New Foundations and the New Governance - Corporate Governance and Business Ethics

It has been established so far that the changed competitive environment of present-day corporations has led them to adopt strategies and structures that challenge the traditional foundations of corporate governance and produce a need to search for new foundations. Left unexamined has been the connection, if any, between this changed competitive environment along with its consequences and the developments that constitute the new governance or corporate citizenship or republican ethics. The development of the new governance is explained by scholars as due primarily to the inability or unwillingness of governments to discharge their traditional roles and responsibility, thus leading corporations to step into the breach. Left explained, however, is the problem, raised by van Oosterhout, of why corporations would do this. What’s in it for them?

The characteristic features of today’s corporate strategies and structures the breakup of vertically integrated, hierarchical firms that rely on fixed tangible assets, economies of scale, and market share and the substitution of looser forms of collaboration in networks focused on innovation and quality can also explain the new governance only if there are some links between the new foundations and the new governance. If there are such links, then it can be shown that the new governance is also an efficient adaptation to a changed competitive environment. This outcome would reconcile the new governance with traditional assumptions about the economic nature of corporations, the legitimacy of shareholder primacy, and the profit motive, which are assumptions too fundamental to be discarded lightly.

The new governance has two defining features that, at first glance, appear to be unrelated, namely participation in rule making, or “democratic will formation” in Habermasian terms, and the administration of civil, political, and social rights. The former feature of participation in rule making is alleged to be the result of corporations operating in a global environment, while reasons for the latter feature are largely unexplained in the literature. However, globalization is an incomplete explanation at best because there is no reason why the traditional vertically integrated, asset-intensive firm seeking economies of scale and market share could not operate globally in a traditionally market-based manner. Globalization alone cannot explain why such corporations could not operate efficiently in markets without getting involved in the kind of non-market collaborative decision making and issue management that constitutes the new governance.

To understand the connection between globalization and the new governance, we need to consider what driving globalization is. It is driven, in part, by such standard economic factors as the search for cheaper, more secure resources, such as labor, commodities, and capital, and for larger markets, which fit with the strategy and structure of the traditional firm. However, other drivers of globalization are the same factors that have led to the changed strategies and structures that characterize present-day corporations. Specifically, the need to innovate with its increasing reliance on human capital has led companies to outsource not merely to use cheaper labor in contract factories, for example, but also to tap creative talent wherever it resides. Furthermore, innovation requires strategic alliances with companies and NGO's that possess different core competencies and capabilities. These alliances take the form of networks of relationships rather than mere market transactions. Innovation also raises social and regulatory issues that would occur even without globalization and inadequate governments and that would attract the concern of other participants in society, including NGO's.

The argument here is that many of the features of today’s competitive environment that require corporations to become more political and to engage in public decision making are not distinctive of globalization per se but reflect the shift from the traditional vertically integrated, asset-intensive firm to less hierarchical, relationship-based networks. This shift is itself a driver of a globalize economy in which new strategic opportunities are to be found. Thus, globalization and the new governance are both the consequences of a more fundamental and profound change in the competitive environment of business. One does not cause the other, but they are, instead, the consequences of the same deeper, underlying causes.

Moreover, the shift from transactions to relationships, from market-based activity to networks, has the effect of making the returns that people and organizations receive from participating in the “extended enterprise” (to use the phrase of Post, Preston, and Sacs) a matter to be determined not by the market prices of their inputs in explicit contracts but by implicit contracts negotiated in a non-market, public arena. That is, the distribution of the wealth created by joint production in relationship-based networks is no longer simply a matter for the market to determine; rather, this distribution becomes contestable as a matter of public decision making, in which corporations and other constituencies collaborate.

Furthermore, the fact that this return depends on such decision making makes these constituencies residual risk bearers in that the return is not fixed by the market but is variable, depending on firm performance. That is, the people and organizations that participate in a corporation’s networks of relationships may receive more or less in return, with the amount to be determined, in part, by the success of the collaboration. This argument contends, then, that in the new competitive environment, other constituencies are residual risk bearers who are affected by corporate decision making and so demand to participate in it. This participation results mainly in implicit, rather than explicit, contracts. Once again, this outcome is not a consequence of globalization but is instead caused by changes in the strategy and structure of present-day corporations that is also itself a driver of globalization.

The same factors that drive both globalization and the increasing politicization of the corporation also explain, to some extent, the new governance role of administering rights. In traditional corporate governance, the distribution of the wealth created by corporations – as well as the costs or burdens is determined separately by the market, in the form of the price of each group’s inputs, and by government. Thus, there are two distribution mechanisms, each with its own separate domain. In consequence, the goods and services that accrue to individuals in society result from their separate roles as economic actors in a market and as citizens of a state. However, in the new competitive environment, the market no longer plays this distributive role to the same extent, and more goods and services become contestable in the public arena. Insofar as these goods and services are viewed as rights, their administration is no longer a matter purely for government but for corporate decision making as well and not merely because of the inability of governments to act but because the decisions necessarily involve corporations. Because non-shareholder corporate constituencies are profoundly affected by these decisions, and also because corporate strategies and forms of organization require wide-based collaboration, the corporation becomes involved in the administration of rights.

These arguments support the conclusion that the main characteristics or defining features of the new governance namely, participating in rule making and administering rights are not due to globalization alone but are the consequence of deeper, more fundamental changes in the competitive environment of corporations, which have led to profound changes in corporate strategy and organization and are themselves among the drivers of globalization. Thus, both the new foundations and the new governance are linked as consequences of this changed competitive environment.

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