Philosophical Underpinnings to Corporate Governance: A Collibrational Approach

  • Steve Letza
  • Clive Smallman
  • Xiuping Sun
  • James Kirkbride
Part of the Studies in Economic Ethics and Philosophy book series (SEEP, volume 39)


The current debate on corporate governance can be characterised as a search for the perfect model. The academic discourse is polarised either on the shareholder paradigm, where the primary focus is on maximisation of shareholder wealth, or on the stakeholder paradigm, where a broader set of issues are presented as pertinent to best practice corporate governance. In the practitioner discourse, the debate is fundamentally focused on practical mechanisms to discipline directors and other actors where the emphasis is on developing regulation either in the form of law or codes. We argue that both discourses rely on a homeostatic view of the corporation and its governance structures. Further, we argue that both discourses pay inadequate attention to the underlying philosophical presuppositions resulting in a static approach to the understanding of corporate governance. We present an alternative, a processual approach, as a means of avoiding the traditional trap in corporate governance theorising. Using this approach, we argue that a collibrated mechanism is more likely to emerge and consequently a better understanding of the heterogeneity of corporate governance practice will follow, providing deeper insight into the fluxing nature of corporate bodies and their governance structures.


Corporate Governance Governance Structure Stakeholder Theory Stakeholder Management Stakeholder Perspective 
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High 1profile corporate fraud and failure is a depressingly familiar litany. Action has certainly been taken both by the courts and the legislature in response to great public concern. Yet, what knowledge is this action based upon? One of the legislative strategies emphasizes the need for a singular governance structure for all corporations. However, research shows that no single model or structure of corporate governance can work at all times; there is no one-size-fits-all approach.

Moreover, the dialectic theoretical orthodoxy is at best questionable. Recognition of these issues alongside the changing nature of economy and society suggests that we need to rethink corporate governance theory. Hence, if we want to push the bounds of our current theories and research, we must move beyond the conventional static and poorly contextualized models that have dominated to date, enabling the development of evidence-based and actionable knowledge, grounded in studies of process and focused upon improving practice.

Corporate Governance Models, Assumptions and Problems

There are four main perspectives in the corporate governance literature: the principal-agent or finance model, the myopic market model, the abuse of executive power model and the stakeholder model (cf. Blair 1995; Keasey et al. 1997).

The Principal-Agent or Finance Model

The principal-agent or finance model is the dominant theory of corporate governance. The model assumes that the only purpose of corporations is the maximisation of shareholders’ wealth, whilst acknowledging that shareholders do not have enough control and influence over managerial action due to their distance from the day-to-day operations. Therefore, it argues regulation enhances the power and control of shareholders.

As the cornerstone of agency theory, the principal-agent relationship exists in any co-operative situation and thus at all levels of a corporation in which the principal delegates work to an agent who performs that work on behalf of the principal. Based on the assumption of self-interested human behaviour, agency theory asserts that managers as agents may pursue their own interests at the expense of the shareholders, hence the so-called “agency problem” (cf. Jensen and Meckling 1976). For agency theorists, to solve the agency problem is to determine the most efficient contract that governs the principal-agent relationship.

Agency theory assumes that all social relations in economic interaction can be reduced to a set of contracts (specifying duties, rewards and the rights of the principal to monitor corporate performance) between principals and agents, where the role of contracts serves as a vehicle for voluntary exchange by actors (cf. Alchian and Demsetz 1972). Thus, the firm is best described as a “nexus of contracts” with the behaviour of the firm simulating the behaviour of a market, i.e., “the outcome of a complex equilibrium process” (cf. Jensen and Meckling 1976).

The main goal of agency theory is to determine the most efficient or optimal contract governing the principal-agent relationship. The question is especially related to whether behaviour-oriented governance (e.g., salaries, hierarchical governance) is more efficient than outcome-oriented contractual governance (e.g., commissions, stock options) (cf. Eisenhardt 1989). For agency theorists, market-oriented governance structures best discipline managers’ behaviour. Financial theorists, however, claim that since managerial behaviour could be constrained by the pressures of capital markets, factor markets and the market for corporate control can best address the issue of management underperformance (cf. Manne 1965). The advocates of this model insist that current corporate governance mechanisms should be allowed to operate freely and that any interference with the market governance mechanisms is irrational and distorts them (cf. Hart 1995).

The Myopic Market Model

The myopic market model shares with principal-agent theory the position that the purpose of corporations is to maximise shareholders’ wealth. However, it argues that the maximisation of shareholders’ well-being is not synonymous with share price maximisation because the market systematically undervalues long-term capital investment. It also argues that the Anglo-American style of corporate governance is flawed by an over concern with short-term return on investment, short-term corporate profits, short-term management performance, short-term stock market prices and short-term expenditures (cf. Charkham 1994; Hayes and Abernathy 1980; Moerland 1995; Sykes 1994). Furthermore, the theory posits that the threat of hostile takeover produces an effect of distortion and distraction from true value creation. For example, otherwise loyal and diligent managers could be forced to take measures against hostile takeover rather than to enhance longer-term performance.

