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competition and change, Vol. 16 No.

4, October 2012, 34352

The New Governance Approach to the

Devolution of Corporate Governance
Mia Rahim
Macquarie Law School, Macquarie University, Australia

The moral arguments associated with justice, fairness and communitarianism have rejected the exclusivity of costbenefit analysis in corporate governance. Particularly, the percepts of new governance (NG) have included
distributive aspects in efficiency models focused on maximizing profits.
While corporate directors were only assigned to look after the return of
investment within the traditional framework of corporate governance (CG),
NG has created the scope for them to look beyond the set of contractual
liabilities. This article explores how and how far NG notions have contributed to the devolution of CG to create internal strategies focusing on actors,
ethics and accountability in corporate self-regulation.
keywords Corporate governance, new governance, shareholder primacy,
enlightened shareholder primacy, corporate social responsibility

Over the last two decades, the dominant mode of firm governance has been under
considerable scrutiny. Argument rages between scholars and practitioners as to what
the best practice should be in the corporate governance framework, as control of such
governance rests with the shareholders who may not be orientated towards public
policy goals. Two vital reasons that compel changes in the nature of governance are,
first, that it becomes difficult for public agencies alone to raise the compliance level
in companies (Freeman, 1997) and, second, that the state alone does not possess
adequate resources to sufficiently encourage private actors to comply, to enforce the
law or to monitor and update rules in light of experience (Solomon, 2007).
Against this background, new governance (NG) is an emerging form of governance
that contributes to changes in corporate governance (CG). The basic concept of NG
is that it proposes various types of stakeholder and strategy to reach an optimal
welfare level. In other words, this concept argues for collaborative governance, in
which stakeholder groups, public agencies and private parties work together to define
and revise standards to reach a mutually acceptable objective (Bradley et al., 1999;
Winkler, 2004). NG is a rapidly growing concept (Sabel & Simon, 2006: 395; Walker
The University of Hertfordshire Business School
and W. S. Maney & Son Ltd 2012

DOI 10.1179/10245294 12Z.00000000021

Electronic copy available at:



& Burca, 2006; Trubek & Trubek, 2007) and, like many new paradigms, it defines
itself in large part appositionally. NG potentially is relevant to almost all areas of
governance in both public and private sectors. The kinds of regulation included in
NG tend to be less prescriptive and less top-down than CG, and more focused on
learning through monitoring than compliance with fixed rules. NG also provides
scope for using a provisional and quasi-legislative framework that helps to set the
terms of diffuse groups of stakeholders to elaborate in particular applications, which
will then be reviewed at the centre with an eye toward revision of the frameworks
(Sabel & Simon, 2006: 399).
The NG approach has contributed to a devolution in CG frameworks. The main
feature of such devolution has been that, along with a functional economic focus, a
public policy approach that seeks to protect investors as well as non-shareholder
stakeholders has become recognized in CG (Rahim, 2011). This devolution has also
contributed to changes in the socio-legal view of corporate regulation.1 In this form
of governance, the role of regulation is to catalyze a process of deliberation that
ensures that different actors contribute to governance and learn from the results of
each others contributions.
This article reviews the intricacies of NG approaches to devolution into CG. The
second section discusses NG, CG and their nexus. The third discusses the impact of
this nexus on traditional patterns of CG. It discusses enlightened shareholder primacy and its impact on the devolution of the dominant frameworks in CG. Finally,
the section concludes that NG has contributed to the rise of enlightened shareholder
primacy, this assisting devolution in the traditional format of CG.

NG, CG and their nexus

NG is derived from a conceptual background concerned with how hardcore corporate
decision making and people-friendly business strategies have begun to converge, as a
product of executive fiduciary duty, stakeholder engagement and economic analysis
of management incentives (Gill, 2008: 463).4 NG also addresses how companies
incorporate stakeholder-friendly business strategies (Bradley et al., 1999; Winkler,
2004), it examines the role of shareholder and board activism in lobbying for social
responsibility (Joo, 2003; Sulkowski & Greenfield, 2005), and it provides quantitative
assessments of reporting practices, indices and ratings that link governance with
responsibility (Deegan, 2002; Statman, 2005; Kolk, 2008). NG implies models
for pursuing this emerging frontier through greater involvement of the board of
directors and it utilizes a comparative approach to cross the border between CG and
To function as a tool for governance, NG highlights the need for public scrutiny
and enforcement. It promotes new regulatory structures that require companies to
track the growing public expectations for accountability. In fact, studies show that
internal governance policies that emphasize social responsibility through transparency and coordination are more successful in bringing about ethical corporate
conduct than traditional prescriptive regulation (Selznick, 2002: 101). Moreover,
contrary to the more traditional forms of regulation, proponents of NG believe that

