Governance Inc.

The use of the nomer ‘corporate’ is hardly an issue in contemporary scholarship on corporate governance. I will argue that this nomer is important for two main reasons. First, the corporate form distinguishes itself from any other form of business representation. In this sense, it is important to know exactly how this form is different to understand how conceptions of ‘corporate governance’ relate to different forms of representation. Second, it is my contention that the use of a particular understanding of incorporation directly informs the concept of internal governance in terms of constituency, structure, ownership and the locus of corporate agency. It is in this sense that I argue that the identification of corporate constituencies and the allocation of agency and ownership is a precondition of business ethics. With this aim in mind, I explore the governance in corporations as the result of the legal understanding of incorporation and the separate legal entity. I explore two historical positions from which five legal positions on the separate legal entity can be derived. These five positions provide reference points for the attribution of ownership and agency between the separate legal entity and the aggregation of individuals that together make up the corporation. Incorporation, as the legal act that constitutes the corporation, can then be shown to adopt multiple and mutually exclusive positions. These positions are central to the debate on the respective claims to agency and ownership between the separate legal entity and the aggregation of individuals. I then end the article by arguing that all concepts of incorporation create legal and economic issues regarding the allocation of ownership and agency, which makes their understanding and the choice behind them important for theories of governance.     

Board Team Leadership Revisited: A Conceptual Model of Shared Leadership in the Boardroom

In the slipstream of several large-scale corporate scandals, the board of directors has gained a pivotal position in the corporate governance debate. However, due to an overreliance on particular methodological (i.e. input–output studies) and theoretical (i.e. agency theory) research fortresses in past board research, academic knowledge concerning how this important governance mechanism actually operates and functions remains relatively limited. This theoretical paper aims to contribute to the promising stream of research which focuses on behavioural perspectives and processes within the corporate board, by delving into one of the research areas perhaps plagued most by these predominant approaches: board leadership. In adopting a team perspective on the board of directors our study goes beyond traditional board leadership research, which has turned a blind eye on actual leadership dynamics, by examining leadership processes and behaviours inside the board team. Specifically, we develop a conceptual framework addressing a novel and ethical approach to team leadership within the board, i.e. shared leadership, which has previously been demonstrated to result in performance benefits in various other team settings.     

The Agency Problems Embedded in Firm’s Equity Investment

We find that agency problems are embedded in firm’s excess and abnormal equity investments that are mainly dictated by controlling shareholder’s motives and ethical choices manifested in ownership and board structure. The excess equity investment is gauged with respect to industry average. The abnormal equity investment is specifically referred to the number of nominal investment companies that are fully controlled by the controlling owners while subject to little governance. Our empirical evidences of 345 Taiwanese non-financial listed firms show that firm’s excess and abnormal equity investments are negatively correlated with controlling shareholder’s cash flow rights while are positively correlated with the control–cash flow deviation, and board affiliation. The results are supportive of the positive incentive hypothesis and the negative entrenchment hypothesis put forth by La Porta et al. (2002, Journal of Finance 57, 1147–1171) and Claessen et al. (2002, Journal of Finance 57, 2741–2742). The negative relation between equity investment and firm’s value further supports the agency postulation that corporate excess and abnormal equity investments represent a leeway for controlling shareholder to exploit wealth of minority shareholders. This study potentially contributes to the literature of business ethics by portraying an empirically testable linkage from controlling owner’s ethical choices to his actions and therefore firm’s value. Yin-Hua Yeh, Ph.D., is Professor and Director of the Graduate Institute of Finance at Fu-Jen Catholic University (FJU) in Taiwan. He is also the Director of the Center for Corporate Governance and Business Ethics at FJU. His main research and teaching areas are corporate governance, corporate finance, and merger and acquisition. Tsun-Siou Lee, Ph.D., is Professor of Finance at National Taiwan University. His main research and teaching areas are corporate governance, futures and options, and financial innovation. Pei-Gi Shu, Ph.D., is Professor of Business Administration at Fu-Jen Catholic University in Taiwan. He is also the Vice Dean of Management College at FJU. His main research and teaching areas are mutual funds and behavioral finance.     

