The Implications Of The New Governance For Corporate Governance Introduction - Corporate Governance and Business Ethics

In the development called “the new governance”, corporations, especially multinational or transnational corporations, have become politically engaged and have assumed new functions that have traditionally belonged to government’s alone.1 According to Scherer et al. (2006), the task of creating and implementing rules in a globalizes world is “no longer a task managed by the state alone”. Rather, multinational corporations, along with governments and other civil society groups, participate “in the formulation and implementation of rules in policy areas that were once the sole responsibility of the state”. In addition to this rule-making function, corporations, it is claimed, serve another role traditionally reserved for government, namely as a provider or guarantor of the “triad” of civil, political, and social rights. Because the activities of making rules and administering rights involve close collaboration with many groups in society and also raise issues of legitimacy, Scherer and Palazzo advocate a “communicative framework” for the new governance based on Habermas’s idea of deliberative democracy (Palazzo and Scherer 2006; Scherer and Palazzo 2007).

Closely related, if not identical, to this concept of new governance as formulated by Scherer, Palazzo, and Baumann is the thesis of Matten, Crane, and Moon that the corporate role in society can now be characterized as “corporate citizenship” (Moon et al. 2005; Matten and Crane 2005; Matten et al. 2003; Moon 2002), and as the “republican concept” of corporate ethics presented by Steinmann and Löhr (1996). According to Moon et al. (2005), the activities of corporations “can be understood as being in some meaningful way similar to that of citizens or citizenship”. This citizenship role filled by corporations by, first, “administering citizenship rights within the normal operation of a firm”, and, second, partnering with governments and non-governmental organizations in “contributing to societal governance outside the firm” (Moon et al. 2005). For Steinmann and Löhr, a republican conception of the corporation or business ethics is necessary because business organizations have a responsibility not only to engage in economic production but also to help secure peace in society by facilitating processes of conflict resolution. Corporations thus have a “double responsibility” for “both economics and ethics” (Steinmann and Löhr 1996,). In accepting this responsibility, corporations assume a politicized role usually reserved for government.

Consequently, they claim, One question that arises about the concept of new governance or, alternatively, corporate citizenship or republican ethics is its bearing on corporate governance. The governance referenced in the phrase “new governance” is not corporate governance but the process of decision making in the social and political order, which has traditionally been a function of government and is now performed with the active involvement of private parties, including corporations (Cutler 2003; Hall and Biersteker 2002; Reinicke 1998; Pattberg 2005). Corporate governance, by contrast, is the set of legal rules which assigns the decision-making or control rights in business organizations and specifies the processes and procedures for exercising these rights. Assuming that present-day corporations, especially large firms that operate globally, have changed in the ways described by these scholars of the new governance, need the governance systems for corporations that prevail in the world today be altered in any way? In short, does the new governance have any implications for corporate governance?

This question is raised but not answered in one brief passage by Scherer et al. (2006):

This suggestion of an affirmative answer is vague, both about the “consequences” that follow from this new role aside from “opening up their internal structures” and enabling more democratic “public control”, and about the reasons for these changes that make it “appropriate” to argue for them. Since systems of corporate governance are derived from some theory of the firm, the question of the implications of new governance for corporate governance extends to the need for some change in the theory of the firm, which is a question that is also raised, but not answered, by Scherer et al. (2006). None of the other advocates of the new governance or corporate citizenship or republican ethics discusses the possible implications of this development for either corporate governance or the theory of the firm.

The aim of this article is to examine the question of what implications, if any, the new governance has for corporate governance and, by extension, the theory of the firm. Is the new governance compatible with traditional systems of corporate governance, which are based on the standard economic theory of the firm, or are some changes required? And if some changes are required, what are these changes and, more importantly, why are they required? The main conclusion of this examination is that, yes, the new governance has some implications for corporate governance and the theory of the firm. However, these implications are due primarily to broader changes in the competitive environment of present-day corporations of which the features cited in the new governance literature are only a relatively small part. One value of this article, then, aside from addressing the question of the implication for corporate governance, is to place the new governance in a larger context and identify some additional forces at work in its development.

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