Corporate Governance and

Complexity Theory
Paul Schumann

This book1 has six chapters:

1. Introduction
2. An introduction to complexity theory – some insights
3. The legal aspects
4. Corporate governance and corporate performance
5. Complexity and corporate governance
6. Conclusion

In “An Introduction to Complexity Theory”, Goergen, Mallin, Mitleton‐Keyy, Al‐Hawamdeh

and Chiu give a good description of some concepts in complexity science applied to social
systems:

• Complexity Theory ‐ “All human systems and institutions are complex in the sense
that they are multidimensional with social, cultural, political, physical, technical,
economic and other dimensions which interact and influence each other. They are
able to adapt to and co‐evolve with changing conditions and are able to create new
order. In a corporate governance context, new order may take the form of new
rules, regulations, corporate governance frameworks, or a new culture; it may also
include the creation of enabling environments that facilitate good corporate
governance within individual organizations as well as industries and economies.
Complexity theory therefore studies social systems holistically; it does not focus
exclusively on one aspect such as the legal framework or compliance, but looks at
the multiple, interacting dimensions that together create the social ecosystem.”
An insight obtained by looking at corporate governance as a complex system “is
that regulators; institutional investors; listed companies and their employees,
customers and suppliers; the financial press and analysts; and other such corporate
governance actors, are intimately interconnected through positive and negative
feedback processes. They influence each other through formal and informal
relationships in such a way that they change their behaviour ‐ in complexity
language, they co‐evolve. It is therefore essential to look at all the related actors
within the whole corporate governance social ecosystem. For example, it is not
enough to focus on the relationship between the board and the shareholders, as
 2

this provides only a partial view of the relevant dynamics that influence corporate
governance.”
• Multiple Interacting Dimensions ‐ “Complex systems are multidimensional, and all the
dimensions interact and influence each other. In a human context the social, cultural,
legal, technical, economic, political and global dimensions may impinge upon and
influence each other. But not all multidimensional systems are complex; machine‐type
systems for example may have many inter‐related parts, but if they cannot create new
order then they are complicated not complex.
Multiple dimensions in a social context, such as corporate governance, may also be
seen in terms of government policy, the strategies and actions of individual firms,
institutional and other shareholders, the financial press and analysts, regulation such as
the US Sarbanes‐Oxley Act of 2002 (Sarbox) and EU regulation. These dimensions do not
exist in isolation, they influence each other and are part of a multi‐dimensional
corporate governance social ecosystem within which single organizations, industries,
national governments and the legal frameworks operate. Furthermore, each
organization will have a set of endogenous dimensions such as its culture, organizational
and power structures and organizational norms that influence each other. Each
organization in turn is influenced by exogenous conditions. All companies exist, for
example, within a specific political, legal, physical, geographic and economic
environment; all these dimensions influence each other, as well as the company itself,
the other companies within the industry, their customers, suppliers, etc. Both the
endogenous and exogenous conditions are in constant flux, as they influence each other
and co‐create the corporate governance social ecosystem.”
• Connectivity and Interdependence ‐ “Complex behaviour arises from the inter‐
relationship, interaction, and inter‐connectivity of elements within a system and
between a system and its environment. In a human system, connectivity and
interdependence mean that a decision or action by any individual (group, organization,
institution, or human system) may affect related individuals and systems. That effect
will not have an equal or uniform impact, and will vary with the 'state' of each related
individual and system at that particular time. The 'state' of an individual or a system
includes its history and its constitution, which in turn includes its organization and
structure. Connectivity applies to the inter‐relatedness of individuals within a system, as
well as to the relatedness between human social systems, which include systems of
artefacts such as information technology (IT) systems and intellectual systems of ideas.”
Connectivity shows itself in formal and informal processes and networks.
“Interdependence comes into being when different parts of the same system (in
this case the corporate governance ecosystem) become so intricately inter‐connected
that a change in one part has (usually) unexpected consequences in other parts of the
same system.”
• Feedback ‐ “An important element in connectivity is feedback. Feedback is traditionally
seen in terms of positive and negative feedback mechanisms, which may also be
described as reinforcing (i.e. amplifying) and balancing. Putting it another way, positive
(reinforcing) feedback drives change, and negative (balancing, moderating, or
dampening) feedback maintains stability in a system.”
Positive feedback is an essential element of a complex system.
• Emergence ‐ “When individuals or groups interact, they create new insights and new
patterns of behaviour, which are more than the sum of the parts, in the sense that they