The myopic market model suggests that corporate governance reform should provide an environment in which shareholders and managers are encouraged to share long-term performance horizons. It is thus necessary to increase shareholders’ loyalty and voice while reducing the possibility of shareholders’ exit to encourage “relationship investing” to lock financial institutions into long-term positions, to restrict the takeover process and restrain voting rights for short-term shareholders and to empower other groups such as employees and suppliers who have long-term relationships with the corporation (cf. Keasey et al. 1997).

The Abuse of Executive Power Model

This model believes that Anglo-American companies suffer from a widespread abuse of executive power. The current corporate governance arrangements leave excessive power in the hands of management, who may abuse it to serve their own interest at the expense of shareholders and society as a whole (cf. Hutton 1995). Supporters of such a view argue that the current institutional constraints on managerial behaviour, such as shareholder involvement in major decisions, disclosed information, non-executive directors, the audit process or the threat of takeover, are inadequate to prevent corporate power from being abused because shareholders that are protected by liquid assets markets are simply uninterested in most abuses of corporate power (cf. Keasey et al. 1997).

It is arguable that the principal-agent analysis is not a realistic description of the current corporate governance structure and process since such a relationship may actually work in the reverse (cf. Kay and Silberston 1995). This assumes that managers are trustees of the corporation as a whole rather than agents of shareholders. Therefore, a new proposal for corporate governance reform is advocated, in which the statutory duties of directors should be to promote the business of the company as a whole and to balance it with shareholders’ claims, more power should be given to the independent directors for nominating and selecting senior managers and the appointment of a CEO should be for a fixed four-year term with only one renewal of contract.

The Stakeholder Model

The stakeholder model in corporate governance has been regarded as the most fundamental challenge to the principal-agent model. The central proposition of this model is that the objective and purpose of the corporation should be defined more widely than the maximisation of shareholder wealth alone. The corporation should recognise the well-being of other groups such as employees, suppliers, customers and managers who have a long-term association with the firm and thus some “stakes” in its long-term success. A wider objective function of the corporation is not only economic equitability, but also social accountability and efficiency (cf. Keasey et al. 1997).

Instrumental stakeholder theory sets up a framework for examining the connections between the practice of stakeholder management and the achievement of corporate performance goals (cf. Freeman 1984). The assumption is that if corporations practice stakeholder management, their performance, such as profitability, stability and growth, will be relatively successful. Thus, stakeholder management becomes a significant strategy for managers who would be sensitive to future change. However, there is no clear guideline in the stakeholder model to ensure managers perform stakeholders’ benefits and social obligation. Some suggestions for stakeholder management include trust relationships and long-term contractual associations, interlocking shareholdings and inter-firm co-operations, ethical behaviour, employees’ participation in decision-making and ownership-sharing scheme.

Common Assumptions

Despite their competing and conflicting diagnoses of and solutions to corporate governance ills, these perspectives share some common assumptions in terms of the nature of corporation, the governance structures and the reason for governance. It is these assumptions and their underlying presuppositions that suggest some fundamental and irresolvable problems with current governance theory.

The current debate on corporate governance is traceable to a nineteenth century argument on the nature of the corporation in corporate law theory, between the “aggregate theory” and the “nature-entity theory”. The aggregate theory claims that the corporation as a legal person is not a real person, but an artificial person created by law or the state as a matter of convenience. The corporation is only a collective name for its members and the aggregate rights of its members. By contrast, the nature-entity theory argues that the reality of the corporation is a real person with its own enduring personality, distinctive mind and will and a capacity to act through its organs. The corporate personality is rightly recognised, and not simply created, through the process of incorporation (cf. Arthur 1987; Barker 1950; Mayson et al. 1994). The aggregate-entity debate eventually suggests an “individualistic” view versus a “holistic” view of the nature of the corporation, which largely influences the current debate in corporate governance between shareholder and stakeholder perspectives. Generally, economists are interested in the organisation of economic actors regardless of their legal form (cf. Loasby 1998). In this context, a firm is no more than a “nexus of contracts” joining inputs to produce outputs among actors and between principals and agents in order to maximise behaviour of all individuals. Whilst shareholder perspectives share the individualistic view of the corporation, stakeholder perspectives tend to view the corporation more or less as a broader collective unity, as an enduring entity and more than just the totality of the shareholdings. Both perspectives attempt to claim a solid, clear-cut, self-contained, enduring and describable characteristic of either an individual atomic entity as the foundation of the corporation or corporate-as-a-whole entity beyond individuals. Those entities are regarded as neutral objects waiting for our discovery and analysis and seem to be pre-given and already existent “out there” independently of our minds. In either case, these entities are extant, socially and legally constructed systems, which we as individuals discover and analyse and to which we add our own constructs and interpretations. Furthermore, the corporation as a social system either bound by contracts or by laws is normally rational with maximum goals, reasonable actions and optimal solutions for the sake of economic efficiency. In both shareholder and stakeholder perspectives, the corporation is viewed as a social tool for the purpose of governance and control in order to maximise the economic interests of shareholders or certain stakeholders.