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such structures can and should be designed to rely less on single-party dictated
preferences and more on stakeholder collaboration, flexibility and pragmatism
(Karkkainen, 2004; Rahim, 2012a, 2012b). Empirical evidence suggests that corporations are more willing to consider effective ways of enforcing compliance standards
and processes, as well as sharing more information, when they operate in a collaborative climate that allows them to perform their own monitoring (Coglianese & Lazer,
2003). Studies have shown that enforcing environmental protections through nonconventional regulatory tactics may also enhance corporate compliance with financial
and workplace protections (Parker & Nielsen, 2006).

CG is an umbrella term. In its narrower sense, it describes the formal system of
accountability of corporate directors to the owners of companies. In its broader sense,
the concept includes the entire network of formal and informal relationships involving the corporate sector and the consequences of these relationships on society in
general (Keasey et al., 1997: 2). These two senses are not contradictory, but rather
complementary. CG has been described as the way in which suppliers of finance to
corporations assure themselves of getting a return on their investment (Shleifer &
Vishny, 1997). However, it may also allude to the whole set of legal, cultural and
institutional arrangements that determine what publicly traded corporations can do,
who controls them, how that control is exercised and how the risks and returns
from the activities they undertake are allocated (Blair, 1995: 3). Taking both of these
senses in conjunction, CG is not merely about maximizing stock value.
Within the CG framework in general, the roles, rights and responsibilities of
corporate directors are crucial (Farrar, 2008: 69146). In particular, the board of
directors is the most appropriate body to design policies and to allow corporate
management to fulfil its responsibilities to society (Mitchell, 2007: 280). In most
cases, this board is the sole body that communicates corporate performance to corporate owners. Eisenberg describes this as the board as manager (1982: 209210).

The Nexus of NG and CG

The potential nexus of CG and NG is frequently understood against the backdrop of
the NG approach that upholds increased participation of the stakeholders in shaping
the regulations for governance (Salamon, 2000). Therefore, this nexus has gradually
been manifested in the replacement of the dominant role of any single framework in
governance with a mixture of public and private, state and market, traditional and
self-regulatory institutions based on collaboration among states, business corporations, stakeholder groups and NGOs (Lobel, 2005). This nexus urges that social
actors, other than the government and business, should actively participate in
regulation, from the creation to the monitoring phase. The nexus focuses on making
self-regulation of corporate conduct more effective rather than on replacing it with a
prescriptive mode of regulation. Enforceable legal frameworks are rare in the context
of voluntary stakeholding of CG, as they suggest an indirect strategy to oblige CG to
embrace, for instance, the social responsibility issues at the core of their internal
strategies. To this end, the nexus creates environments to promote ground-level activism, advocacy and media campaigns to influence CG (Parker, 2007; Rahim, 2011).



Scholars have devoted substantial attention to investigating the efforts undertaken