Paul Schumann, 512.632.6586, paschumann2009@gamil.com, http://insights‐

foresight.blogspot.com
 3

arise systemically from a group as a whole. The same insights could not arise from
individuals working in isolation and then simply adding their insights. Once new
behaviours or new ways of working, or even a new emergent culture, come into being,
however, they in turn affect the interacting individuals in two ways. A culture (or social
context) limits certain behaviours and at the same time opens up new possibilities. In
other words, we constantly create our context by influencing our environment, and in
turn are being influenced by the environment that is created through the multiple
interactions of all actors. We can think of this as a dual process of emergence.”
• Self Organization ‐ “In an organizational context, self‐organization may be described as
the spontaneous coming together of a group to perform a task (or for some other
purpose) without external direction; the group decides what to do, how and when to do
it; and no one outside the group directs those activities.”
• Co‐evolution ‐ “Co‐evolution may be described as reciprocal influence that changes the
behaviour of the interacting entities. In a biological context, as entities and organisms
interact and adapt within an ecosystem they alter 'both the fitness and the fitness
landscape of the other organisms'. The way each element influences and is in turn
influenced by all other related elements in an ecosystem is part of the process of co‐
evolution, which Kauffman and Macready describe as 'a process of coupled, deforming
landscapes where the adaptive moves of each entity alter the landscapes of its
neighbors' .
Another way of describing co‐evolution is that the evolution of one domain or entity
is partially dependent on the evolution of other related domains or entities; or that one
domain or entity changes in the context of the other(s).
The main point, however, to note is that co‐evolution involves reciprocal influence
and change within a co‐evolving ecosystem. If influence and change are entirely in one
direction then that would be more accurately described as 'adaptation to' a changing
environment. However, short‐term adaptation may result in long‐term co‐evolution, if
the entities in due course influence and change each other.”
• Exploration ‐ “In the process of creating new order, complex systems explore possible
alternatives open to them. They can be quite creative and innovative and find new and
different ways of reaching an objective.
Exploration of the space of possibilities also means that complex social systems
need to generate variety and that the search for a single optimal solution may be
neither possible nor desirable. Any solution can only be optimal under certain
conditions, and when those conditions change, the solution may no longer be optimal.
If, however, a variety of possible solutions exists, then as the environment changes the
system is able to draw on these alternatives, which may have become more appropriate
in the new circumstances.”
A fitness landscape can help to explain why a single solution is not adequate over
time.
“If a company has a very successful strategy, or a country has a successful
framework, its success is limited to a particular context at a certain time. As other
organizations within the social ecosystem adjust their own strategies to compete, they
affect and alter the industry fitness landscape and in the process the 'hill' showing high
fitness of the successful strategy has transformed into a valley. If the organization has
not been exploring alternative micro‐strategies, it will be left with no alternative that fits
the new environment.”

Paul Schumann, 512.632.6586, paschumann2009@gamil.com, http://insights‐

foresight.blogspot.com
 4

• Far From Equilibrium ‐ “Another key concept in complexity is that of 'far‐from‐

equilibrium'. When open systems are pushed 'far‐from‐equilibrium' they are able to
create new structures and new order.”
“In a social context 'far‐from‐equilibrium' is taken to mean moving away from
established norms, procedures, ways of working and relating.
When an external event disturbs the behaviour of a system significantly, to such an
extent that it can no longer continue to operate under its current regime, it reaches a
critical point when change becomes imperative. It can then either 'create new order'
and find a different way of operating or die. In dissipative structures the tendency to
split into alternative solutions is called bifurcation, but the term is misleading in that it
means a separation into two paths, when there may be several possible solutions.
Before the system settles into a new solution, several alternatives were possible. The
critical point is therefore a source of innovation, when alternative options are explored.”
• Historicity ‐ In a complex system history matters, but you can’t predict the future of the
system from its past.
“…the specific paths that a system may follow depend on its past history. This is
called historicity. The point here is that past history affects future development but does
not determine it, as there may be several possible paths or patterns that a system may
follow. This explains why the precise behaviour of a complex system may be very
difficult to predict, even while keeping the system within certain bounds.”

