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Clarke, Dr Andrew --- "Stylized models of corporate governance" [2006] NZYbkNZJur 11; (2006) 9 Yearbook of New Zealand Jurisprudence 160

Last Updated: 22 April 2015

Stylized Models of Corporate Governance

Dr. Andrew Clarke*

i. INTRODUCTION

The contemporary study of corporate governance is focused around the notion of relationships between, and the influence over, certain key drivers. At a basic level, for example, there is a growing recognition that ‘the markets themselves, in particular the international securities markets, increasingly influence company law, national as well as European and international’.¹ This might suggest a simple linearity between markets and the emergent corporate form. The reality is that the study of such relationships and the power-influence binaries are far from static or agreed. Klaus Hopt and Eddie Wymeersch, for example, note that:

The inverse relationship- the La Porta et al thesis that company law is relevant for the capital and financial markets- has been observed and hotly debated, both on an empirical and theoretical level.²

The markets therefore provide another analytical entry point into the examination of corporate and employee governance. A basic categorization of national corporate governance systems based on markets is that of either

‘outsider’ or ‘insider’ systems.³ It provides a useful ‘starting point for the examination of the distinguishing features of the major models’.⁴ The models are based on the ‘significant differences between the corporate ownership structures across jurisdictions’⁵ and ‘has resulted in the evolution of two different financial systems which are referred to as the “insider system” and the “outsider system”’.⁶ This convergence of corporate governance and financial systems reveals the inexact and amorphous nature of the theoretical concepts. The models spring from seeking solutions to the set of ‘problems arising

* Associate Professor, School of Law, University of Canberra, Australia.

1 Klaus J. Hopt and Eddy Wymeersch (eds), Capital Markets and Company Law (2003) Preface.

2 Hopt & Wymeersch, ibid, Preface. See, for example, S Johnston, R La Porta, F Lopez-Silanes and A Shleifer, ‘Tunneling’ in Hopt, Klaus J and Eddy Wymeersch (eds), Capital Markets and Company Law (2003) 611-618.

3 Colin Mayer, ‘Stock-markets, Financial Institutions and Corporate Performance’ in N Dimsdale and M Prevezer (eds.), Capital Markets and Corporate Governance (1994)179-

94.

4 On Kit Tam, The Development of Corporate Governance in China (1999) 25.

5 Low Chee Keong (ed.), Corporate Governance: An Asia Pacific Critique (2002) 4.

6 Low Chee Keong, supra n 5 at 4-5.

from the separation of ownership and control.’⁷ These are agency costs and transactions costs,⁸ and as we shall see, these points overlap. The approach to these issues depends on the system under examination.

Masahiko Aoki summarizes the long battle for supremacy of the two main forms of governance:

For decades, legal and economic scholars, as well as practitioners, have been debating regarding whether corporate governance ought to be, and will be, structured in the sole interests of investors or for a broader range of objectives including public and other stakeholders’ interests. Some of them argue that the presence of different types of corporate governance structure is a sign of inefficient historical legacy and they ought to eventually converge according to the same standard of investor interests. Others argue that such convergence is not desirable or political from ethical, political, historical, and other reasons.⁹

Aoki’s analysis configures the insider and outsider models against one another, and also raises the analysis of Jonathon Charkham.¹⁰ His thesis is that the ongoing tensions, dialogue and disagreement over the choice of models will be a prevailing theme of 21^st century debate in the governance arena.

ii. COMPARING SYSTEMS

Insider Systems

Insider systems are characterized by ‘a high level of ownership concentration, illiquid capital markets and a high degree of cross-shareholding between companies within a corporate group.’¹¹ Such systems ‘tend to be characterized by concentrated ownership or control.’¹² Examples include Germany, Japan and continental Europe.¹³ Such systems are ‘common in continental Europe which exhibits elaborate sets of mandatory rules although its disclosure

7 On Kit Tam, supra n 4 at 25.

8 Ibid.

9 Masahiko Aoki, ‘Institutional Complementarities between Organizational Architecture and

Corporate Governance,’ RIETI Conference on Corporate Governance, January 8-9, 2003,

1. http://www.rieti.go.jp/em/events/03010801/report.html

10 Jonathon Charkham, Keeping Good Governance: A Study of Corporate Governance in Five

Countries (1994).

