European Corporate Governance

Readings and Perspectives

Thomas Clarke, Jean-Francois Chanlat

• Publisher: Routledge
• Year: 2009
• ISBN:
  9781134135974
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

For decades, Europe has sought to become more financially integrated with the United States and thus European legal institutions, regulatory, governance and accounting practices have faced pressures to adapt to international competitive markets. Against this backdrop, European corporate governance systems have been criticized as being less efficient than the Anglo-American market based systems.

This textbook examines the unique dimensions and qualities of European corporate governance. Reforms of key institutions, the doctrine of shareholder value and the seemingly irresistible growth of CEO power and reward are critically analyzed. The book brings out the richness of European corporate governance systems, as well as highlighting historical weaknesses that will require further work for a sustainable corporate governance environment in the future.

In light of the most severe financial crisis since the 1930s, this intelligent look at European corporate governance is a vital textbook for courses on corporate governance and a great supplementary textbook on a host of business, management and accounting classes.

PART ONE
Dimensions of Governance

INTRODUCTION TO PART ONE

Part One examines the dimensions of governance in the widest perspective. The recent transformation of European corporate governance is part of a wider restructuring of governance arrangements universally. This has encompassed changes in both the private and public sectors at local, regional, national and international levels. A replacement of traditional governance institutions by new forms of governance has transformed the management and control of social and economic institutions at every level. The structures of governance, processes of decision-making, and forms of accountability have all been subject to extensive reformulation in the interests of adapting to new social and economic demands. In this broad conception governance involves a “system of rule, as the purposive activities of any collectivity, that sustain mechanisms designed to ensure its safety, prosperity, coherence, stability and continuance” (Rosenau 2000:171).

In the first reading Kees Van Kersbergen and Frans Van Waarden discuss the concept of governance as a bridge allowing a cross-disciplinary consideration of issues of governability, accountability and legitimacy. The different aspects of the definition of governance they outline associates governance with legitimacy and efficiency. They recognize that increasingly the mechanisms delivering legitimacy and efficiency once identified with national governments are now often associated with international, regional or local collectivities. While internationalization continues, it remains clear that different regions, countries and localities manage successfully with different kinds of institutions and approaches to governance.

Good governance in the market sector refers to the system of ownership, direction and control of business corporations in the pursuit of the accountability and transparency that will attract investors and public respect. This consideration of the importance of good governance has progressed into new public sector management, often involving restructuring in the interests of better performance and customer satisfaction. A new frontier is in the governance of networks of public, private and community organizations. This mode of governance is self-organized and directed, and rooted in common trust and negotiated understandings. Networks can involve bringing together different levels of government across policy areas, finding multi-dimensional solutions to multi-dimensional problems.

Finally, in the market sector there is the morphing of hierarchical entities into an increasing emphasis on the cooperation of dense networks of firms whether in clusters of smaller enterprises, or in multiple strategic alliances (Hermens 2009). The question could be posed, “What is the relevance of individual corporate governance in an era of networked enterprises?” In fact, although the network has become the dominant organizational metaphor of the digital age, it remains an emergent form. Networks synthesize multiple experiences in informal and open social systems, and have demonstrated a remarkable capacity to coordinate complex activities. Networks have demonstrated a wide adaptability and have proved viable in facilitating creativity in knowledge development and innovation in a wide variety of industrial firms, public sector organizations, community groups, and international agencies. The many different types of dynamic knowledge network; their fluid form, and restless existence have compounded the difficulties of understanding the mysteries of network governance. Though networks have often been considered as antithetical to more traditional modes of organization including the bureaucracy, market and clan, it is interesting to consider how networks may coexist with other modes of organization (Josserand 2004:113). Much of the thinking on network governance concentrates on the more autonomous forms of network; however networks involved with more formal structures are probably as significant in their impact.

Even autonomous networks necessarily evolve governance frameworks around building relationships with prospective partners, establishing membership protocols, setting network objectives, specifying human and resource requirements, and codifying these understandings. Similarly many forms of network experience a life-cycle, a co-evolution of relations of knowledge, power and trust. Van Kersbergen and Van Waarden distil the essence of network modes of governance as relations between relatively autonomous but interdependent actors such as business firms, or public and private organizations, compared to more simplified structures of hierarchical control. Therefore in network governance the central processes are negotiation, accommodation, cooperation and alliances rather than command and control.

Van Kersbergen and Van Waarden go on to consider the implications of shifts in autonomous policy making and governance of nation states to transnational and supranational actors. Simultaneously there is also a shift of governance down to local agencies and community bodies. In the international economy both of these impulses are powerful with a pronounced shift towards multinational corporations operating in international markets, often regulated by international agencies, while at the same time often there are vibrant local economies with clusters of firms making important contributions. In this new and more complex and changing context traditional governance institutions often prove ineffective, and this has drawn attention to new sources of legitimacy, accountability and responsiveness.

Looking at how European corporate governance is responding to the new responsibilities it faces, Wieland focuses in upon the moral dimensions of economic transactions, and at integration of value creation and moral values. From this perspective formal compliance procedures cannot in themselves achieve improvements in corporate governance. Similarly a singular focus on shareholder value cannot displace the moral compass of the corporation. Hence Wieland offers an expansive definition of governance as the resources and capabilities of corporations, including moral resources, to accept responsibility for meeting the interests of all stakeholders. These principles have been reflected in the majority of European corporate governance codes surveyed, and often have deep historical and cultural resonances in different European countries. In essence what Wieland is arguing is that effective leadership, management and control of corporations is impossible without integrating the moral commitments and values which inform behaviour. Where governance systems of monitoring and compliances are unsupported by moral values and ethical cultures, disasters such as Enron, WorldCom and Arthur Andersen occur. When such dislocation of rules and values happens, not only are the rules circumvented but risks are concealed. Wieland emphasizes the importance of integrating corporate governance and business ethics and the relevance of this for strategic and operational decision-making processes.