In “The Legal Aspects”, the authors explore the relationship between the socially motivated
desires of stakeholders and profitability (and other issues of value to the corporation):
“There are two types of practical benefit that corporations may gain: one is in the form of
immediate or short term profitability, and the other is long‐term survival, competitiveness and
enhancement in value.”
This is followed by a concise (and heavily reference) description of short term profitability:
“Corporations are interested in short term profitability. This is because shareholders are
generally interested in short term profitability. Shareholders’ interest in short term profitability
may also be explained by theoretical perspectives of the corporation. The corporation is an
internal arrangement of contracts minimizing transaction costs. Following the separation of
ownership from control, the overriding agenda of the owners is to pursue the wealth
maximization of their capital input, and the principle agent problem is to monitor or control the
management…One way of controlling the agent is via regular corporate reporting of the
financial performance of the company.”
What the authors found in the research on the subject are:

• There is no link between the corporate reporting of the issues that are of concern to
stakeholders and the short term financial performance of the company. The empirical
research has also produced mixed findings of social reporting on share prices.
• “Empirical studies indicate that corporations that engage with their stakeholders, such
as the environment, employees and the community in general, in the long term may
attract better employees and management and thus ensure their future success.” They
“…also tend to demonstrate longer term survival and competitiveness as such
engagement may improve corporate image and attract customers and investors.”
However, “Such long term value is not necessarily reflected in higher return on assets or
equity.” On the other hand,“..shareholders may hold shares for economic purposes as

Paul Schumann, 512.632.6586, paschumann2009@gamil.com, http://insights‐

foresight.blogspot.com
 5

well as non economic purposes…” But, “…the theory of the corporation as a nexus of
contracts does not by nature mandate a sole focus on profit maximization and allows
shareholders to pursue other objectives.”

As you might guess there’s a lot of controversy about these findings. Philosophically many
people believe that it is not the role of corporations to meet social needs. “There are also those
who argue against the normative view of stakeholder engagement. They tend to justify their
view along four lines of argument.”

• “…shareholders are the only residual claimants and that a corporation’s objective is to
maximize the returns for the collective body of the shareholders.”
• “…accountability to stakeholders will introduce inefficiencies in corporate management,
as managers’ time is diverted to concerns other than the shareholders’ concern for
profit maximizations.”
• “…corporate accountability to stakeholders is a dangerous detraction from the
corporate objective of profit maximization, leading to the usurping of power in a social
democracy where elected public institutions should in principle be responsible for those
issues.”
• “…stakeholders are too diverse and varied.”

The authors devote several pages to the discussion of gatekeepers as actors in corporate
governance. This is especially relevant because of Sarbanes‐Oxley in the U.S. They consider the
following gatekeepers:

• Accountants
• Consultants/investment banks
• Lawyers
• Financial analysts
• Credit rating agencies
• Corporate governance ratings
• Credit providers
• D&O insurers
• Stock markets
• Securities regulators

From a complexity perspective, it is important to consider the entire system regardless of

legal, theoretical or ideology.
“Shareholders, employees, stakeholders and gatekeepers are all part of the complex social
ecosystem surrounding the corporation. Following the recent global financial crisis, the call for
enhanced shareholder monitoring of financial institutions will likely entail changes to the
dynamics in the relationships the financial institutions have with their shareholders.
Nevertheless, at the same time, widespread redundancies following the economic downturn
may undermine the position of employees as important stakeholders in companies. The future
importance of stakeholders may depend on their potential to organize themselves as a pressure
group, the support they receive from the political leadership, and whether social responsibility
and sustainability for businesses will gain in importance. As for gatekeepers, the contractual
relationships gatekeepers establish with companies may put them in a proximate position to
Paul Schumann, 512.632.6586, paschumann2009@gamil.com, http://insights‐
foresight.blogspot.com
 6

learn of the goings on within the company. The opportunity for the gatekeeper to gain access to
information, and to be involved in a monitoring role, allows the gatekeeper‐corporation
relationship to be seen through the lens of complexity theory. Some of the effects have been
observed to be adverse, such as gatekeeper capture in the Enron debacle and the continued
uphill struggle faced by whistleblowers. In the latter area, the law has stepped in to positively
encourage whistle blowing, particularly in the US, and to impose liability on corporations that
treat whistleblowers with prejudice.”