11 Low Chee Keong, supra n 5 at 5.

12 M Maher & T Andersson, ‘Corporate Governance: Effects on Firm Performance and Economic Growth,’ in McCahery, Joseph A, Piet Moerland, Theo Raaijmakers and Luc Renneboog (eds.), Corporate Governance Regimes: Convergence and Diversity (2002)

386-418, 386.

13 On Kit Tam, supra n 4 at 25.

requirements tend to be less stringent.’¹⁴ Typically, insider based systems do not have ‘an active market for corporate control, which is usually vested with large shareholders, including banks.’¹⁵ Such systems have also been referred to as ‘blockholder systems’¹⁶ in that they typically give rise to concentrated, and inactive, shareholdings in the hands of a few key groups such as founders, family members or banks.

As we shall see in 1.7 below, these systems make extensive formal provision for employees in their corporate governance arrangements.

Outsider systems

In contrast, outsider based systems are reliant on ‘active external markets for corporate control through mergers and takeovers of listed companies.’¹⁷ These systems include many individual investors and institutional investors quite prepared to buy and sell control of firms. They are characterized by ‘wide dispersed ownership.’¹⁸ The market is, as a result, likely to be more volatile and the shareholders will sell their stake in the company, if it is in their interests. The outsider system ‘exhibits widely-dispersed ownership structures, liquid stock markets, low levels of interlocking shareholding between members of the same corporate group and active market for corporate control.’¹⁹ Examples include the US, the UK and Australia where ‘corporate laws tend to be a set of default rules since the financial markets are subject to tight regulation and strict disclosure requirements.’²⁰ These have also been referred to as ‘market systems,’²¹ in contrast to blockholder systems. The range of labels reveals that the stylized systems of governance are still in a fluid, and somewhat embryonic stage.

The picture painted of an outsider system is of a Darwinian environment where the weak firm either implodes or is taken over. This view accords with Roe’s observation that:

14 Low Chee Keong, supra n 5 at 5.

15 On Kit Tam, supra n 4 at 25.

16 William W. Bratton & Joseph McCahery, ‘Comparative Corporate Governance and Barriers to Global Cross Reference,’ in Joseph A. McCahery, Piet Moerland, Theo Raaijmakers and Luc Renneboog (eds), Corporate Governance Regimes: Convergence and Diversity (2002)

23-55, 25.

17 On Kit Tam, supra n 4 at 25.

18 Maher & Andersson, supra n 12 at 386.

19 Low Chee Keong, supra n 5 at 5.

20 Ibid.

21 Bratton & McCahery, supra n 16 at 25.

the American-style public corporation is a fragile contraption, filled with contradictions, easy to destabilize and destroy. Although it dominates American business, due to its counter-balancing ability to agglomerate capital and efficiently spread private risk, it needs multiple preconditions to arise, survive, and prosper.²²

Outsider systems tend to make little or no formal provision for employees in their corporate governance arrangements.

ii. THE PHENOMENON OF AGENCY COSTS

The genesis of the agency costs phenomenon lies in the work of Berle and Means and their ‘classic text’²³ of 1932, The Modern Corporation and Private Property. Their thesis was that:

[O]wnership and control had become separated in America as corporations grew too large and complex to be controlled by the single dominant entrepreneurial families, such as the Rockefellers, Carnegies and Fords, on whom modern American industry was founded.²⁴

In essence, managerialist corporations had replaced entrepreneurial fiefdoms. This separation can be characterized in two ways. First it can viewed as ‘an efficient arrangement for the division of labour between professional managers and investors/risk bearers to create wealth together.’²⁵

Alternatively, the very fact of separation of owner and manager creates issues of distance and potential miscommunication and hence, an agency problem. Treating the separation of ownership and control ‘as a problem to be resolved ... has, however, been the main theme of the corporate governance literature.’²⁶

The shareholders, as principals, are separate from their agents, the managers. There will often be a ‘misalignment of interests’²⁷ between the two groups because of the differing, postmodern perspectives they bring to bear in how the firm operates. Race Mathews notes that ‘the basic agency dilemma’ is a

‘core problem’ ‘because individuals are, by nature, inclined to opportunism

22 Mark J. Roe, Political Determinants of Corporate Governance: Political Context, Corporate

Impact, (2003) 200.

23 David Uren, The Transparent Corporation: Managing Demands for Disclosure (2003)

135.

