Corporate Governance: Its scope, concerns and theories

• Date: 01 October 1997
• Author: Shann Turnbull
• Published date: 01 October 1997
• DOI: http://doi.org/10.1111/1467-8683.00061

Corporate Governance: Its scope,

concerns and theories

Shann Turnbull

This paper outlines the conceptual, cultural, contextual and disciplinary scope of the

rapidly evolving topic of corporate governance. As a basis for improving the rigour of

research and analysis, some definitions are suggested. Reasons for the diversity of view-

points and concerns are considered. To provide an orientation for new scholars and those

from specialised disciplines, recent surveys of corporate governance are reviewed from their

ethnocentric, contextual, and intellectual contingencies. The prospects of developing the

topic as a "science of organization" are considered along with areas for future research.

Key words: agency, control, corporations, culture, cybernetics, directors, firm, financ e,

governance, information theory, institutions, ownership, political, power, regulation, self-

regulation, self-governance, shareholders, stakeholders, stewardship, theory of the firm,

transaction costs.

Introduction

The purpose of this paper is to provide

an orientation in corporate governance

for both new scholars and specialists in

disciplines which intersect with the topic.

These disciplines include micro-economics,

organizational economics, organizational

theory, information theory, law, accounting,

finance, management, psychology, sociology

and politics. Each may view corporate

governance in a different way, somewhat

like the apocryphal group of blind people

trying to identify an elephant through touch

by each describing quite different parts of

the animal.

To encompass most perspectives, an in-

clusive definition of corporate governance

is introduced in the next section to include

all types of firms and other institutional

arrangements involved in productive ac-

tivities. The third section considers how

some key words are used in different ways

within, and between, disciplines. To assist

in integrating the knowledge of the various

disciplines, some common language is

suggested.

A diversity of agents is shown to be in-

volved in influencing, controlling, regulating

and managing firms, productive networks

and associations. Again, an inclusive ap-

proach is used to encompass the diversity

of ways in which leading workers in the

field define the topic of corporate governance.

The next section considers the origins of

the diverse viewpoints. The various per-

spectives are related to the discipline and

professional affiliati ons of various writers

in the field as well as to their cultural and

contextual situations. We then consider how

well theories of the firm fit these various

contingencies and how governance practices

differ between cultures.

Two surveys of corporate governance

undertaken in 1996 by US scholars are then

reviewed from the perspectives developed

by the paper. One survey undertaken by

the National Bureau of Economic Research

comprehensively reviews the extensive, but

narrow, financial perspective used by econo-

mists who base much of their analysis on

transaction costs and agency theory. The

other survey prepared for the OECD, pre-

sents four viewpoints. These are: (i) a

Volume 5 Number 4 October 1997 #Blackwell Publishers Ltd 1997. 108 Cowley Road, Oxford OX4 1JF, UK

and 350 Main Street, Malden, MA 02148, USA.

CORPORATE GOVERNANCE180

simple finance model, (ii) stewardship theory,

(iii) stakeholder theory and (iv) the politics

of shareholder control at the micro level of

the firm. This fourth perspective is reviewed

from a macro political context which includes

an historical outline of how state and federal

governments in the US concerned themselves

with the control and regulation of companies.

The section concludes by considering some

emerging political issues raised by Monks

(1996) in the governance of US firms and the

national economy.

Three additional approaches are suggested

for analysing how productive activities are

governed by social institutions. These are

based on analysing respectively: (i) culture;

(ii) power and (iii) their information and

control (i.e. cybernetic) architecture.

Research opportunities are iden tified in

such topics as: (i) limited life enterprises;

(ii) worker ownership and control; (iii) com-

pound boards with two, three and more tiers;

(iv) information theory; (v) productive net-

works; (vi) holonic structures; and (vii) self-

regulation and self-governance. Concluding

remarks follow.

Definitions

Corporate governance describes all the influ-

ences affecting the institutional processes,

including those for appointing the controllers

and/or regulators, involved in organizing the

production and sale of goods and services.

Described in this way, corporate governance

includes all types of firms whether or not they

are incorporated under civil law.

Firms can exist as either common or civil

law companies, partnerships, joint ventures,

limited liability partnerships, co-operatives,

mutual associations, building societies,

friendly societies, trading trusts, etc. Fama &

Jensen (1983b) even considered churches.

However, organizations like a church, not

engaged in the production and sale of goods

and services, do not meet the generally

accepted description of a firm.

Firms may be publicly traded, privately

held, for profit, or not-for-profit. Much of the

literature on corporate governance implicitly

assumes that only publicly traded firms are

the subject of analysis (e.g. Blair 1995:3). This

would limit the topic to less than 40,000 firms

world-wide and involve only a fraction of all

economic activity in even the most advanced

market societies (FIBV 1993; Economist

1995:116).

Restricting the study of corporate govern-

ance to publicly traded corporations would

limit investigation into the most efficient

institutional arrangements for un dertaking

productive activities. It may well turn out

that privately held entities could provide the

most efficacious form of enterprise. A possi-

bility supported by Jensen's (1993:869) view

of `a proven model of governance structure'

discussed later, and the outstanding record of

firms found around the town of Mondrago

Ân

in Spain (Turnbull 1995d).

If firms include all social institutions

engaged in the production and sale of goods

and services, then both public and private

sector organizations such as schools, hospi-

tals, clubs and societies, need to be included.

With firms defined in this way, the scope of

corporate governance includes nearly all the

economic activity of a nation. It was by asking

the question, `Why is not all production

carried on by one big firm?' that Coase

(1937) laid the foundations for developing a

`theory of the firm'.

Coase considered the existence of a `master

and servant relationship', or an `employer

and employee relationship' as a defining

feature of a firm. However, this condition

would exclude activities carried out by

teams, partners, joint venturers, strategic

alliances, associations and networks. This

led Alchian & Demsetz (1972) to ask the

question `what is meant by a firm?' They

concluded that `The term firm as commonly

used is so turgid of meaning that we can not

hope to explain every entity to which the

name is attached in common or even tech-

nical literature'.

However, Coase (1937) also stated: `the

distinguishing mark of the firm is the

supersession of the price mechanism'. This

definition avoids the problem of identify-

ing the institutional form of a firm. It does

not necessarily avoid the problem of ident-

ifying the boundaries of a firm (Barney &

Ouchi 1986:78). The boundary problem

emerges when analysing joint ventures,

strategic alliances, associations and networks

which some scholars treat as `economic

entities which have a coherence, a struc-

ture, and an individuality of their own'

(Mathews 1996b:116). Ambiguous bound-

aries are found with Mondrago

Ânfirms,

their relationship groups and their supra-

organizational systems, as pointed out by

Turnbull (1995d).

The need to identify firms and their

boundaries may not be required to develop

the most efficacious institutional arrange-

ments for organizing productive activities in

society. The problem of defining firms or their

boundaries is avoided by defining corporate

governance as proposed at the beginning of

this section.

SCHOLARLY RESEARCH AND THEORY PAPERS 181

#Blackwell Publishers Ltd 1997 Volume 5 Number 4 October 1997