Following these assumptions, both perspectives try to discover an optimal governance structure that can effectively solve the agency problem or the problem of abuse of executive power. Thus, the market governance mechanisms advocated by the principal-agent model and the hierarchical forms of governance by the other three models are regarded as competing alternatives for rational selection and appropriate design. Both sides of the debate assert that only one optimal and universal governance structure is effective in disciplining management performance, which could be repetitively tested and objectively chosen. The criterion of selecting the optimal governance structure for all the perspectives accords to the principle of economic efficiency since, it is argued, institutional change has its root cause in efficiency. There exists a rational process of ensuring that more efficient economic forms and governance structures prevail over less efficient ones (cf. Williamson 1975). Economic rationality or efficiency is seen as a common reason for both shareholder perspectives and stakeholder perspectives to search for an elegance, purity, certainty and universality of governance form – “the ultimate demonstration of rationality at its best” (Solomon and Higgins 1997, p. 29). In agency theory, rationality is embodied in the optimisation of contracts. The myopic market model suggests curbing irrational short-termism by forcing actors to take a more considered (rational) long-term view. The abuse of executive power model seeks a similar route to rationality, insisting that irrational (in the eyes of the corporate whole) directors’ powers be curtailed, with independent scrutineers seeking the optimum path. Stakeholder theory seeks a collective rationality, in which the demands of one group cannot disproportionately outweigh the requirements of others.

Issues with Current Corporate Governance Analysis

While the above models have significantly developed our understanding of corporate bodies and provide valuable perspectives on corporate governance, emerging evidence from the news media and public inquiries into major corporate failure, as well as the authors’ experience as practitioners, demonstrates that the claim of universal principles and optimal governance structures explicitly made by the four models is at best only partially supported in corporate governance practice. This raises the question of whether there is any solid and objective foundation such as individual entity or corporate entity for building an optimal and universal structure. As all of the four models suggest that the validity of the competing analyses on corporate governance relies on supporting empirical evidence (cf. Keasey et al. 1997), therefore, either market governance or hierarchical governance, as alternative solutions, should be demonstrated in practice to be optimal or superior. However, this is not the case as the evidence available does not simply support any single governance structure claimed to be most effective. Counter-evidence from all quarters of the corporate governance debate denies both market governance to be optimal and hierarchical governance effectiveness. Indeed, corporate governance has experienced perhaps too much of both “hierarchical dysfunction” and “market failure” in Anglo-American business history. Whilst hierarchical governance failure is largely due to reluctant shareholders and defective boards of directors (cf. Bishop 1994; Hart 1995; Hawley and Williams 1996; Jensen 1993; Latham 1999; Sternberg 1998), market governance failure is primarily due to short-termism and unreliable market forces (cf. Bishop 1994; Hart 1995; Herman and Lowenstein 1988; Parkinson 1995; Pound 1993). For example, the designed function of hierarchical governance relies on shareholders’ effective monitoring such as vote, voice and proxy fight. However, since the increasing separation of ownership from control in the early twentieth century (cf. Berle and Means 1932), individual shareholders are less inclined and have less incentive to participate in the monitoring system due to the free-rider problem, lack of information, useless proposals, managers’ manipulation and legal restrictions. It is arguable that this incentive problem might be offset by the gravitas of large institutional directors, and there are signs that pension funds and their “city”-based managers are not atomised, but aggregated in global “investment villages”. Further, there is some evidence that major fund holders are using their “muscle” to leverage the behaviour of boards in search of improvements in effectiveness (cf. Bhojraj and Sengupta 2003), but this same evidence also suggests problems with other performance measures. Chief amongst several issues, institutional shareholders suffer from a corporate form of disassociated multiple personality disorder, since their small shareholders require them to monitor corporates on their behalf, whilst at the same time they must act as investors whose duty is to maximise the returns for their beneficiaries. Whilst they may be able to strike a balance, conflict and dissociation will occur where they take a long-term view of their positions and incur expense in intervening in management under-performance, whereas simultaneously as investors enjoying the freedom to incur the least expense in intervening in management to secure the best return for their beneficiaries. These roles are not easily reconcilable and fail by dint of a compound agency problem (cf. Short and Keasey 1997). Thus, shareholders in practice fail to monitor both directors and managers who should act on behalf of shareholders under the current governance arrangements.