Recognition Based upon the Vitality Criterion: A Key to Sustainable Economic Success

Recognition is a basic precondition of participation. This article applies the dimension of recognition to business ethics. A case is made for normative stakeholder management as a voluntary commitment at the level of corporate leadership; this also meets management’s strategic demands. A vitality criterion is offered as a heuristic instrument, suggesting that any operation should be avoided which would violate the legitimate interests of stakeholders. For this reason, the recognition of mutually-conditioned stakeholder claims is understood as the central management idea.     

Stock Option Repricing: Heads I Win, Tails You Lose

Recent scandals at Enron, WorldCom and Global Crossing have put the ethical spotlight on corporate malfeasance as never before. However, these are the situations in which management knew that they made the wrong choice. As professor Joseph Badaracco of Harvard Business School points out, the real ethical dilemmas arise when people must choose between right and right — where both choices can be justified, yet one must be chosen over the other. Whether or not to reprice stock options represents one such ethical dilemma. Repricing can help exodus of talented employees and motivate them to improve firm performance. However, it alienates shareholders and other workers of the company who are left unprotected from the adverse economic consequences of a stock price decline.In this paper we examine the ethics and the economics of stock option repricing. We find that repricing runs counter to two key tenets of business ethics — distributive justice and ordinary decency. To examine the economics of repricing, we draw upon agency theory to identify situations where repricing has the potential to benefit shareholders. However, a survey of empirical research reveals that these benefits do not translate into reality. Repricing does not improve employee retention or firm performance. In addition, managers benefit by opportunistically timing the repricing. Due to weaknesses in corporate governance such as lack of independence and conflicts of interest, the current repricing practice seems to be at odds with the objective of shareholder wealth maximization, and at a more fundamental level, a violation of board's fiduciary duty to shareholders. We offer suggestions that mitigate the ethically undesirable effects of repricing in the wider context of prevailing corporate governance and regulatory environment. We believe that these suggestions, if properly implemented, can transform repricing from a greed-inspired evil to a valuable compensation tool to retain employees, boost their morale, and enhance stockholder wealth.     

Agency Theory,Reasoning and Culture at Enron: In Search of a Solution

Applying evidence from recently available public information on Enron, I defined Enron’s culture as one rooted in agency theory by asserting that Enron’s members were predominantly agency-reasoning individuals. I then identified conditions present at Enron’s collapse: a strong agency culture with collectively non-compliant norms, a munificent rare-failure environment, and new hires with little business ethics training. Turning to four possible antidotes (selection, objectivist integrity, integrity capacity, and stewardship reasoning) to an agency culture under these conditions, I argued that the currently available ethics literature would have made little difference toward averting Enron’s collapse if any of the recommendations from the relevant ethics literature had been implemented. I conclude by identifying new directions for business ethics literature in order to make it more implementable under the conditions identified at Enron. Essentially, we need a way to clearly determine (1) the difference between connivance and commitment, (2) what is meant by balance with regard to the multiple dimensions of ethics and legal theories, and (3) the proper balance between agency and stewardship reasoning. Brian E. Kulik is a Ph.D. candidate in Management at Washington State University’s School of Business. His work focuses on the prevention of corporate corruption, corporate governance and ethics, teamwork and diversity, and research methods. His research to date has appeared in the Western and National Academy of Management conference proceedings and the journal Organizational Analysis. He earned M.S. degrees from Washington State University and The University of Cincinnati, and M.B.A. from The University of Denver.     

The Moderating Effects from Corporate Governance Characteristics on the Relationship Between Available Slack and Community-Based Firm Performance

Recent perspectives on community investments suggest that they are opportunities for firms to create value for shareholders and other stakeholders. However, many corporate managers are still influenced by a widely held belief that such investments erode profits and are therefore unjustifiable from an agency perspective. In this paper, we refine and test theory regarding countervailing forces that influence community-based firm performance. We hypothesize that high levels of available slack will be associated with higher community-based performance, but that this relationship will be moderated by three important governance variables: board independence, investment fund ownership, and CEO ownership. We find support for our hypotheses in longitudinal study of a large sample of U.S. corporations.     