by civil society actors (e.g. NGOs and non-profit organizations) and corporations in
influencing corporate regulation (Parker, 2002). To date, these efforts have concentrated on strategies such as working with companies to build their social responsibility through consulting, training and publishing stock market indexes and ratings that
measure their performance (Bastmeijer & Verschuuren, 2005; Rahim, 2011). Along
with the development of the precepts of NG, multi-party involvement in regulation
and monitoring is developing as a vehicle through which CG and social responsibility converge. The changing nature of corporate monitoring, the identity of the social
regulators participating in the process and the substantive mechanisms unfolding to
control corporate behaviour suggest the important role of this convergence. Laws,
rules or policies hold the key dimension of such convergence and drive the process
underlying it within companies with the aim of reaching a particular goal. Such a
regulatory approach drives CG to engage reflexively in regulation so that CG can
compel corporate management to initiate the strategies required to contribute in
fulfilling public policy goals.
NG precepts have led to the development of different regulatory strategies for CG
to target resources in a more sophisticated manner and direct corporate management
to hold public policy goals at the core of corporate self-regulation (Lobel & Amir,
2007). This development in CG has begun the process of convergence in the tensions
between CGs engagement with shareholder and stakeholder interests.2 It offers
theoretical insights into why companies should not be treated solely as their shareholders private property but rather as semi-public enterprises based on sophisticated
transactions and relational contracts among investors, managers, employees and
other stakeholders (Blair & Stout, 1999). NG scholars suggest that applying the contractarian approach to corporate law (which portrays the corporation as a voluntary
nexus of contracts (Eisenberg, 1998: 825826; Klausner, 2005: 782784)) as well as
the realistic approach (which paints the corporation as a separate legal personality
akin to a human being (Allen, 2001)) should not result in giving superior property
rights to shareholders above employees. Rather, they posit, workers who invest their
labour as an input in the enterprise should enjoy legal recognition of their residual
interest in the companys assets (Allen, 1992; Greenfield, 1997).
The ethos of the corporate social responsibility movement has helped this new
notion of CG to reconcile the tension between shareholders and stakeholders and
render CG more attuned to constituency concerns. Business and society has gradually accepted this development in the CG framework. When The Economist recently
asked over 1,000 executives how [their] organization[s] define corporate responsibility, 31.4 per cent of the respondents answered maximizing profits and serving the
interests of shareholders (2008). This was the second-most common answer after
taking proper account of the broader interests of society when making business
decisions, which was chosen by 38.4 per cent of respondents. This development
has implications for the application of CG and social responsibility. Accordingly, the
study of CG is gradually beginning to incorporate concepts such as non-financial
accountability, ethical codes and standards of conduct, socially driven investment and
fiduciary duties, board diversity, stakeholder engagement, sustainability reporting
and socially responsible corporate strategies (Dawson, 2004). The next section delves
more deeply into this issue.



The NG and CG nexus and its impact on the devolution of CG

This section discusses how the nexus of NG and CG at the normative level has
impacted on the dominant pattern of CG. It focuses on the development of enlightened shareholder primacy (ESP), which is based on the core of NG approaches and
contributes to the devolution into CG.

Enlightened shareholder primacy

The development of ESP dates back to the debate between Adolf Berle and E. Merrick
Dodd (1932) concerning the objectives of a company. Berle (1930) argued that corporate directors should not, as managers of companies, have any responsibilities other
than to shareholders and that their focus should only be upon maximizing profits.
Dodd argued that companies are economic institutions and that they should therefore
contribute to social development along with the responsibility of generating profits
(932: 1148). While the arguments of Berle have largely been accepted, especially in the
US, those of Dodd have successfully paved the way for a chorus of scholarship on the
societal approach in CG. This seminal debate and the changed business practices
following the ideas of each proponent have gradually augmented the argument for
ESP that allows corporate directors to consider the interests of constituencies, other
than their shareholders, in the actions they take. This has also created scope for the
directors to design strategies for the long-term well-being of a company.
ESP has moderated directors obligations to manage the company in a way that has
ensured only the achievement of short-term benefits, such as maximizing immediate
profits (CAMAC, 2006: 8489). Recent literature has utilized the term enlightened
shareholder value or enlightened self-interest to indicate that, although shareholder
value is paramount, careful consideration of stakeholder interests is usually in the
interest of the company (Australian Parliamentary Joint Committee on Corporations
and Financial Services, 2006: 46). This development in shareholder primacy accepts
that good management should involve assessing the impact of a particular decision
in considering the likely consequences for corporate reputation; this has helped
corporate management to attract and retain employees and minimize risk by
incorporating social policy goals at the centre of their strategies (Group, 1999).
ESP suggests that corporate directors ought to be empowered to consider the interests of stakeholders while maintaining shareholder primacy. This has provided new
insights into how companies are run and operated on a daily basis within the precepts
of CG. It relates to the social welfare-driven approaches to CG and policy and
proposes that business efficiency should not only aim at higher stock prices but also
at internalizing environmental and social externalities and acknowledging the
often-unequal distributive consequences of creating corporate surpluses (Mitchell,
1991; Greenfield, 2005). However, this concept does not undermine the interests of
shareholders. Rather, it adds stakeholders interests to the CG framework along with
shareholders interests. Thus, this concept emphasizes moral arguments associated
with justice, fairness and communitarianism (Greenfield, 2000; Shamir, 2008) and
endorses approaches that reject the exclusivity of a narrow costbenefit analysis and
the exclusion of the distributive aspects of efficiency models that focused on maximizing profits. Germany and Japan are prominent in maintaining a scale of values based