As an alternative to hierarchical governance, market discipline is highly valued by the principal-agent theorists. The hostile takeover movement, the so called market for corporate control, reached a peak in the US and the UK in the 1980s, but was quickly ended at the end of the 1980s due to the collapse of the junk bond market, resistance by managers, political pressure and an economic downturn. Market governance has been seriously criticised as less effective and too costly in improving corporate performance and promoting long-run wealth (cf. Bishop 1994; Latham 1999; Parkinson 1995; Pound 1993). Stock market and share price are in fact less unbiased and useful indicators of the “fundamentals” of corporate performance, rather it often reflects shareholders’ psychology, guessing, changing moods and prejudices and thus routinely misprice assets (cf. Keynes 1936; Shiller 1989).

Furthermore, the conception of economic rationality and efficiency has been criticised as too narrow and too static. Economic logic is the prevailing core assumption in current corporate governance analysis. The principal-agent or finance model is deeply rooted in market efficiency theory originated in both classical and neo-classical economics. The other three corporate governance models, as described above, challenge the “market-optimum” assumption and propose hierarchical-like governance structures based on various internal monitoring mechanisms. Nevertheless, underpinning all these models is the notion of economic rationality as well. The only difference is that those three models prefer long-term, rather than short-term, corporate performance horizons shared together by shareholders or stakeholders with managers. Although some aspects of the stakeholder theory emphasise corporate ethical behaviour and social responsibility, the main purpose of this model is instrumentalist, based on the principles of economic rationality and efficiency such as managerial strategies and long-term business success.

The main criticism of the economic logic as an explanation of social phenomena is that it presupposes pure economic conditions and a level playing field in considering rational selections in a corporation, under which the selections are simplified and isolated from other social processes such as social (non-economic) relationships, structural power and institutional contexts (cf. Roy 1997). It is also arguable that economic rationality and efficiency is an overly narrow conception which loses insight of the complexity and many sides of rationality as well as inevitable irrationality in human life (cf. Rescher 1988). Further, empirical evidence in corporate governance has shown that there is no rationality of action or some absolute standard of efficiency at all, nor one most efficient mode of organisation and optimal governance structure in the world, nor only one way to pursue organisational goals. The rules by which realities are constructed can be negotiated and changed as the outcome of the social interactions between key players/actors such as managers, their corporations and government agencies (cf. Fligstein 1990).

The essential problem with the dominant economic logic in governance is that “a static conception of governance (…) ignores the continuous and ongoing interaction between choices made, and the context into which choices are embedded” (Mueller 1995, p. 1220). Obviously, the static approach in corporate governance analysis presupposes and inherits a priori principles, ready-made concepts and taken-for-granted notions, such as principal-agent relationships, market efficiency and hierarchical structure, and then identifies, classifies and simplifies the complex practices of corporate governance with these conceptual templates for analysis and explanation. In doing so, the dynamic practice and lived experiences of corporate governance are forced to fit theoretical models, which become increasingly abstracted, isolated, fixed, endured and finally static and dogmatic.

This privileging of a homeostatic and entitative conception of reality generates an attitude that assumes the possibility and desirability of symbolically representing the diverse aspects of our phenomenal experiences using an established and atemporal repository of terms and conceptual categories for the purposes of classification and description. For it is only when portions of reality are assumed to be stable and hence fixable in space-time that they can be adequately represented by symbols, words and concepts. A representationalist epistemology thus orients our thinking towards outcomes and end-states rather than on the processes of change themselves. It is this basic epistemological assumption which provides the inspiration for the scientific obsession with precision, accuracy and parsimony in representing and explaining social and material phenomena, including the practices of corporate governance. These social phenomena are regarded as relatively enduring, concrete and observable entities which can straightforwardly be subjected to factor analysis. The consequences of this on the direction which research and theorising in the field of corporate governance has taken must not be underestimated. Indeed, it has instilled a set of instinctive “readinesses” (cf. Vickers 1984) amongst management academics to construe theories as being straightforwardly “about” an externally existing and pre-ordered reality. This predisposition explains the intellectual orientation of the orthodox approach to analyses of corporate governance. It justifies prevalent notions such as “the marvel of the market”, “the finance notion of control”, “the principal-agent relationship”, “nexus of contracts”, “self-regulation” and “internal monitoring” as relatively enduring and universally valid conceptual entities which are taken for granted and seemingly theoretically unproblematic.

With the awareness of the fallacy of representationalism, all the justifications of the theoretical entities about corporate governance, including the preoccupied concepts of market governance and hierarchical governance and their related assumptions, must consequently be questionable. If the corporate governance issues cannot simply be interpreted by an economic logic founded upon a static and entitative conception of reality, then an alternative processual approach can better describe and explain corporate governance practice.