24 Uren, supra n 23 at 135.

25 On Kit Tam, supra n 4 at 23.

26 Ibid.

27 On Kit Tam, supra n 4 at 25.

and the pursuit of their own self-interest.’²⁸ As John Donahue notes in relation to the agency issue, it marks a ‘difficulty in all but the simplest relationships, of ensuring that the principal is faithfully served, and the agent is fairly compensated.’²⁹ Masahiko Aoki describes the agency cost phenomenon in the following terms:

Agency theory casts the economic interaction of agents (in the generic sense) in a certain domain of the economy as a principal-agent relationship. Then it inquires into what type of self-enforceable (incentive compatible) arrangement can be established as a second-best response to environmental and incentive constraints when information asymmetry exists between the principal and the agent.³⁰

As Aoki notes ‘agency theory provides powerful partial equilibrium analysis of an institution in a particular domain of interaction between the principal and the agent(s), with institutional arrangements in other domains taken as given environments.’³¹ Whilst the theory is useful, its limits are proscribed by the fact that the results of the principal-agent model ‘may be valid only relative to an implicitly assumed institutional environment of the domain.’³²

However, the basis of agency costs will differ depending on the type of corporate governance system under review. As Maher & Andersson note, ‘each country has through time developed a wide variety of mechanisms to overcome the agency problems that arise from the separation of ownership and control.’³³

There is a basic difference between insider and outsider systems in terms of how the agency problem plays out in practice. In outsider systems, ‘the basic conflict of interest is between strong managers and widely dispersed weak shareholders.’³⁴ In contrast, in insider systems ‘the basic conflict is between controlling shareholders (or blockholders) and weak minority shareholders.’³⁵

Maher & Andersson conclude that ‘one of the most striking differences between countries’ corporate governance systems is in the ownership and control of firms, and the identity of controlling shareholders.³⁶

28 Race Matthews, ‘The Mondragon worker co-operatives and their lessons for Australia,’ in Gollan, P & Patmore, G, (eds.), Partnership at Work: the challenge of employee democracy, Labor Essays 2003 (2003) 151-164, 159.

29 John D. Donahue, The Privatisation Decision: Public Ends, Private Means (1989) 38.

30 Masahiko Aoki, Towards a comparative institutional analysis (2001) 18.

31 Aoki, supra n 30 at 18.

32 Ibid.

33 Maher & Andersson, supra n 18 at 386.

34 Ibid.

35 Ibid.

36 Ibid.

Beyond this basic distinction between insider and outsider systems, it is ultimately difficult to quantify the exact function of agency costs and its relationship with other influences, such as, for example, the quality of a nation’s corporate law. As Mark Roe notes, ‘a currently popular academic theory is that the quality of corporate law largely determines whether ownership will separate from control.’³⁷ Whilst:

this theory is quite strong for understanding why ownership separation is difficult to maintain in, say, Russia, the transition economies, and many developing nations, it does less well in explaining weak separation in richer, democratic nations, some of which have good corporate law and several of which would not have had much trouble getting good corporate law if the polity had sought to promote a stock market.³⁸

This paradox means that agency cost theory can provide a useful ‘additional explanation’³⁹ for such separation. As Roe concludes, ‘law might be fine, but if agency costs would be much higher after separation because weak product market competition constrains managers only mildly, the founding owners would be reluctant to push separation.’⁴⁰

Incomplete contracting

As between managers and shareholders there will also be ‘incomplete contracting’⁴¹ in the sense that much of the relationship will be governed by assumptions and implied understandings. The relationship between the two groups has been governed by the articles of association that form a contract between the company and each individual shareholder and between each shareholder inter se. More recently in Australia, the constitution or replaceable rules have taken the place of the articles. Both forms of contract are incomplete; that is, they are not a complete code, but sketch out the basis of good relations between the two. They are generic and provide a starting point only. As Gillian Rose, the philosopher puts it, ‘in professional life, beyond the terms of the contract, people have authority, the power to make one another comply in ways which may be perceived as legitimate or illegitimate.’⁴² Incomplete contracting therefore refers to the gaps in the formal contractual arrangement and refers to all those facets of the relationship that make it work smoothly or make it work at all.