on different types of moral sense and ethics. In Germany, co-determination and

worker representation on the supervisory boards of companies are common, while in
the UK, CG allows corporate directors to consider employee issues that are beyond
the contractual agreement. Recently, even a number of US states have created constituency statutes that allow consideration of a broad range of stakeholders (Farrar,
2008: 451).
Based on the communitarian precept of NG, ESP legitimizes far-sighted strategies
in CG. It supports corporate directors and senior managers initiatives by considering
the interests of non-shareholder stakeholders as long as these initiatives foster corporate profits. In its report Corporate Responsibility: Managing Risk and Creating
Value, the Australian Parliamentary Joint Committee on Corporations and Financial
Services (2006: 59) observed that the level of social responsibility in business decision
making has increased in recent times. This report mentions that many directors of
Australian companies make decisions founded on social responsibility as well as the
interests of shareholders. The Committee mentions that: [p]rogressive, innovative
directors, in seeking to add value for their shareholders, will engage with, and take
account of, the interests of stakeholders other than shareholders (ibid). Meredith
Hellicar, the chairwoman of the substantive James Hardie Group, acknowledged that
corporate directors are aware of the threat from the shareholders and the possibility
of being the object of legal suits, even though they are engaging more in stakeholder
engagement and social responsibility (Buffini, 2005: 4).
Moreover, ESP permits corporate directors to focus on long-term interests.
Although it is accepted that most shareholders prefer to earn a stable rate of profit
over the long term, not all shareholders want directors to focus on short-term benefits
(IFRS, 2006, in IMA, 2006: 4). The Australian Parliamentary Joint Committee on
Corporations and Financial Services takes the view that most shareholders prefer to
support corporate responsibility, as they believe that this will lead to long-term gain
for shareholders (2006: 50). At this point, Hansmann and Kraakman mention that
there is no longer any serious competitor to the view that corporate law should
principally strive to increase long-term shareholder value (2000).
The move towards this more enlightened approach has contributed to the inclusion
of NG notions in CG.3 NG defines this transformation as a convergence of business
self-interest and the interest of society to ensure that companies perform their social
responsibilities. This has already been reflected in corporate governance scholarship.
For instance, the OECDs recent publication on corporate governance principles
defines the basis of an effective CG framework as one that, should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the
division of responsibilities among different supervisory, regulatory and enforcement
authorities (2004: 17). The OECD considers that CG is instrumental in reaching
fundamental social and economic goals and emphasizes that the CG framework
should be developed with a view to its impact on overall economic performance,
market integrity and the incentives it creates for market participants and the promotion of transparent and efficient markets. Regarding the legal and regulatory requirements, as this organization describes, CG should be consistent with the rule of law,
transparent and enforceable. It further mentions that the division of responsibilities
in CG should be clearly articulated and ensure that the public interest is served.



