Corporate Governance and Disappointment

This paper explains the changing faces of corporate governance in US and UK through the 1990s and 2000s. The authors journey through the governance methods of Thatcher and Reagon, and Blair and Bush, while recording the political and economic circumstances that fostered each phase of change. It focuses specifically on the disappointment with corporate governance, as it failed to deliver on its promise again and again, and how the respective governments of US and UK tried to manage and minimise this disappointment. This paper delves into a political economy debate which shows how and why corporate governance must inevitably as it fails to deliver responsible corporate behaviour and increases social division by sanctioning extravagant pay packages to the top management.

What is Corporate Governance:

The term 'Corporate Governance' only passed into common usage in the early part of 1990s. Corporate Governance is defined broadly as ‘the physical exercise of management and policy'. In other words, it is accountability through procedural compliance.

The authors take the position that in dealing with corporate governance issues, traditional finance theory on the economically optimum contracting relationship between management agents and shareholder principals is in crisis, and thus cannot be expected to fulfil the requirements of the modern day corporations, that are faced with increasingly vocal socialists of today.

The gap in finance and corporate governance in literature identified through this paper is that existing literature appears to be uninformative and naïve as it generally fails to consider the political, economic and social context that influences and shapes governance. Thus this paper looks at corporate governance through three different lenses of political, economic and social context, and relates the disappointments each of these phases have projected.

Political context

From neoliberalism with responsibility to governance everywhere

Ever since the 1980s till the 2000s, the increased role of the government in the economy has been regarded with caution, and efforts have been on-going to minimise the inclusion and intrusion of governments in direct economic play. The general idea has been that ‘the government is the problem, not the solution' (Reagon, inaugural speech, 1980). The aim then has been to gradually evict the government from the economy by

a. minimising the state ownership of infrastructure

b. curtailing the state control of institutions like labour markets and social welfare

c. a substitution of governance through establishing frameworks and regulation procedures in public interests, promoting socialization.

This was done by the two governments in different but complimenting manners. This frame is now neoliberalism with responsibility, this goes to say that neoliberalism, or in other words, the deregulation and privatization of corporations, is coupled with social responsibility. To this end, in the late 1990s, UK adopted the ‘third way', as opposed to rightist or leftist style of governance. This third way incorporated the issues of social responsibility into governance by highlighting the concept of ‘equality of opportunities' as opposed to equality of outcomes'. In the same vein, US adopted the compassionate conservatism agenda, which supported welfare reforms, after school programmes, homes for unwed mothers, drug treatment centres etc.

Under both these setups, however, much emphasis is laid on rhetoric rather than ground realities, with the result that these control technologies ended up promising more than could be ultimately delivered. This incoherence with the Third Way and Compassionate Conservatism led ultimately to increasing opportunity for establishment of governance procedures. Governance thus came to be seen as a set of procedural rules about how the show is run. The measures specifically taken in this regard were (i) audit was strengthened so as to restrain accounting fraud, and (ii) remuneration committees were used to discourage over payment to management executives in private corporations. In simpler terms, governance promises to make all those in power in giantfirms, hospitals, universities and voluntary organizations visible and accountable to the rest who fear repercussive action. And it does so by ensuring procedural compliance.

Corporate Governance and the Agency Problem/Solution Couple

After discussing the political aspect of governance, attention is now focussed on the issue of governance under the specific agency theory perspective. This perspective entails that corporate managers should act in the