37 Roe, supra n 22 at 142.

38 Ibid.

39 Ibid.

40 Ibid.

41 On Kit Tam, supra n 4 at 25.

42 Gillian Rose, Love’s Work (1995) 54.

Contract, as forming the basis of relationships in wider society, have been highlighted by the US legal philosopher, John Rawls.⁴³ In the seminal work, A Theory of Justice, Rawls links societal justice with the notion of contract. His has been called a theory of ‘contract ethics’⁴⁴ or the ‘social contract model’.⁴⁵

For Rawls, society is just if we associate with one another on the basis of equality. He writes that ‘free and rational persons concerned to further their own interests would accept in an initial position of equality as defining the fundamental terms of their association.’⁴⁶ This basic conception of justice as underpinned by equality, then forms the rationale for law-making and of the institutions that build upon it. As Rawls concludes ‘our social situation is just if it is such that by this sequence of hypothetical agreements we would have contracted into the general system of rules which define it.’⁴⁷ Rawls links the notion of contract theory with rationality. He notes that ‘the merit of contract terminology is that it conveys the idea that principles of justice may be conceived as principles that would be chosen by rational persons, and that in this way conceptions of justice may be explained and justified.’⁴⁸

For present purposes, Rawls’ theory of the basic social contract can be extrapolated to the contract theory that links shareholders and the company, and through it, the managers. The basis of their relationship is the more formalized contract represented by the articles of association or its various replacement versions. Contract links the two groups, and forms the basis for more detailed and complex relationship building. It is nonetheless incomplete, because no contract can ever be a complete code that determines and delineates the exact boundaries of a relationship. The contractual nexus is therefore incomplete.

The contractual relationship between shareholders and the company, and by extension the board, does provide a strong foundation recognized by the common law tradition. Establishing a contract between parties has been the pre-eminent engine for growth in the commercial aspects of the common law for more than eight hundred years.⁴⁹

The situation of shareholders as contractually engaged vis-a-vis the company is in contrast with employees. There is no contractual nexus between owners and employees. Additionally, employees do not enjoy the group contractual rights afforded shareholders by the articles. Whereas the articles are a generic

43 John A. Rawls, Theory of Justice (1972) 11-17.

44 Peter Singer, (ed.), Ethics (1994) 363.

45 Mary Midgley, ‘Duties Concerning Islands’ in Peter Singer (ed.), Ethics (1994) 374-87,

377.

46 Rawls, supra n 43 at 11.

47 Ibid, 12.

48 Ibid, 16.

49 J.H. Baker, An Introduction to English Legal History, (3^rd ed.) (1990).

public document provided to all of the same class of shareholders, employees who are not subject to an industrial award, negotiate their contracts in private, one to one with the company. This style of employment arrangement has been encouraged by the advent of Australian Workplace Agreements (AWAs).⁵⁰ We will examine this phenomenon further in Chapter 6 dealing with Australian employee provision.

The written contract of employment is essentially a private matter between the company and employee. Contract forms the basis of the relationship such that:

the majority of the working population has access to the means of production only through some contractual arrangement with their owners, by means of which the workers promise to obey all orders from management and deliver all products of their labour, receiving for their time or effort only a stipulated wage.⁵¹

Asymmetric information

The agency costs will also be determined by the degree that information is asymmetric as between the managers and the shareholders. The term

‘asymmetric information syndrome’ has been coined by the US economist, Joseph Stiglitz. Stiglitz refers to ‘the differences in information between, say, the worker and his employer, the lender and the borrower, the insurance company and the insured.’⁵² Such asymmetries are ‘pervasive in all economies.’⁵³ The perceived value of this approach is that it provides ‘the foundations for more realistic theories of labour and financial markets.’⁵⁴ This model has been referred to as ‘information economics.’⁵⁵ It sets up a useful dichotomy for investigating the context of employee governance provisions. In basic terms, it points to the inequality between managers who are the repository of much confidential information, and the owners whose access to the same is problematic.

The utility of the division needs to be tempered by corporate realities. For example, if information access is asymmetric as between managers as agents and shareholders as principals, this is more so the case as between managers as senior employees and the rump of general or, by definition, junior employees.

50 Breen Creighton and Andrew Stewart, Labour Law: an Introduction (2000).

51 Paul Singer, ‘Capital and the National State: A Historical Interpretation’ in John Walton

(ed.) Capital and Labour in the Urbanized World (1985) 17-42, 17.