Stakeholder Learning Dialogues: How to Preserve Ethical Responsibility in Networks

The shift in corporate strategy, from vertical integration to strategic alliances, has developed hand in hand with the evolution of organizational structure, from the vertically integrated firm to the network organization. The result has been the elimination of boundaries, more flexible organizations, and a greater interaction among individuals and organizations. On the negative side, the specialization of firms on single areas of competence has resulted in the disaggregation of the value chain and in the disaggregation of ethical and legal responsibility. To illustrate this point, the paper considers some cases, such as the case of the "beer girls" of Southeast Asia, who are used unethically by distributors to sell beer and liquor. To deal with the problem of the disaggregation of ethical responsibility, managers can use organizational culture and ethical values to control the performance of employees and of other organizations. Contemporary developments in business ethics also offer tools for dealing with the problem. For example, "global corporate citizenship," integrated social contracting theory, and stakeholder learning dialogues provide ways of integrating the interests of all stakeholders. The task is now to use these new approaches to create a governance process that incorporates the voices of all stakeholders, especially the voices of those stakeholders that have legitimate and urgent moral claims, but lack the power to establish those claims.     

The Causal Effect of Corporate Governance on Corporate Social Responsibility

In this article, we examine the empirical association between corporate governance (CG) and corporate social responsibility (CSR) engagement by investigating their causal effects. Employing a large and extensive US sample, we first find that while the lag of CSR does not affect CG variables, the lag of CG variables positively affects firms’ CSR engagement, after controlling for various firm characteristics. In addition, to examine the relative importance of stakeholder theory and agency theory regarding the associations among CSR, CG, and corporate financial performance (CFP), we also examine the relation between CSR and CFP. After correcting for endogeneity bias, our results show that CSR engagement positively influences CFP, supporting the conflict-resolution hypothesis based on stakeholder theory, but not the CSR overinvestment argument based on agency theory. Furthermore, firms’ CSR engagement with the community, environment, diversity, and employees plays a significantly positive role in enhancing CFP.     

The Impact of Corporate Social Responsibility Disclosure on Financial Performance: Evidence from the GCC Islamic Banking Sector

We examine corporate governance diversity within a Coasian framework of stakeholder rights, where the central role of governance is to ensure that necessary firm-specific investments are made. This Coasian perspective on stakeholder theory offers a unifying framework towards a global theory of comparative corporate governance, bridging the gap between economic theories of the firm and stakeholder theory, also offering an economics-based alternative to agency theory that explicitly accounts for stakeholder rights. The Coasian perspective encompasses a diversity of corporate governance systems, but does not imply a unique global corporate governance benchmark. We posit that governance is firm dependent and endogenous conditional on the constraints imposed by a national governance system; consequently, there should be no systematic relationship between governance and firm performance once the national constraints are controlled for. However, the same national corporate governance system constraints confer comparative advantages to firms whose efficient levels of firm-specific investments are favored.     

Private Firms and Corporate Governance: An Integrated Economic and Management Perspective

This article provides a definition of corporate␣governance and highlights the challenges in adapting understanding of governance to the privately-held firm. We emphasize the need to develop the scope of governance in privately-held firms beyond the traditional agency theory focus in the financial economics literature relating to large publicly-listed corporations. There is a need to draw on and integrate an array of theoretical perspectives from both economics and other social science disciplines as well. We present a schematic model of corporate governance which places the contributions presented in the special issue in context and which serves as a guide to highlighting gaps in the research base. We review the principal issues relating to corporate governance in privately-held firms which relate to: governance in different organizational contexts (institutional context; the industrial sector within which the firm finds itself, the ownership context of the firm, and the stage within the firm’s life-cycle); the scope of corporate governance; and other internal governance mechanisms to be considered We identify areas for further research on corporate governance in privately-held firms with respect to processes of governance, organizational contexts, assumptions about the owners, executive remuneration, financial reporting, the nature of the dependent variable relating to the expected outcome of different approaches to governance and various methodological issues. We suggest a need to develop governance codes for privately-held firms that are flexible enough to take account of the different types of governance needs of firms at different stages in their life-cycle.      

