Revitalizing the institutional roots of Anglo-American corporate governance

Abstract

Over the past three decades, the topic of corporate governance has become an increasingly high-profile aspect of social-scientific scholarship, in both the Anglo-Saxon world and continental Europe. To a significant extent, however, the conceptual boundaries of the corporate governance debate have been set narrowly in accordance with the logic and language of the dominant ‘agency’ paradigm of governance. According to agency theory, the central problem of corporate governance is the question of how to minimize the (harmful) consequences of the separation of ownership and control within public companies first identified by Berle and Means (1932), by reference to competitive market pressures coupled with market-based incentive and disciplinary mechanisms. In this article, we present an alternative interpretation of the corporate governance problem premised on the logic and language of institution rather than the market, which we argue is both more empirically relevant and conceptually defensible than the dominant agency paradigm. To this end, we rely on some fundamental and longstanding doctrines of Anglo-American corporate law in conjunction with recent developments in the economic theory of the firm. According to the proposed ‘institutional’ model of corporate governance, the central governance problem is that of how to exploit, rather than minimize, the (beneficial) consequences of the separation of ownership and control, so as to engender the development of a more sustainable system of governance than that emanating from the free interplay of (stock) market forces. After setting out the key conceptual underpinnings of our revived institutional model, we analyse how worker involvement in corporate decision-making might be advanced as a way of instrumentalizing this framework within firm-level governance practices.

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