52 Stiglitz, J, Globalization and its Discontents (2002) xi.

53 Ibid.

54 Ibid.

55 Ibid, xii.

We need therefore to be cognizant of the fact that firms, especially large ones, are not simply amorphous entities where the term ‘employee’ has an agreed or undifferentiated status.

There may, of course, be other examples of asymmetric information. For example, as between shareholders:

[I]ndividual shareholders with relatively small holdings have little incentive to gather and bear the relatively fixed costs of collecting information to enable them to monitor and control the behaviour of the board. Alternatively, large shareholders may have sufficient incentives to obtain the information necessary to control management effectively if the benefits of such monitoring outweigh the associated costs.⁵⁶

As David Uren notes, ‘the market is a deep source of information about companies; it is a judge of management’s performance, it dictates the wealth of a company’s shareholders and it sets the company’s cost of capital.’⁵⁷ The problem with this analysis is that the information market does not act evenly as between shareholders. For example, as Uren notes, ‘an emerging trend is for directors, in particular the chairman, to engage directly with institutional shareholders as a means of gaining an independent view of the company, other than that filtered through the chief executive.’⁵⁸ Under this practice, the information, access and privilege afforded to institutional shareholders, places them in a powerful and superior position as compared with individual shareholders. As Mark Roe notes in relation to contemporary US institutional shareholders:

[T]hey are no longer the 100-share individuals of the standard model. They own bigger slices of a company’s stock. They are informed about corporate governance trends. And some of them are informed enough about a firm’s operations and business to give serious feedback to directors and managers.⁵⁹

CalPERS (the Californian based pension fund manager ⁶⁰) is the pre-eminent example of the informed, and indeed guiding, institutional behemoth. Roe’s observation appears to be borne out in practice. As David Sainsbury, the then

56 Helen Short and Kevin Keasey, ‘Institutional shareholders and Corporate Governance in the United Kingdom’ in Kevin Keasey, S. Thompson and M. Wright, (eds.), Corporate Governance: Economic, Management, and Financial Issues (1997) 18-53, 29.

57 Uren, supra n 23 at 241-2.

58 Ibid, 242.

59 Roe, supra n 22 at 17.

60 California Public Employees’ Retirement System (CalPERS). As the website claims, CalPERS provides retirement and health benefits to more than 1.4 million public employees, retirees, and their families and more than 2,500 employers. http://www.calpers.com/index. jsp?bc=/about/home.xml

Deputy Chair of the UK family grocery giant Sainsbury acknowledged in 1993

‘large shareholders at the top end tend to provide a greater identity between management and shareholders.’⁶¹ This identity of interests is a privilege of the large, elite, typically institutional, shareholder.

Navigating the ‘moral hazards’

The term ‘moral hazard’ was originally used in the insurance context to refer to ‘the tendency of people with insurance to reduce the care they take to avoid or reduce insured losses.’⁶² In the context of agency cost discussions, moral hazard has been explained thus:

Moral hazard arises when agents (such as managers) discover information that is valuable to the principal (such as the shareholders) after the principal has contracted for their services. The problem produces a moral conflict because morally the agent should inform the principal about the newly discovered situation and renegotiate if necessary. However, the agent stands to gain from not doing so.⁶³

The moral hazards within a company are a result of differences in role and location. They arise because of, and as part of, the broader agency problem.⁶⁴

As trading opportunities expand geographically, it may become necessary for merchants to hire agents to carry out their business on their behalf in remote. It may now be hard for the merchants to directly supervise and monitor the operational activities of their agents on a daily basis. So there arises the possibility of the agents acting dishonestly, for instance, embezzling the merchants’ goods, acting opportunistically or shirking their obligations.⁶⁵

In this sense, there is a constituency of ‘distant stockholders.’⁶⁶ They ‘have two main worries’⁶⁷ vis-à-vis the managers. These are the misdirection of resources which affect the agency costs⁶⁸ and ‘the level of insider machinations.’⁶⁹

The main context in which the moral hazard arises involves managers and their relationship with the owners. This phenomenon has been part of the historical development of companies as owners withdrew from companies due to economic imperatives. From the end of the 19^th century, ‘as a result