In “Corporate Governance and Corporate Performance” the authors’ conclude:

“What these findings illustrate, if a complexity theory perspective were to be used, is that
the diversity of responses depends on local context. This is a strong argument against universally
applicable and inflexible 'standards'. The continuing debate on the global‐local issue shows that,
although a common infrastructure is useful to provide a degree of commonality, local
constraints and difference usually demand diversity in the local response. There is a very good
argument from complexity theory, which underpins this view. In a constantly changing
environment, a solution which appears optimal under the current set of conditions is unlikely to
continue to remain optimal when the environment and thus the multiple conditions (social,
political, economic, technical, etc.) change. If there is local diversity, there are multiple micro‐
strategies already tried out and some of them are likely to fit the new environ‐mental
conditions. In the corporate governance and the finance fields, a diversity of local response is a
sign of health; if there is a major crisis, it will be disastrous if the solutions have been uniform
and universal, while diversity would provide a faster recovery.”

In “Complexity and Corporate Governance”, the authors cover:

• Complex Systems – A complex system is “a system comprised of numerous interacting

entities (parts), each of which is behaving in its local context according to certain rules
or forces. In responding to their own particular local contexts, these individual parts can,
without explicit cooperation, cause the system as a whole to display emergent patterns,
orderly phenomena and properties at the collective level. In some complex systems, the
constituent parts are not themselves complex systems and are governed by unchanging
rules, while in other more complicated systems, these parts can themselves be complex
systems, governed by rules that evolve, which are referred to as "adaptive agents",
guided by "internal models", giving rise to a whole referred to as a "complex adaptive
system". In these systems, it is possible for a mutually consistent ecology of parts to
emerge from what is effectively a decentralized bottom‐up process of co‐design.”
Maguire and McKelvey
• Networks ‐ Networks are the aggregations of links between any collectivity of agents,
such as people, in the case of organizations and other social collectivities, and
organizations in the case of larger‐scale social systems. Three types of networks have
been studied in the corporate governance literature: (1) the networks that emerge from
corporate board director interlock, in which boards of large corporations share common
directors; (2) methods of understanding the internal dynamics of organizations; and (3)
firms and stakeholders within economies.”
“…networks embody a relational rather than a transactional or atomistic view of the
organization and this brings new challenges of understanding more about the origins,

Paul Schumann, 512.632.6586, paschumann2009@gamil.com, http://insights‐

foresight.blogspot.com
 7

evolution and management of relationships, as well as how they can confer competitive
advantage.
The bulk of the literature on networks in corporate governance lies in the first type
of network: director interlock. A number of authors analyse the interlock of the largest
corporate boards in the United States within a network framework, concluding that such
networks display small‐world properties. The small‐world phenomenon refers to the
idea that even when two people do not have a single friend (or corporate board
membership) in common, they are separated by only a short chain of intermediaries.
Specific preconditions for a small world include that: (1) the network is very large,
containing many nodes; (2) the network is sparse, in that each node has few ties relative
to the size of the population; (3) the network is decentralized, i.e. no single node is
connected to most other nodes; and (4) the network is locally clustered and has
transitive properties, i.e. a friend of a friend is a friend.”
“The influence of such directorship overlap networks and their small‐world
properties on corporate governance can be immense, particularly in the area of
information diffusion. To understand the influence of such networks on the decisions
made by boards, Battiston et al. provide two models of corporate decision sharing
representatives of two types of influence exerted by director networks of Fortune 1000
companies. Model One assumes that board interlock only introduces a bias in the initial
opinions of interlocking directors, in that directors serving on several boards start a new
meeting with an initial opinion adopted at the last meeting on another board; in Model
Two, the more direct influences of common board memberships and external signals by
decisions of other connected boards are factored in.”
“Others apply network analysis to larger‐scale organizational and inter‐firm
connectivity. Heracleous and Murray propose a network typology based on two
dimensions: interdependence, the extent to which firms involved in the network utilize
each others' outputs and resources in their own operations; and durability, the extent to
which different networks persist in the longer term, and with similar participants (in
both structure and content).”

