporate governance [ . . . ] nowhere does anyone appear to have defined corporate governance per se.” These and other definitions indicate that the field of corporate governance is a rich one. As stated by Tricker (1993:2), “ . . . corporate governance can mean many things to those concerned. Institutional investors have a different perspective from corporate regulators, board members from researchers. Insights can be drawn from the professional and theoretical worlds of organisational behavior, jurisprudence, financial economics, accountancy and auditing, as well as from the experiential worlds of director behaviour and board practices.” See also Moerland (1997) for an overview of corporate governance definitions.
Corporate Governance and the Role of Corporate Boards of Directors
Of importance to this study is the recognition that boards of directors are essential to most definitions of corporate governance. Although Demb and Neubauer (1992a:16) explicate that it is much too narrow a focus to equate corporate governance with the role of boards of directors, these and other authors indicate that corporate boards are important to the accountability of corporations and the way corporations comply with modern ethical and economic standards. Cadbury (1993:9) states that it “ . . . is the ability of boards of directors to combine leadership with control and effectiveness with accountability that will primarily determine how well . . . companies meet society's expectations of them.”
Williams and Shapiro (1979) see strong and effective boards as valuable corporate assets. According to these authors, “enhancing the perception of corporate accountability and thus reducing the pressure for a government role in corporate decision making is a vital goal. However, both management and directors also share another, more fundamental, goal – to develop a board which can bring the best, most informed and most objective advice available . . .” (Williams and Shapiro, 1979:14-15). Wang and Dewhirst (1992) even proclaim that the board of directors is one of the greatest organizational innovations in the field of corporate governance. Yet, similar to the discussion on the meaning of corporate governance, it is not easy to give an unambiguous and narrow definition of the role of corporate boards of directors.
Distinctive perspectives of corporate governance - such as the shareholder and stakeholder perspectives - give rise to differences in the definition of boards’ roles in the governance of corporations. Seen from a shareholder perspective of corporate governance, corporate boards are understood as internal devices to align the interests of management and shareholders. In addition, boards of directors are seen as devices that alleviate agency problems associated with Berle and Means' (1932) classical dilemma of the separation of ownership from control in listed corporations (Judge, 1989; Walsh and Seward, 1990; Rediker and Seth, 1995). According to these authors, a shareholder perspective of corporate governance rests upon the assumptions that corporations are private property and that executive and non-executive directors are fiduciaries of corporations’ shareholders. Moreover, Gedajlovic (1993) suggests that a shareholder perspective of corporate governance defines corporations as entities that are subordinate to the interests of shareholders (see also figure 1.1).
The stakeholder perspective of corporate governance departs from assumptions underlying a shareholder perspective of corporate governance. This perspective sees corporations as superordinate entities in which a variety of parties have vested legitimate interests. As such, this perspective also recognizes interests of stakeholders other than stockholders that need to be protected by corporate boards of directors. This also has implications for the roles of corporate boards in the governance of corporations. As stated by Gedajlovic (1993:53): “The executive (and non-executive directors, eds.) must balance the pluralistic claims of those with a vested interest in the corporation in order to secure their required contribution.” Seen from a stakeholder perspective of corporate governance, these vested interests are not necessarily limited to those of shareholders.
Shareholder and Stakeholder Perspectives of Corporate Governance
Source: based on Gedajlovic (1993:53-54).
When these competing perspectives are taken into consideration, a clear answer to what the roles of corporate directors should be in the field of corporate governance is not easily given. The roles of corporate boards may ultimately depend on specific circumstances and the way stakeholders and directors themselves define the responsibilities of boards of directors and those of affiliated corporations. Notwithstanding, this indicates that definitions of corporate governance and definitions of the roles of corporate boards can move on a continuum based on a purely economic shareholder view to a purely stakeholder view of corporate governance (see also figure 1.1).
|1.2 The Organization of Corporate Boards of Directors Next→|
- 1.7 Conclusion
- 1.6 The Research Approach of This Study
- 1.5 The Organization of This Study
- 1.4 Research Questions on the Formal Independence of Corporate Board Models
- 1.3 Alternative Approaches to the Formal Independence of Corporate Boards of Directors
- 1.2 The Organization of Corporate Boards of Directors