61 Richard Whittington, What is Strategy and Does it Matter? (1993) 52.

62 On Kit Tam, supra n 4 at 37.

63 Ibid.

64 Ibid, 26.

65 Aoki, supra n 30 at 68.

66 Roe, supra n 22 at 176.

67 Ibid.

68 Ibid.

69 Ibid.

of the new technologies of the Industrial Revolution, which required much larger firms to create economies of scale.’⁷⁰ As a result, shareholders ceased to manage companies

directly and hired professional managers-below board level- to run them instead. As time went on the managers began to graduate to board level, and gradually came to form the majority of board members. The process of completely separating ownership and control was accelerated after the Second World War when financial institutions started to build up their industrial investment portfolios.⁷¹

We will now briefly examine relevant aspects of this agency issue.

iii.TECHNIQUES TO ALIGN THE INTERESTS OF

MANAGERS AND SHAREHOLDERS

The need to align interests arises as a corrective to ‘the misalignment of interests between shareholders (principal) and their agents (managers) and because of incomplete contracting.’⁷² The solutions have been founded on developing ‘mechanisms for monitoring, and accountability, and the design of ex ante managerial incentive systems.’⁷³

In particular, ‘managerial compensation potentially aligns shareholder and manager interests by maintaining a close relationship between pay and performance.’⁷⁴ This particular linkage is problematic. It assumes that shareholders will think act and vote as a block. Heterogeneity is, however, likely to dominate a company whose shareholders include individuals and institutions. The institutions are likely to wield more power in light of their larger holdings recorded in the share register. Such institutions are more likely, as a species of professional investor, to have access to better information. This profile of the typical public company means that the majority rule is likely to be concentrated in terms of the share register. This, in turn, challenges traditional notions of equality as between shares and the ideal of corporate citizenship.

Individual shareholders may get to speak at the AGM, but the company’s share register operates essentially as a behind-the-scenes device. This can mean that individual antipathy to, say, a proposed remuneration package is overcome by block voting by institutions. The problem is that ‘the diminishing marginal

70 N. Kendall & A. Kendall, Real-World Corporate Governance: A Programme for Profit-

Enhancing Stewardship (1998) 16.

71 Kendall & Kendall, supra n 70 at 16.

72 On Kit Tam, supra n 4 at 25.

73 Ibid, 25-6.

74 Klaus Gugler, (ed.) Corporate Governance and Economic Performance (2001) 42.

utility of money makes the monetary reward required to induce good behaviour larger than the monetary penalty needed to discourage bad behaviour.’⁷⁵ One suggestion is that ‘one principle of efficient compensation is that managers should be rewarded for outcomes over which they have control.’⁷⁶ This raises the issue of identifying such issues. It is part of a complex and ongoing debate. As Uren notes, ‘the issue of how to stop management from exploiting its position has been wrestled with for centuries.’⁷⁷

Improving communication within companies

The phenomena of incomplete contracting, asymmetric information and related concepts are, in reality, styles of inefficient communication. They are blockages between the key cohorts of the company. Corporate governance in a systemic sense is aimed at developing more complete and more efficient communication modes. In the idealized governance model, issues of control and accountability would not be problematic. There would be no gap or slippage between constituent parts of the company. In an idealized company, information (and its products, risk awareness and insight) would be shared equally, subject to the regulatory rules of the market place. Indeed, the goal of better communication can be said to be a critically important feature of better governance.

One of the aims of good governance is to keep steadily improving the communication mechanisms within companies, to reduce the asymmetries and to continue to complete the gap in matters of contract, and in so doing successfully diminish the scope of the moral hazards inherent in a wealth- generating entity.

According to recent Australian research ‘failures of corporate governance weren’t due to a lack of government regulation, board structure or the experience of directors.’⁷⁸ According to Cairnes ‘the problem is the people. Boards fail because of the social system, the culture and the way people talk to each other.’⁷⁹ The communication test is a crucial aspect of a systems failure;

‘what came out again and again is what makes boards work is a robust culture of candour, honesty and respect; strong people being prepared to put the issues out there and have the debate.’⁸⁰

75 Ibid.

76 Ibid, 43.

77 Uren, supra n 23 at 135.

78 Fiona Buffini, ‘Boards failing the talk test,’ The Australian Financial Review, 21 November,

2003, 16, quoting Margot Cairnes, author of ‘Boardrooms that Work.’