A Process Philosophy Approach to Corporate Governance

A process approach must not be equated with the commonsensical idea of the process that an individual or a system as a separate and solid entity undergoes in transition from one place to another caused linearly by external forces or power. Rather, it is a metaphysical orientation that emphasises an ontological primacy in the “becoming” of things; that sees things as always momentarily stabilised outcomes: “[S]tability (…) waves in a sea of process” (Rescher 1996, p. 53). This process ontology promotes a dispersive view of reality as a heterogeneous concatenation of event-occurrences that cannot be comprehensively captured by static symbols and representations. For process philosophers (cf. Bergson 1903; James 1909, 1911; Whitehead 1929/1978, 1933/1961), the principles of process, such as movement, change, indeterminacy and probability, are the fundamental features of reality. Process and modes of change rather than things and fixed stabilities best represent our encounters with and in the natural and social world. The immediate and dynamic intuition of living experience is more faithful to reality than the conceptual work of thought, for thought can only deal with stable things. The symbolic system of representation (e.g., language) is always inadequate in capturing the real world, since much of what we experience remains tacit and unspeakable. Thus, processes cannot be described or explained in terms of non-processual elements. A much clearer understanding of the processual approach can be seen in three dimensions (or principles, sub-approaches) of processes, including interrelatedness, systemic-wholeness and periodic-historicity.

Interrelatedness, interconnection, interdependence or interrelationship is the core principle of process thought: the “principle of relativity”. The logic of interrelatedness is that our raw experiences refer to action, activity and acting rather than fixed things and forms; acting is relating in character, relating the whole with the constituents, relating one constituent with all others. By their interrelational acting, all constituents are naturally “bound” or “bonded” together to form a particular whole. Thus, everything is not independent and absolute, but conditional, relative and interdependent: “[A]ll things are by their participation in other things” (Jungerman 2000, p. 6). In the interconnected systemic whole, each event or element as a locus is a creative integration of relations; it embodies aspects of all the others, contains the information of the whole.

The very essence of an ongoing process is not fragmented and unconnected, neither as coincident factors artificially given or analytically put together, but integrated and co-ordinated where a macroprocess organises microprocesses into a systemic whole and microprocesses and macroprocesses cannot be split and isolated. A process is not just one event or “occasion of experience”, but a series of interconnected eventual developments, a co-ordinated group of changes and an ordered society of occurrences, which are systematically connected to one another causally or functionally.

Process is essentially related to a time dimension (cf. Rescher 1996). An instant is not a process. The self-identity of a process must be manifested within a period through which a unitary whole is realised. The character, pattern or form of a process only exhibits in a whole period of action. A process by definition cannot be understood merely by a collection of sequential properties as with the conventional mode of thinking, but by a spatiotemporal continuity in which an ongoing process “combines existence in the present with tentacles reaching into the past and the future” (ibid., p. 39), that is, by historical connections. Everything is “becoming” – integrating and incorporating all past events, experiences and possibilities to create something new and become what it is. “Becoming” is one-way direction: any present potentiality and actuality are conditioned, though not completely deterministic, by its history, by its predecessors and by its retrospective necessary connections. Thus, “an entity’s relations to its predecessors are essential, constitutive or internal for the entity; but its relations to successors are inessential or external” (Hartshorne 1984, p. 59).

What the processual approach offers is an opportunity to view the corporation in its original sense as a human construction, a social world that is fully constituent of human minds and direct experiences in addition to physical materials, which are fundamentally processual in nature. This worldview has no pre-given, neutral and fixed essence and meaning unless it is individually experienced and understood and collectively perceived and constructed. It has its own logic and intrinsic value embedded in its social processes characterised by interrelatedness, systemic-wholeness and periodic-historicity. What the processual approach offers is the option to turn our attention away from the theoretical abstraction of governance models to the fundamental human experience and practice of governing processes. It affords us the means to develop keen sensitivity and awareness of the subtle and complex governing relationships and forces, the tacit and explicit knowledge generated in direct and indirect experiences, the firm-specific and contextual-dependent governing problems and their pragmatic solutions. It fully accomodates the rational and irrational, conscious and intuitive sides of social attitudes and behaviours, and the ceaseless and endless search for the reflective and renewable understanding of governance practices for continuous improvements.

Corporate Governance as Self-Generating Order

The “true” and “objective” representation of a fixed corporate reality in current corporate governance theory is misleading, since, “truth” and “objectivity” are in and of themselves relative constructs around which scientific and pseudo-scientific debate often turns. This is particularly so in social realities such as corporate governance for even the standing of a “fixed” legal entity may be subject to change as a result of a political process. The distinctiveness of the social reality from the natural world is that it is fully composed of human minds (conscious and unconscious) and ideas (practical and theoretical), which are the most basic elements of the social world and from which our attitudes, behaviours, actions, social relations and social conventions derive and are generated. Since mental activities are always in flux (cf. Rescher 1996, pp. 105–118) and social reality as mind-composed and mind-mediated is, fundamentally, processual rather than substantial, any perceived enduring pattern or social stability in practice are relative in themselves (i.e., temporary in history and during a period) and subject to manipulation and collective maintenance.