Inside Agency: The Rise and Fall of Nortel

By employing the theoretical template provided by agency theory, this article contributes a detailed clinical analysis of a large multinational Canada-headquartered telecommunications company, Nortel. Our analysis reveals a twenty-first century norm of usual suspects: a CEO whose compensation is well above those of his peers, a dysfunctional board of directors, acts of income smoothing to preserve the confidence of volatile investors, and revelations of financial irregularities followed by a downfall. In many ways, the spectacular rise and – sudden – fall of Nortel illustrates excesses of actors within, and contradictions of the system of corporate governance implied by the agency model. Furthermore, this case illustrates limitations of the agency framework in complex situations with short-term oriented investors.     

What Managers Could See in the Philosophical Block of “Free Will”?

Business ethics’ theories have come under a lot of criticism lately. The problem has been the lack of a philosophical base or the inadequate implementation of it. We are trying to solve this problem by examining the roots of ethics and then applying it to the business environment. The root that has been undeservedly overlooked has been the concept of free will, the oldest philosophical problem on which every ethics theory lies. We have chosen two theories that we think would be the best base for business ethics. We will shortly present the others. Since free will presents the core of business ethics, business ethicists must first agree on which theory to implement. Aristotle’s and Aquinas’ theory of free will best amplify the core of economic theory, because it gives reason a central and most important role in the theory. The concept of free will is mainly philosophical as is business ethics so the article follows this tradition, but we tried to give business examples where possible. We do not give a final conclusion because it should be reached by debate and mutual agreement between business ethicists. Matej Drascek is presently a graduate student at University of Ljubljana, Faculty of Social Studies. His research interests include: corporate social responsibility, stakeholder theory and business ethics. Stane Maticic got his Phd in Theology at University of Lateran, Rome. He is presently a priest at the Archbishopric of Ljubljana. His research interests include: ethics, symbolism and theology.     

Concepts and Working Instruments for Corporate Governance

Enterprises seem to entirely operate on their management. But behind the scenes directors play a very important role. On a strategic level (in the long term) they will determine the direction of the company.Even though on the level of daily management a great deal of quality instruments and control systems exist, this is not the case on the highest level, the board. It is in this specific area that the idea of corporate governance must be situated.In 2000 the Association of Christian Employers and Executives in Flanders (VKW) facilitated the formation of a consultation committee consisting of leading employers and business executives, having the task to translate this idea of corporate governance into useful working instruments. The author of this paper was the secretary to this consultation committee.One of the main questions in this area considers the ethics of the board. The other way around corporate governance is a very important instrument realising more responsible business, because it depends on the specific business model in the board and the firm.The first results were presented in February 2001. In February 2002 a first update was published, with some new insights, information and working instruments.     

Leading by Example: Values-Based Strategy to Instill Ethical Conduct

Years of research clearly shows that relying on traditional organizational power bases is not effective when companies want to promote business ethics and performance. It is not only that the use of legitimate power to establish ethics codes and coercive power to punish employees who do not comply does not work; this study—based on a multi-method research approach in the retail industry—indicates that the classic iron fist leads to unethical business values and lower service performance. But there is a light at the end of the tunnel for forward-looking managers. The ethical attitudes and behaviors of employees within international organizations is a dynamic variable that is possible to change by the use of values-based leadership. Our extensive study of a large grocery store chain owned by a multinational corporation indicates that managers who lead by example will boost team values and commitment.     