79 Buffini, supra n 78.

80 Ibid.

The way that issues concerning employees are handled can be a key barometer of the effectiveness of a firm’s communications. For example, ‘executive pay is arguably the primary mechanism by which the board can control and monitor top executives or at least signal to management what is important to the shareholders.’⁸¹ As a result ‘boards must continually evaluate the public relations impacts of their actions in addition to the pay/performance linkage.’⁸²

Communication is both direct and coded, express and implied. The symbolic meaning of a company’s treatment of its stakeholders is an important feature in the life of the postmodern firm.

The theory underpinning the need for good communication is that 20^th century firms became so vast that they were forced to embrace decentralization. This phenomenon was recognized by Peter Drucker in 1946.⁸³ Drucker argued that:

decentralisation is the condition for the conversion of bigness from a social liability into a social asset. Bigness, if centralized – whether for lack of a policy or because the units of production have been allowed to grow too large for effective decentralization – carries with it dangers to the stability and functioning of society, just as it carries dangers to the stability and functioning of the corporation.⁸⁴

Drucker’s work underpins the work of theorists such as Henry Mintzberg, who postulated the view that very large firms needed to guard against certain risks that inherently seemed to accompany large firms. That development was a network or ‘system of work constellations’ where ‘quasi-independent cliques of individuals who work on decisions appropriate to their own level in the hierarchy.’⁸⁵ The firm, therefore, needs to provide the mechanisms for communication – whether formal or informal – that overcome the potential resistance of these self-filling constellations. There are, as a result, complex

‘flows of information’ within an organization.⁸⁶

Peter Drucker notes the centrality of good communication for effective managers. ‘Setting objectives, organizing, motivating and communicating, measuring, and developing people are formal, classifying categories’⁸⁷ of

81 Kay, Ira T, CEO Pay and Shareholder Value: Helping the US Win the Global Economic

War (1998) 77.

82 Kay, supra n 81 at 77.

83 Peter Drucker, Concept of the Corporation (1946) 228.

84 Drucker, ibid, n 83 at 228-9.

85 Henry Mintzberg, The Structuring of Organizations: A Synthesis of the Research (1979)

54.

86 Ibid, 12. See also Kolb, D. et al (eds.), Organizational Pyschology: A book of readings, 2^nd

Ed (1974).

87 Peter Drucker, Management: Tasks, Responsibilities, Practices (1999) 22.

management. There is a direct link between effective communication and optimizing the skills and contribution of the employee. The manager, he notes,

works with a specific resource: people. And the human being is a unique

resource requiring peculiar qualities in whoever attempts to work with it.

‘Working’ with the human being always means developing him or her. The direction which this development takes decides whether the human being

– both as a person and a resource – will become more productive or cease, ultimately, to be productive at all.⁸⁸

For Drucker, a firm needs to be studied by looking at its social aspects ahead of other features. He notes that Frederick Taylor (1856-1915), the pioneer of workplace analysis started out with social rather than engineering or profit objectives.⁸⁹

This is similar to Abraham Maslow’s⁹⁰ ‘hierarchy of needs’ approach that places a five step pyramid of needs as the blueprint for worker satisfaction, the base being physiological, and then up to safety, social, esteem and finally, self-actualization.⁹¹ For Maslow, communication was also the ‘key to effective management.’⁹² This was borne out by the size of corporations governed by

‘the necessity for integrating the advantages of bigness with those of smallness and for avoiding the disadvantages of bigness and those of smallness.’⁹³

iv. CONCLUSION

This paper has sought to highlight some of the rich and dynamic intersections between law and other disciplines in the ongoing development of corporate governance. As John Farrar has noted, corporate governance is too important a subject to be left to the lawyers alone.⁹⁴ It is a project informed by several sources. These include politics, economics, cultural studies and psychology. It is at these points of overlap, intersection and departure that the models will grow both nationally, and internationally. This takes the debate beyond the sometimes narrow realms of legal analysis and descriptors. As a result,

88 Ibid.

89 Ibid, 29.

90 Abraham Maslow was a US psychologist whose work embraced management theory and

has since been widely influential in terms of the development of such theories.

91 Ann R. Kaplan, The Maslow Business Reader (2000) 153.

92 Ibid.

93 Ibid.

94 John Farrar, Corporate Governance: Theories, Principles, and Practice 2^nd Ed. (2005)

xxvi.

the debate about corporate governance architectures and their relationship with global forces, looks set to play an ever more prominent role as the 21^st century unfolds.