Hence, in a truly processual sense, corporate governance is a process of governing which varies continuously and emerges from social interaction. The current crop of governance models are evidently unsupported because they are simplified abstractions filtering out the concrete experiences and complex dynamics of governing practice, based upon historical “snapshots” taken from the continually moving and flowing processes of governance that is moving towards an uncertain future. Rather than searching for general, universal and timeless principles (cf. Porter 1991), corporate governance theorists would do better to become aware of the sensitivity of time, process and history (cf. Tsoukas 2001), that is, the actual workings of reality where ambiguous perceptions, individualistic understandings, local contingencies, pragmatic actions and solutions, rational and irrational behaviours prevail.

The concepts of “spontaneous order” (cf. Hayek 1982) and “emergent pattern” (cf. Morgan 1997) better than any fixed notions describe the fluid character of corporate governance practice. Social systems are intrinsically open to diversities of individual actions, since individual actions depend on individual perceptions and understandings, which are inextricably bounded with individual properties of experiences (cf. Sayer 1984; Tsoukas 1992, 1994) (“subject-referring properties”; cf. Taylor 1985). Individual experiences cannot be exactly repeated over time and across contexts, and individuals are in the process of continuous learning, developing and interacting with others. Hence, self-understandings and self-interpretations as both responses to local contingencies and “enactment” of environments (cf. Weick 1977, 1979) are necessarily implicated in defining individual actions. This eventually means that under close scrutiny, individual actions and behaviours are self-governed patterns that emerge from a combination of their own historical experiences, current understandings, local conditions and multiple possibilities. As human beings, we experience our life-processes in our own activities and in our own acts of free will, rather than as being driven and determined purely by external forces. This means that the emergent patterns of self-governance are not directly imposed from outside such as through hierarchical orders or through predetermined logic (cf. Morgan 1997, p. 266), but through self-determination (cf. Frankl 1959). Thus, power (essentially, governance) is not a possessed, fixed and abstracted thing, a sense of imposed domination and centralisation (cf. Foucault 1979/1988). Rather, it must be exercised, existent in relationships and expressed in actions. Power as exercised is not simply an obligation or a prohibition on those who “do not have power”; it is manifest in the reaction to and reflection of the given pressure, in their attitudes, willing and intent. The outcome of power and governance is transmitted by them and through them in the process of obeying, disobeying, negotiating, debating and compromising. External forces and pressures are only possibly influential on individual perceptions and reactions, as one of the elements of individual “enactment” in their environments. However, it is important to recognise that when self-governance is defined as spontaneously emergent and individually distinctive, it does not mean that it is isolated from social processes. On the contrary, as social beings, individuals’ understandings and interpretations are the results of social interactions through communications, observations, learning and thinking. Hence, self-generating pattern and spontaneous order in a society and in the corporation are largely characterised (or coloured) by collectively constructed pattern and order through more or less shared values, beliefs, cultures, conventions, habits, negotiated meanings, compromised actions, inter alia (cf. Berger and Luckmann 1966).

Given the subjectivity of meaning-generations and mind-dependence of social actions, corporate governance should not be understood as pre-defined in the context of pre-designed structures, fixed and unchangeable entities, imposed and externalised order; rather, it should be generated from daily experiences and dynamic practices. Thus, belief in corporate governance frameworks that are prescribed and specified in rules, regulations or agreements such as corporate laws, company articles and private contracts is overly simplistic and unnatural. Governance that relies on maintaining a fixed definition by the provision of rules is impossible to practice and sustain in the long-term. No doubt that governance is often embedded within contextual rules for guiding behaviours and actions. However, in the process of application in practice, the interpretation of governing rules is dependent upon the understandings of the individual actors and complex social interactions, for rules can never “provide for their own interpretation independently of those agencies whose interpretations instantiate, signify or imply them” (Clegg 1989, p. 97). Hence, power or governance is a nexus not of contracts, but of contested meanings and interpretations within multiple possibilities and a socially negotiated order and collectively constructed reality. Governance is not rule-reification and rule-implementation in general, but in the process of rule adapting to local conditions within specific contexts.

Given the emergent and self-generating nature of corporate governance, what theorists and practitioners need to deal with corporate governance issues effectively is not to presuppose a mechanic and machine-like notion of corporate entity that can be governed externally and objectively through the traditionally designed three-tier hierarchical structure of governance or through the market for corporate control. They need to evaluate specific contexts, historical backgrounds, temporary circumstances and contingent factors that condition the process of governing practices and which are sensitive to the processual character of direct experiences, particular interpretations, meaning-generating and sense-making in both collective sense and individual manner. In a processual view, self-governance itself is not a fixed notion either; it is a continuously renewing and innovative pattern. What is needed for theorists and practitioners is not to attempt to stop and freeze or ignore change, but to flow with and facilitate it (cf. Morgan 1997), leaving room for individual interactions, innovations, judgement and adjustment so as to enable effective actions. Looking inward both intuitively and thoughtfully to address the contingencies and temporary issues at hand and generating order out of chaos from “inside” is a more effective route to understanding and facilitating corporate governance.

