Abstract
This chapter pursues a normative approach to corporate governance, bridging economic theory on the nature of the firm and corporate management strategy. It intends to show that from a welfare economics perspective there is room for improvement if governments are willing to revisit the legal framework and redesign the institutional boundaries of the firm. In concrete, echoing concerns being put forward by the World Economic Forum and other international organisations, it is proposed that the social accountability of the modern corporation and its institutional boundaries should be revisited on legal grounds. A new role for top management is advanced in the context of principal-agent theory.
TopThe Nature Of The Firm
Without controversy one can say the firm is a social arrangement for production. The seminal view on the nature of the firm proposed by Coase (1937) perceives the firm as a nexus of contracts and offers one of the most influential contributions to corporate governance. Transaction costs, used to draw a dividing line between the firm and the market, opens a role for managers which Williamson (1973, 1975), Holmstrom (1977) and Hart (1995), among many others, explored. The cost of setting up a hierarchical structure to coordinate production has to be analysed vis-a-vis the costs of trading in the market.
Key Terms in this Chapter
Shareholder Value: In stock markets, shareholders are usually taken as privileged stakeholders to whose benefit should the firm be managed; accordingly, managers should pursue shareholder value maximization.
Business Ethics: It describes how moral principles and values impact managers’ decision making when facing ethical dilemmas and controversial situations – i.e., differentiating right from wrong, or good from bad.
Corporate Governance: System of internal rules, practices and processes to govern the corporation, defining power and accountability, and enabling managers to deal with the challenges of running a company – from setting goals to decision making – while balancing the interests of all stakeholders.
ESG: Environmental, Social, and Governance (ESG) comprises a set of standards meant to measure the social and environmental impact of a company; the argument being that business performance should be assessed on factors other than simply the financial return on investment.
Corporate Strategy: Articulated action set, describing how managers use resources and develop capabilities to achieve chosen corporate goals.
Principal Agent: Firms are not always managed by the owners of capital, and when this is the case managers are contracted as professionals (agents) to act on behalf of the proprietors (principal).
Stakeholders: A stakeholder is a party who has an interest in a firm and can either affect or be affected by its business; firms have an array of stakeholders with diverse and often conflicting interests.
Transaction Cost Economics: The term “transaction costs” is credited to Coase and is meant to represent the cost of contracting and combining resources in production. As there are multiple and alternative modes of production, each incurring in different costs, preference should be given to the most economical one.
Enterprise Risk Management: Theoretical framework to incorporate risk definitions and concepts in management practices, from corporate strategy to operations systems, aiming at preventing and mitigating adverse situations and to minimise losses.
CSR: Corporate Social Responsibility (CSR) defines how corporations self-commit to sustainability and integrate social and environmental concerns in its strategic goals and management practices.