Organizational Networks

Edge of Chaos
High

Embedded
Interdependence

Scanning Building social capital

Innovating
Diverging
Brokered
Coordinating
Ensuring governance

Atomistic Association
Low

Informating Guarding

Low High
Durability

Paul Schumann, 512.632.6586, paschumann2009@gamil.com, http://insights‐

foresight.blogspot.com
 8

“In line with Stephenson and Hayden's analysis, Rowley defines two key network
concepts, which are used as an initial step towards understanding structural influences:
'density' of the network and 'centrality' in the network of the focal firm. Density is a
characteristic of the whole network, measuring the relative number of ties that link
actors together and is calculated as a ratio of the number of relationships that exist in
the network (stakeholder environment), compared with the total number of possible
ties if each network member were tied to every other member. As density increases,
communication across the network becomes more efficient, the consequence of which
is the diffusion of norms across the network, which in turn leads to shared behavioural
expectations. The combination of shared expectations, the ease of information
exchange, and the potential for coalition formation (all of which characterize dense
networks) produce strong unified stakeholder pressures and lead organizations toward
conformity. Densely tied networks produce strong constraints on organizations' actions.
Centrality is an individual actor's position in the network relative to others,
specifically connoting the power obtained through the network's structure, as opposed
to power gained through individual attributes. Within centrality, Rowley identifies
'degree', 'closeness', and 'betweenness' as the measures of an actor's number of direct
ties, independent access (shortest or 'geodesic' paths) to others, and influence over
other actors, respectively. As centrality increases, the focal organization's ability to
resist stakeholder pressures increases.”

Network Concepts
High

Subordinate Compromiser
Comply with stakeholder Balance
expectations Pacify Stakeholders
Bargain
Density

Solitarian
Gatekeeper
Low

Avoid stakeholder
pressures Control stakeholders

Low High
Centrality

• Path dependence – “This view of the central role of initial conditions in forming
subsequent structures is a powerful critique of the idea that contemporary functional
needs are the only relevant factors in understanding the causes and dynamics of
corporate structures. From a complexity perspective, acknowledging and understanding
the role of history in helping to explain what we observe today is important. Here its
particular importance is in creating the power and resource environment, in which
corporate structures exist.”

Paul Schumann, 512.632.6586, paschumann2009@gamil.com, http://insights‐

foresight.blogspot.com
 9

“The notions of complementarity and consistency therefore provide an alternative

explanation as to why path dependence arises in systems ‐ if agents act on the basis of
immediate gains then systems can be trapped at local optima because they contain
complementary elements. This is to say that because the different parts of the system
fit well together, their persistence is mutually reinforcing. This means that the system
can tend towards a point which is optimal for that set of elements immediately present ‐
i.e. a local optimum, but will find it difficult to reach a point which is optimal for all
possible combinations of elements within the system ‐ i.e. a global optimum.
Therefore, even if overall one system is potentially more efficient for corporate
structures, the lock‐in produced between the complementary elements of the system
will create a locally efficient point. Schmidt and Spindler argue that this is a richer and
more plausible explanation for persistent divergence than one based on the costs of
switching, since the latter implies that strong pressure on costs of non‐convergence
would eventually produce convergence. In contrast, this analysis allows the envisioning
of convergence towards inefficient systems on the basis of complementarity.”
• Co‐evolution – “Belloc and Pagano develop a co‐evolutionary approach to the
relationship between the political system and the system of corporate governance in a
country. This approach aims to supplement and develop Roe's analysis of the causal
effect of politics on corporate governance, which argues that a low level of 'social
democracy' has fostered a dispersed ownership structure in the corporate sphere of the
US. Belloc and Pagano argue instead that forms of corporate governance also influence
politics, and that this two‐way cumulative causation implies the existence of multiple
paths of co‐evolution, between politics, technology and corporate governance. A
theoretical case and an empirical case are made for co‐evolution through two‐way
causation.”
“From a complexity perspective, this process of mutual influence is central to the
understanding of how and why different systems have developed. Positive feedback is
seen to reinforce the different managerial technologies at work within each system. For
example, the American model invests considerably in training managers and the
concentration of capital in firms, perhaps at the expense of training workers. This leads
to the adoption of technical and organizational technologies that favour the
accumulation of top‐down and hierarchical forms of knowledge, which in turn makes
the continued training of the managerial class more important. Although European
forms of governance are more diverse, on the whole the power of owners and workers
rather than managers has resulted in the bottom‐up transmission of tacit or informal
knowledge at the expense of a skilled managerial class and the formalization of
knowledge. Both equilibria are self‐reinforcing.”
• Emergence – “Bad corporate governance ‐ and in its worst form corporate corruption ‐
is, according to Frederick, a natural consequence of the adaptive responses of
managerial agents in business environments. These business environments are shaped
by particular biological processes, internal order‐creation processes and
attractors/values which shape the trajectories of behaviour. In this case, the business
environment shapes and promotes managerial agents who are potential agents of
corruption. A selective process determines who the executive agents are, and these
tend to be individuals who display evolved ancestral neural algorithms which answer the
needs of a business environment, i.e. the disposition to economize, compete, dominate,
submit and contract. Two of the dominant tendencies for these agents will be to