From Governance to Governing

Currently dominant theories of corporate governance, despite their contrasting and competing perspectives, remain trapped in the same mode of thinking which assumes that the reality of governance practice should be force-fitted to idealised models. However, such an approach is not likely to be applied in practice and would not improve corporate governance if it did, and “the alternative approach – of adapting the model to reality rather than reality to the model – deserves equal consideration” (Kay and Silberston 1995, p. 86).

The fundamental problem with the current analyses of corporate governance is that their perspectives are constructed through a purely homeostatic approach (cf. Kirkbride and Letza 2004) that ignores the continuous interaction between choices made and their specific contexts, and the continuous flow of corporate governance practices including especially issues of precedence, personal incentives, individual perceptions and societal approval. Although the competing models may claim that their perspectives are based on corporate governance practice and drawn from observations and investigations, there is, in fact, little evidence of their theoretical viability. The main reason for this is quite simply that such research and analyses rely upon a static and entitative view of reality which presupposes that situations, definitions and contexts remain stable and are hence not subjected to the necessary vagaries of change and interpretation.

Thus, they tend to deal only with abstract conceptual frameworks and pre-given assumptions as well as a priori principles rather than on discrete empirical factuality, continuity and radical experiences. The preoccupation is thus on consistency rather than on relevance. Taking their hypothetical and theoretically established “entities” and “generative mechanisms” as ontologically unproblematic, they justify their theses by insisting that their perspectives are truthful in so far as they accurately represent the “objective” realities of corporate governance practice. By so doing, they commit to “the fallacy of misplaced concreteness”: mistaking theories for reality itself (cf. Whitehead 1929/1978, 1933/1961).

We argue that corporate governance cannot be viewed as a pre-designed, universalised and fixed model; rather, it is a process of governing, an emergent pattern continuously generated from complex social interactions in historical and contextual specifications. It is an ongoing reality-constituting and reality-maintaining activity in which all participants both inside and outside corporations actively participate in shaping and reshaping perceptions and priorities. In this sense, principles, assumptions, issues, problems and solutions cannot be interpreted as pre-given, objective and taken-for-granted. They are always in the process of constructing, reconstructing, changing and renewing. We thus suggest that to comprehend corporate governance practice, one should not attempt to subscribe to theoretical linearity, extremity and absoluteness and ignore the dynamics and flexibility of human minds, character, behaviours and social interactions. What is needed is to draw attention to and understand the “rationality of practice”, the diverse responses to localised requirements and the continently emerged governing pattern, having its own logic and intrinsic value and being acceptable at a given moment. A significant inspiration for “governors” in practice is an “art of governance” (cf. Foucault 1974), an art “which concerns all and which touches each” and “which presupposes thought” (Burchell et al. 1991, p. x). Human minds, thought and ideas enjoy real power in the construction and change of social reality and governance. An art of governance is, in contrast to the “science” of governance, to work with the invented and changeable ideas, appreciate different viewpoints, respect distinctive ways of doing things, set fluid targets, take flexible measures and solutions, adjust and readjust strategies and techniques. Governance is a non-linear and unstable equilibrium. It is to prepare for change, flow with change and forward to change.

The term “governing” as a descriptive action verb is better than the static noun “governance” as the intended description of governing activities in continuing processes, “here and now”, rather than the abstracted description of any end-state and outcome of activities, “there and then”. “Governing” directs our attention to what is emerging and happening in practice, what is being done and relating to people involved in specific governing processes, and what people are directly experiencing, ideally perceiving and socially communicating and interacting. It avoids directing interest to abstracted theorising and modelling. Above all else, governance suggests the past, whereas governing is firmly in the “here and now”, albeit with one eye on a multiplicity of uncertain futures.

Future Research Directions

Perhaps the major issue in corporate governance research stems from our limited understanding of what really goes on in directors’ minds and inside boardrooms – the “fields”, “symbolic capital” and “habitus” that comprise the “practice” (cf. Bourdieu 1984) of corporate governance. Current theories focus upon external impacts based around a static view of the corporate entity. Conventional models do not look at the process of governing as the evolving sum of experiences of those who govern. Related to this is a research issue that focuses upon developing a deeper understanding of directors’ knowledge, experience and skills and the effects of these upon behavior, particularly in decision making processes. Some of this type of research has occurred (cf. Leblanc and Gillies 2005; McNulty et al. 2005), but its findings, whilst valuable, are often limited by methodology focused on variance analysis and as such are far from definitive or significant. Such research is also important if we are to build a picture of the state and nature of the “talent pool”. Also, we must recognise in all of this that governance does not take place in a vacuum; context is critical, and our accounts of governing must in turn account for the influence of politics, polity, culture, economics and the natural environment.

