The Challenge of the New Governance - Corporate Governance and Business Ethics

The world of the new governance, in which corporations participate in rule making and the administration of rights, challenges and is challenged by this traditional account of corporate governance, both from an explanatory and normative perspective. A key feature of the traditional account of corporate governance, which is supported by the underlying economic theory of the firm, is that corporations engage in private, self-interested economic transactions while government attends to its public role of rule making and the administration of rights. Advocates of the new governance, as well of corporate citizenship and republican ethics, assume the effectiveness and legitimacy of the market mechanism, and so there is a need for some explanation of why these new corporate roles should arise in a competitive market if, indeed, they do.

The only explanation offered by advocates of the new governance is that corporations have taken on the tasks of rule making and administering rights in situations where the government has been ineffective because it lacks either the power or the ability to act effectively. However, the existence of a n ed does not explain why corporations have moved to fill it. As van Oosterhout observes, new governance scholars offer no plausible reasons why corporations would be efficient rule makers or administrators of right or, m ore important, why they would take up these responsibilities in the first place (van Oosterhout 2005).

He writes, Missing from the discussion of the new governance, then, is any explanation of how the new roles that corporations have allegedly undertaken could possibly be efficient, so that these responsibilities would be voluntarily undertaken by corporations or imposed on corporations by a state government committed to the pursuit of efficiency or any other values. Beyond this problem, the account of the new governance does not provide any well-articulated theory of the firm that would support these roles for corporations.

Explanation aside, the normative justification for corporations as private actors to undertake these roles is questionable. As a consequence, a problem of legitimacy arises that is examined at length by Palazzo and Scherer (2006). They find a solution for this problem by holding corporations to stricter democratic accountability in a “communication-based approach to political theory” that involves “a continuous process of deliberative discourse” (Palazzo and Scherer 2006), following Habermas. However, the very existence of a “problem” with legitimacy indicates that the new roles of corporations cannot be understood within the more conventional framework of corporations as economic actors in competitive markets. That there should be a problem with legitimacy is itself a problem with the new governance. The standard view of firms as private economic institutions operating in a market is too fundamental to both economics and ethics to give up easily, merely to solve a normative problem about legitimacy, especially when this does nothing to solve the more fundamental problem of explanation.


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