This inevitably leads to fundamental questions of what is the corporation, what are the objectives of the corporation, who are the key economic actors, and what are the appropriate governance structures to pursue these objectives? Different theoretical approaches offer different answers to these key questions (Clarke 2004). Agency theory has a narrowly-focused, market-based utility-maximizing view of the corporate actors involved, and the governance structures that are required to allow owners to monitor and control managers. From the view of transaction cost economics the firm is a nexus of contracts that organize and regulate transactions of products and services, focusing on the hierarchical governance structures that decide the integrity of transactions, with the objective of the effective accomplishment of transactions. In contrast organization theory in its resource-based and competence-based approaches understands the corporation as a pool of human and organizational resources, where the purpose of governance is to coordinate these resources to achieve economic success.

There are similar important distinctions in approach among the great array of corporate governance codes that have been developed and applied across Europe in the last 20 years. Different codes represent different ideas on the objectives and orientations of the firm. Wieland distinguished three significant approaches of the European codes in their understanding of corporate governance:

• Maximization Model
  Focusing on shareholder interests, this regards the firm largely from the viewpoint of agency theory as a vehicle for increasing shareholders’ capital.
• Economizing Model
  Adopting the view of transaction cost economics, the firm is regarded as an organizational vehicle for accomplishing economic transactions in an efficient way.
• Cooperation Model
  The firm is seen as a vehicle for coordinating the cooperation between possessors of internal and external resources to realize material and non-material benefits.

From his consideration of how different European codes manifest one or other of these three approaches, Wieland concludes that corporate governance codes that focus on the agency problem in a utility maximizing model are not open to the wider dimensions of business ethics beyond honoring contracts. In contrast the economizing and cooperation models do allow for the integration of moral and social responsibility into corporate governance and business decision making. This wider frame of reference of stakeholder-oriented codes enables economic calculation to be informed by questions of moral and social responsibility.

REFERENCES

Clarke, T. (2004) Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance, London: Routledge.

Hermens, A. (2009) The Governance of Strategic Alliances, London: Routledge.

Josserand, E. (2004) The Network Organization: The Experience of Leading French Multinationals, Cheltenham: Edward Elgar.

Kooiman, J. (1993) Modern Governance, London: Sage.

Lazonick, W. (2001) Public and Corporate Governance: The Institutional Foundations of the Market Economy, Economic Survey of Europe, 2: 59–76.

Nooteboom, B. (2002) Trust: Forms, Foundations, Functions, Failures and Figures, Cheltenham: Edward Elgar.

Rhodes, R.A.W. (1997) Understanding Governance, Buckingham: Open University Press.

Rosenau, J.N. (2000) Change, Complexity and Governance in Globalising Space, in J. Pierre (ed.), Debating Governance: Authority, Steering and Democracy, Oxford: Oxford University Press.

von Tunzelmann, N. (2001) Historical Coevolution of Governance and Technology, The Future of Innovation Studies, Eindhoven University of Technology, The Netherlands, September 20–23.

1 “‘Governance’ as a Bridge Between Disciplines: Cross-disciplinary Inspiration Regarding Shifts in Governance and Problems of Governability, Accountability and Legitimacy”

from European Journal of Political Research (2004)

Kees van Kersbergen and Frans van Waarden

SUMMARY

Modern societies have in recent decades seen a destabilization of the traditional governing mechanisms and the advancement of new arrangements of governance. Conspicuously, this has occurred in the private, semi-private and public spheres, and has involved local, regional, national, transnational and global levels within these spheres. We have witnessed changes in the forms and mechanisms of governance by which institutional and organizational societal sectors and spheres are governed, as well as in the location of governance from where command, administration, management and control of societal institutions and spheres are conducted. We have also seen changes in governing capabilities (i.e., the extent to which societal institutions and spheres can, in fact, be steered), as well as in styles of governance (i.e., the processes of decision making and implementation, including the manner in which the organizations involved relate to each other). These shifts tend to have significant consequences for the governability, accountability, responsiveness and legitimacy of governance institutions. These developments have been generating a new and important research object for political science (including international relations). One of the crucial features of these developments is that they concern a diversity of sectors. In order to get a thorough understanding of ‘shifts in governance’, political science needs, and is also likely to adopt, a much stronger multidisciplinary orientation embracing politics, law, public administration, economics and business administration, as well as sociology, geography and history.

INTRODUCTION

In recent decades, traditional governance mechanisms have started to become destabilized and new governance arrangements have emerged. Such shifts in governance have occurred in the private, semi-private and public spheres, and at (and in-between) the lo...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• List of figures
• List of tables
• Acknowledgements
• List of contributors
• Introduction: A New World Disorder? The Recurring Crises in Anglo-American Corporate Governance and the Increasing Impact on European Economies and Institutions
• PART 1 DIMENSIONS OF GOVERNANCE
• PART 2 VARIETIES OF CAPITALISM: LATIN, GERMANIC, AND ANGLO-AMERICAN SYSTEMS
• PART 3 CONVERGENCE OR DIVERSITY OF GOVERNANCE SYSTEMS?
• PART 4 THE REFORM AND TRANSFORMATION OF EUROPEAN CORPORATE GOVERNANCE INSTITUTIONS
• PART 5 THE IMPACT OF SHAREHOLDER VALUE
• PART 6 CEO POWER AND REWARD