These related issues reflect a renewed interest in the “practice turn” in organisation and management studies (cf. Schatzki et al. 2001), particularly in what key organisation members do to realise strategy. An approach that focuses upon process will allow the research community to fully and properly understand the complexities of governing and to assess the implementation of best practice or deep causation in decision making.

Methodological Issues

At the heart of this research agenda is process, which presents to us a methodological issue, since much of extant governance theory is derived from the traditional “variance approach” to social science (cf. Mohr 1982). This approach focuses on studying fixed entities with varying attributes (which have a single meaning over time) and which only “synopsizes” reality (cf. Tsoukas and Chia 2002). Explanations are based upon necessary and sufficient causality and upon efficient causality. The generality of theory derived from this approach depends upon uniformity across contexts. Time ordering among independent variables is not relevant and the emphasis of such work is on immediate causation. This approach to theory development does not accommodate all types of forces that influence the process of governance, and the research strategies used focus upon deterministic causation (cf. van de Ven and Poole 2005). This approach cannot explain phenomena that “encompass continuous and discontinuous causation, critical incidents, contextual effects, and the effects of formative patterns” (Poole et al. 2000, p. 4).

Research in corporate governance requires an approach that will clarify similarities and differences among theories in order to facilitate theoretical integration and to generate a comprehensive understanding of governance. This requires a rigorous epistemological base, built upon an ontology that is more in keeping with understanding governing processes. We argue that the requirement is for an approach that accommodates a “fluxful”, changeable and emergent post-modern world, emphasizing reality as inclusively processual. A processual approach acknowledges that corporate governance practice around the world developed and continues to develop in a variety of unique cultural, historical and social circumstances.

In this approach, explanations of events would be based on necessary causality, as well as final (goal), formal (structure) and efficient causality, which means that explanations would be layered and incorporate both proximal and distal causation. This is because such explanations recognize that change and interconnectedness are predominant characteristics of nature. Generality depends on versatility across cases and time and time ordering is paramount. What emerges from such an approach is a process study narrating the emergence of the social construction of governance (cf. van de Ven and Poole 2005).

Well specified though they may be, many of the “variance theoretical” papers are based upon an analysis of corporate financial data. Consequently, we need more evidence from acts of governing rather than the output from such acts. If we are to develop a deeper understanding of governance, then we need to understand directors as well as the artifacts that they produce. In other words our research designs must capture data about the process of corporate direction over time (cf. Ancona et al. 2001). Capturing time-oriented action leads to a focus on events, which represent a temporarily stable picture of individual and collective actions or experience and which inevitably change the context in which processes occur. Developing process studies of governance requires researchers to intimately observe the actions and interactions of organisation members in the real-time instantiation of governing processes, through deploying ethnographic and participant observer methods in order to access and generate data (cf. Boden 1990). Such methods enable the researcher to identify events; characterize process sequences and their properties over time; test for temporal dependencies in process sequences; evaluate hypotheses of formal and final causality; recognize coherent patterns that integrate narratives; and evaluate development models (cf. Poole et al. 2000, p. 92). However, the data produced by such approaches is more complex than the norm, requiring that we employ different approaches to its analysis if we are to discover patterns in governing processes and to develop grounded explanations of these processes (cf. ibid., p. 5).

Parting Thoughts

Our current knowledge of the practice of corporate governance is limited, mainly because of ideological posturing in favour of shareholder or stakeholder primacy that goes back to the 1930s and beyond. As a consequence, evidence-based action in pursuit of improved governance in response to public concern is similarly often ideologically limited. Carter and Lorsch (2004) call for a return to the “drawing board” for corporate governance in order that practice reflects the complex world. Reflecting complexity requires that we understand the practice (cf. Leblanc and Gillies 2005) of governance and the processes that comprise this practice. This, in turn, requires that we researchers too should return to the drawing board seeking deeper and more meaningful evidence from which to inform and improve practice.


  1. 1.

    This paper extends work previously presented at the Academy of Management 2006 and 2007 conferences.



The author is grateful for comments made by reviewers and those in attendance at the conferences.


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Copyright information

© Springer Science+Business Media B.V. 2011

Authors and Affiliations

  • Steve Letza
    • 1
  • Clive Smallman
    • 2
  • Xiuping Sun
    • 3
  • James Kirkbride
    • 4
  1. 1.European Centre for Corporate GovernanceLiverpool John Moores UniversityLiverpoolUK
  2. 2.School of Management, University of Western SydneySydneyAustralia
  3. 3.Leeds Business School, Leeds Metropolitan UniversityLeedsUK
  4. 4.London School of Business and FinanceLondonUK

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