A Chinese Perspective: Business Ethics in China Now and in the Future

China now manufactures or assembles over 50% of the world’s products. However, the world has been reeling from daily accounts of defective “Made in China” products. China has been at the forefront of growing concern, not only about its products and enterprises, but also about its business ethics. This article analyzes recent events connected with the Made in China label from the perspective of evolving Chinese business ethics. Part 1 analyzes three of these events. Part 2 details and analyzes the state of business ethics in China today. Part 3 concludes by exploring the future of business ethics in China. The main conclusion is that business ethics in China faces two kinds of ethical challenges: how to restrict the lawless in as short a period of time as possible and how to protect and advance the interests of employees, investors, and the public through corporate management and public administration.     

Erratum to: Ethics,Diversity Management,and Financial Reporting Quality

This article proposes and empirically tests a theoretical framework incorporating Reidenbach and Robin’s (J Bus Ethics 10(4):273–284, 1991) conceptual model of corporate moral development. The framework is used to examine the relation between governance and business ethics, as proxied by diversity management (DM), and financial reporting quality, as proxied by the magnitude of earnings management (EM). The level of DM and governance quality are measured in accordance with the ratings of Jantzi Research (JR), a leading provider of social and governance research for institutional investors. This DM score is part of an index developed by JR that investment managers use to integrate DM criteria into their investment decisions. As expected, a negative relation between corporate DM development and financial reporting quality is found while controlling for other factors known in the literatures on governance and accounting choices to affect earnings quality. Despite some caveats presented in conclusion, this study contributes to the ethics, governance, and financial reporting literatures by studying the dynamics between governance and ethics in the prevention of EM.     

The Governance of Corporate Sustainability: Empirical Insights into the Development,Leadership and Implementation of Responsible Business Strategy

This article explores how corporate governance processes and structures are being used in large Australian companies to develop, lead and implement corporate responsibility strategies. It presents an empirical analysis of the governance of sustainability in fifty large listed companies based on each company’s disclosures in annual and sustainability reports. We find that significant progress is being made by large listed Australian companies towards integrating sustainability into core business operations. There is evidence of leadership structures being put in place to ensure that board and senior management are involved in sustainability strategy development and are then incentivised to monitor and ensure implementation of that strategy through financial rewards. There is evidence of a willingness to engage and communicate clearly the results of these strategies to interested stakeholders. Overall, there appears to be a developing acceptance amongst large corporations that efforts towards improved corporate sustainability are not only expected but are of value to the business. We suggest that this is evidence of a managerial shift away from an orthodox shareholder primacy understanding of the corporation towards a more enlightened shareholder value approach, often encompassing a stakeholder-orientated view of business strategy. However, strong underlying tensions remain due to the insistent market emphasis on shareholder value.     

An Analysis of 10 years of Business Ethics Research in Strategic Management Journal: 1996–2005

From a corporate governance perspective, one of the most important jobs of a firm’s top management team is to create and maintain a positive moral environment. Business ethics has long been considered a cornerstone in the field of strategic management and a number of scholars have called for more research in this area over the years. In this paper 658 articles that appeared in Strategic Management Journal over the 10-year period between 1996 and 2005 are reviewed for business ethics focus and content. The results reveal that while business ethics research in Strategic Management Journal is on the rise, the overall focus on this research stream has been limited. The most prominent ethics theme during the review period was environmentalism, accounting for 30% of all ethics articles. Author affiliations, future research directions, and implications are also discussed.     

Monitoring Costs,Managerial Ethics and Corporate Governance: A Modeling Approach

This article evaluates effectiveness and costs of external regulation, in particular the Sarbanes–Oxley Act of 2002 (SOX) in restricting managerial malfeasance and safeguarding shareholder interests. It discusses the role of managerial ethics as an alternative corporate governance mechanism to protect shareholder value. This article builds a mathematical model to illustrate shareholders’ choices of best corporate governance mechanisms, taking into account the influence of managerial ethics, effectiveness and costs of monitoring. We suggest that the best corporate governance design and the optimal monitoring expenses are influenced by managerial types, monitoring efficiency, and effectiveness of ethics education. We conclude that stringent regulation and monitoring may not always enhance shareholder value. When managerial ethics could be improved by ethics education or social norms, ethics education may be a better alternative than stringent regulation.