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Corporate Accountability and Governance Reform An Alternative Logic of Value to Agency Theory’s Dead End Charl du Plessis University of Virginia The Accountable.

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Presentation on theme: "Corporate Accountability and Governance Reform An Alternative Logic of Value to Agency Theory’s Dead End Charl du Plessis University of Virginia The Accountable."— Presentation transcript:

1 Corporate Accountability and Governance Reform An Alternative Logic of Value to Agency Theory’s Dead End Charl du Plessis University of Virginia The Accountable Corporation February 2005

2 Questions: Corporate Accountability Who or what is it that we hold accountable? For what is it being held accountable? Focus of Discussion Cultural perceptions of two concepts –The Corporation: From production system to investment system (Fligstein) –Shareholder Value: From profit-maximization to a plurality of sentiments (Smith and Sen) Mapping governance reform past and present to perceptions

3 Explore origin of cultural conceptions, and the shift to the agency logic of the firm as investment system Introduce the more progressive governance reform proposals of MacAvoy and Millstein (”MacMill”) Review evolvement of governance to locate MacMill amidst other new reforms (Congress, SEC & Exchanges, Conference Board, Delaware Courts) Identify central role of agency logic and its impact on reforms List problems associated with the agency logic Investigate viability of a so-called value logic as an alternative Consider implications for governance practice Paper Structure

4 From Corporate to Agency Logic AssumptionsCorporateAgency ManagementProfessionals with unique knowledge, Stewards of firm Fungible agents of shareholders, Self-dealing The FirmUnique core competenciesNexus of contracts Resource AllocationManagement allocateShareholders diversify High-order Cultural Frame Professional autonomy, production-function Capitalist markets, investment-system Theory of Organization Managerialist Theory (Chandler, 1962) Agency Theory (Jensen & Meckling, 1976) CompensationUsed to attract scarce management talent Used to align management and shareholder interests Allocation of CashRetain and reinvestRedistribute to shareholders

5 Evolvement of Governance Separation of owners & management (Berle and Means, 1932) – Chandler’s managerialist theory and corporate logic of unique knowledge and strategic contribution of management 1960s onwards - rise of managerial capitalism, with management following own dictates. Conglomeration and merger activity focused on growth over profitability 1976 – Jensen & Meckling on agency theory. Higher-order cultural framing of economy adopts the agency logic of the capital market’s emphasis on share price (Zajac and Westphal, 2004) Late 1970s – inflation and the rise of the CFO (Zorn, 2004) Fligstein (1990) – legislative triggers and conceptions of control within firm. Cultural conception of firm as investment-system Agency logic dominates governance reform during earlier reforms (FASB & CalPERS) and with new reforms. Progressive proposals like MacMill and Conference Board follow same logic of separation, and the centralization of authority

6 The MacMill Proposals Stated Objective: Board conduct > structure Complete separation of Chair and CEO Sarbanes-Oxley certification of financial statements extended to the board Board takes responsibility for strategy, risk- management and financial reporting Board must assure itself of the integrity of management Board to appoint internal auditors, and also own consultants, advisors and counsel

7 New Reforms & The Agency Logic Congress: Sarbanes-Oxley 2002 NYSE/NASDAQ & SEC: Majority of independent directors, independent board committee activities, additional committees Conference Board Commission 2003: Separation, self- evaluation, executive sessions, presiding director, “ethical tone set at the top” Delaware: Expansion of good faith requirement to cover new reforms Dominant Themes > Separation as independence > Still more oversight

8 Problems with Agency Logic Separation - wrong metaphor for independence of mind and conduct (Reiter & Williams, 2004). Generic threats within homogenous groups: Self- interest, self-review, advocacy, familiarity, intimidation, self-serving bias, confirmation bias, anchoring, optimism, overconfidence and recency Leadership issues - informational, motivational, and relational Compliance cost and competitiveness

9 Impoverishment of Value Smith: Selfish, social and unsocial passions. No distinction between citizen and economic agent Sen: “Universal selfishness as actuality may well be false, but universal selfishness as a requirement of rationality is patently absurd” Enron thought-experiment in unscrambling the omelet –Prima facie evidence of market for trust and integrity –Doing the right thing –Doing things right Plurality of investor sentiments not exhausted by profit-maximization

10 Which way now? Start at a logic of value that allows for plurality of investor sentiments Requires democratization of shareholder voice Stakeholder theory offers example of workable discourse model Feminist critiques against Habermas’ discourse ethic relevant and limits stakeholder theory’s contribution due to power differential between owners and rest Introduce Knightian uncertainty and its centrality to profit to augment ownership when determining discourse participation under stakeholder model Relate these ideas back to current structures?

11 Knightian Uncertainty Frank Knight, Nobel Prize Economist, in what Stigler describes as “condensed restatement of the theory of value” 1921: Distinction between –Risk: Probabilistic and measurable –Uncertainty: Immeasurable “known unknowns, and unknown unknowns” Examples: –Shareholders, risk-less rate of T-bonds, exit through selling, risk only exist on aggregate –Employee training, and supplier asset specificity

12 The Search for Alternatives Agency Problem & Moral Hazard Corporate Governance Reform Private Ownership: - Scale - Transaction Cost - Transparency ALTERNATE LOGIC? Discourse Approach : - Stakeholder Theory - Power Asymmetry AGENCY LOGIC Separation Approach: - Compliance Cost - Leadership Issues - Logical Impossibility OWNERSHIP UNCERTAINTY VALUE LOGIC Co-Evolutionary Approach: - Beyond Ownership - Knightian Uncertainty & True Economic Profit - Creation and Mitigation of Uncertainty

13 A Value Logic of Governance AssumptionsValue Logic High-order Cultural Frame Organizations function as co-evolutionary systems of uncertainty creation and mitigation amongst citizens The FirmReplaces church and state as pre-eminent social institution. Controls vast resources, cross borders, affect human lives. Creator and disseminator of value ManagementPlurality of talent and motive. Oversight as necessary as is empowerment. Leadership sets normative tone Resource AllocationStakeholder Capitalism: Asset-specificity of both financial and social capital. Credible commitments reduce mobility Theory of OrganizationStakeholder Theory, modified from firm-centric organizational position, to democratizing discourse model CompensationEquitable meritocracy: contribution of resources and bearing of uncertainty determine participation and reward Allocation of Cash FlowAccording to democratically communicated value ordering of legitimate stakeholders within context of each firm

14 Implications for Governance Operationalize shareholder value concept beyond profit/CSR dichotomy Professionalism of board – old boys weekend model needing protection of lawyers unacceptable Directors have duty to create channels for low-cost and frequent shareholder voice. Distinguish between: –Explicit (equitable) right to vote, and –Implicit (equal) right to participate in the voting process Nominating/governance committee to create forum for stakeholder participation – uncertainty as metric Neutralize relative power of institutional investors


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