The dominant position of shareholder primacy has been minimized within the CG
framework whereby issues related to companies public policy and social responsibilities are now significant. Ethical norms and the need for accountability have been
two of the driving sources of CG, and, with the stakeholder notion being increasingly adopted in existing business practices, the potential convergence between CG
and NG has come to the foreground. This convergence in the face of regulatory,
business and social changes in global markets has somewhat decreased the controversy over both the potential and limitations of corporate accountability mechanisms.
Changes to the dominant position of shareholder primacy and the rise of stakeholder
pluralism arguments have resulted in the development of the enlightened shareholder
approach in CG. This enlightenment is the source of the changes to the traditional
precepts in CG. While corporate directors were only assigned to look after the return
of investment within the traditional framework of CG, NG has created the scope
for them to look beyond the set of contractual liabilities. It has rendered scope for
corporate directors to create internal strategies focusing on pluralization of actors,
ethics and accountability in corporate self-regulation.
Whereas previously there were two separate mechanisms of CG, one catering
to profit centric corporate decision making and the other to socially responsible,
people-friendly business strategies, NG precepts have contributed to the development
of a more hybridized and synthesized body of governance and norms that regulate
corporate practices. This has helped enlightened shareholders to explore how the
traditional notion of CG may be reformed.


The recent major corporate scandals have contributed to CG gaining attention as a public policy
topic. These incidents have prompted legislators
and businesses to allow greater scrutiny over
accounting manoeuvres and towards greater transparency to prevent managers from engaging in
fraud. After the Enron crisis, the US president
announced his Ten Point Plan to Improve Corporate Responsibility and to Protect Americas
shareholders, focusing on CG reform in the US.
Afterwards, the SarbanesOxley Act was passed.
This Act has introduced comprehensive accounting
reform for public companies and severe penalties for
failure to comply. It has divided pro-business and
pro-regulation advocates over the value of these
reformative approaches and their political effects.
For details, see The Presidents Leadership in Combating Corporate Fraud, at: <http://georgewbushwhitehouse.archives gov/infocus/corporateresponsibility/>; Public Company Accounting Reform and
Investor Protection Act of 2002, at: <>; Harshbarger and Jois (2007).
There are some models that describe the strategies
for incorporating stakeholders in corporate regulation.

Amongst these models, Clarksons Risk-based

Model, the Normative Stakeholder Accountability
Model and the Managerial Stakeholder Model are
noteworthy. The underlying notion in Clarksons
Risk-based Model is that, a stake represents some
form of risk and that without risk there is no stake
and hence the rights of stakeholders in any strategy
should be based on the stakeholders liabilities. On
the basis of this notion, this model divides stakeholders into two groups: voluntary stakeholders and
involuntary stakeholders. For details, see Clarkson
(1995) and Belal (2008: 21). The Normative Stakeholder Accountability Model argues that the corporate strategies related to stakeholders should not be
based on their abilities. Rather, it is the duty of the
company to look after the interest of all stakeholders without dividing them according to their ability
to further the economic objective of the company.
For details, see Deegan and Unerman (2006)
and Belal (2008: 21). The Managerial Stakeholder
Model emphasizes the strategies that relate voluntary stakeholders to corporate issues in accordance
with their abilities to further corporate interests. For
details, see generally Gray et al. (1996).



Based on the notion of this approach, different

countries are incorporating different strategies into
their corporate regulation. For instance, the Operational and Financial Review completed in the UK
was built on the concept of enlightened shareholder
value, that is, it was designed to provide shareholders with better information concerning the companys performance. The EU adopted this approach
into its Modernisation Directive that requires a

balanced review of a companys non-financial key

performance indicators including information
relating to environmental and employee matters.
The European Management Audit Scheme and the
Companies Act 2006 (UK) are some other instances
within which considerable weight has been given to
this approach to facilitate corporate governance and
to retain its core notion. For details, see Gregor

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Notes on contributor
Dr Mia Mahmudur Rahim is a Casual Academic Staff member in the Macquarie Law
School at Macquarie University. He completed his LLB with Honours and LLM at
Dhaka University; LLM in International Economic Law at Warwick University as
a Chevening Scholar; MPA at LKY School of Public Policy with a NUS Graduate
Scholarship and PhD at Macquarie University with a Macquarie University Research
Excellence Scholarship. Before starting his doctoral research at Macquarie Law
School, he was a Deputy District and Session Judge in Bangladesh. He also worked
for the Bangladesh Law Commission and the Supreme Court of Bangladesh. He is an
Associate Member of the Center for Legal Governance of Macquarie University.
Correspondence to: Mia Mahmudur Rahim, Room 541, Building W3A, Macquarie
University, Australia. Email:;

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