Paul Schumann, 512.632.6586, paschumann2009@gamil.com, http://insights‐

foresight.blogspot.com
 10

economize on behalf of the firm, and to seek personal gain. Where the balance between
conditions favouring economizing for the firm and those conducive to personal rent‐
seeking tips in favour of rent‐seeking, it is to be expected that executive corruption
emerges.
This application of the concept of emergence to corporate behaviour is important
from a complexity perspective, since it highlights the role of interaction between
different elements of the system ‐ in this case executive agents and the corporate
environment ‐ in explaining outcomes. However, it is rather limited as an application of
emergence to the theme of corporate governance more broadly.”
• Evolutionary strategy – “Complexity arises when complex systems approach the edge of
chaos. This is when emergent system‐level phenomena generate patterns in time and
space that have neither too much nor too little form, and are neither static nor chaotic
but are instead interesting due to the coupling of individual and global behaviours.”
The authors describe “an 'edge‐of‐chaos' structural design, which allows a 'balance
to be struck between the need for order and stability, and the need for innovation and
creativity'. Going too far in the former results in tight structures, poor flexibility and the
'bureaucracy trap', while excessive indulgence in the latter leads to excessive but
ineffective communication, obscure responsibilities and the 'chaos trap'.”
A second and probably superior design is rule based. “Given the superiority of self‐
organizing processes, as opposed to tight control, as a way to release the organization's
creative forces and sensitivity to design influences, the corporate center is left with the
role of designing "simple rules", i.e. objectives or policies that frame self‐organizing at
the business level.”
Based on Kauffman’s biological NK model of adaptive strategy, “Organizations adapt
by altering their existing form and structure in an attempt to enhance their fitness ‐ or
ability to remain strong and competitive in the organizational environment ‐ in a payoff
surface, or 'fitness landscape'. A fitness landscape is a multidimensional space in which
each attribute of the organization is represented by an aspect of the space itself, whilst
a final dimension indicates the organization's fitness level. Increasing the density of
interdependencies affects the complexity of the landscape and, in turn, the emergent
patterns of behaviour.
N represents the number of elements that characterize the entity (actions or policy
choices, in the context of organizations) and K the level of interactivity between a given
entity and N, the internal components. When there are no interactions between
different attributes (K is low), the landscape tends to assume a single‐peak
configuration, demonstrating that in an environment of low interdependency, and thus
low interaction, there is a single optimum configuration. However, as interactions
increase (K is high), the landscape becomes multi‐peaked, and is a function of the search
behaviour of actors moving on the landscape. Actors on a landscape are able to identify
the positive and negative gradients around their current position ‐ and are thus able to
engage in local or incremental searches ‐ but are unable to make similar judgments for
more distant ones. As a result of locking into the first available solution, a strong form of
path dependence is often observed. One way of overcoming such lock‐ins is to engage in
'long‐jumps', random explorations of more distant portions of the landscape,
simultaneously altering many elements of the internal N. The alternative courses of
action available, such as incremental versus long‐distance searches, raise the following
dilemma for the authors: how can the benefits of long‐distance searches ‐ by

Paul Schumann, 512.632.6586, paschumann2009@gamil.com, http://insights‐

foresight.blogspot.com
 11

reconfiguring N, the internal components ‐ be maximized, without losing the advantages

of exploiting the knowledge acquired by the existing internal structure?”
A conceptual fitness landscape is shown below:

• Reflexive Adaptive Systems – “To the application of complexity to corporate

governance, particularly in an era of accelerating change and increasingly complex
problems and tasks, Morley makes the foundational contribution of a redefinition of
control:
Control' has to be redefined for complex systems because, whilst simple systems can be
idealized mechanical systems with all their relationships made explicit, interconnections
in complex systems are so dense that this is not possible. Understanding complex social
systems is about understanding the process by which rules change and are applied. As
the increasing specialization required for individual jobs means that managers are less
and less able to closely supervise their subordinates, the question for an organization
focuses on how each individual knows what rules they should work by to be a successful
member.
Moreover, because not every element in a system is distinct, the idea of 'control' cannot
be viewed as a distinct element in the system.”
A Reflexive Adaptive System is a type of Complex Adaptive System that has a degree
of consciousness. A Reflexive Adaptive System “has a model of itself embodied in itself,
so that the model can be subject to simulations, which can lead the system to perform
actions that it has previously never performed or to respond purposefully to situations
that it has previously never experienced.”
• The Broader View and Corporate Social Responsibility – “Complexity theory has also
been used as a platform to promote reforms to corporate governance based on
alternative ethical values, which are derived from the position of the corporation both
as a complex system in itself, and as an agent in the wider complex systems of the
economy or the world.
Monks argues that in the past people have mistakenly viewed corporations and the
economy either as people (i.e. with intentions and agency) or as machines, governed by
predetermined rules. According to Monks, these views are wrong and he suggests that
Paul Schumann, 512.632.6586, paschumann2009@gamil.com, http://insights‐
foresight.blogspot.com
 12

corporations and the economy should be viewed as complex adaptive systems. Such a
view gives us a basis on which to envision a 'restored' corporation, i.e. one that does not
seek unlimited life, size, power and licence, but rather long‐term life, appropriate size,
balanced power and greater accountability. Ultimately, the best agents to ensure these
objectives are long‐term shareholders, who are sufficiently independent, informed,
motivated and empowered to perform this role. They should do this within a corporate
framework of more rigorous legal compliance, full disclosure of likely social costs and
minimal political involvement.
Monks uses complexity theory to argue for a balance between a mechanistic or
static and a dynamic view of corporations. The mechanistic tendencies of corporations
to economize and seek profit result in the externalization of cost to the environment as
far as possible ‐ corporations are by design efficient externalizers of cost and risk.
However, this means that the longer‐term and wider social impacts of their activity are
not taken into account. Healthy corporate governance is defined as the 'relationship
among various participants in determining the direction and performance of
corporations consistent with the public good'.
Furthermore, corporations have been given some rights of individuals through the
interpretation of the 14th Amendment to the US Constitution, which allows a
corporation to be treated as a person. However, because of the limited liability of
directors and the inability to incur legal penalties other than financial ones, corporations
are neither susceptible to the standards of accountability nor the deterring effects of
punishment to which people are subject. This greatly increases the power of
corporations and breaks the ties of accountability that should attach it to society as a
whole.
Hope exists for restoring corporations, however, through an understanding of their
dynamic nature. According to Monks, they strongly exhibit six features of complex
adaptive systems: multiplicity, spontaneity, accommodation, adaptation, transcendence
and metamorphosis, and there are many examples of these features at all levels in
corporations. These have the power to counterbalance the aforementioned dangers of
unlimited life, size, power and licence of corporations.”

The authors recognize the shortcomings of the literature on complexity and corporate
governance. In each section they assess the literature and make suggestions for further work.
“There are two major weaknesses with the literature cited. One is that most authors
concentrate on one or very few complexity principles. The other is that most of the work
reported is theoretical rather than practical.”
However, there is much promise in this line of thought. Complexity, in my opinion, will
provide the tools necessary to redefine a corporation, and like the poet Khayyam’s wish2 allow
us to:
Re‐mould it nearer to the Heart's Desire!

“Complexity theory need not be used only as an explanatory and descriptive framework, but
may be used to move from a deep understanding of the problem space to create an Enabling
Environment that addresses the problem in a sustainable way. Enabling environments are the
set of cultural, social, technical, physical, legal, political, economic and other conditions that
together create that environment. They interact and influence each other, and enable the
internal environment to co‐evolve with the external, broader social ecosystem.”

Paul Schumann, 512.632.6586, paschumann2009@gamil.com, http://insights‐

foresight.blogspot.com
 13

Corporate Governance and Complexity Theory, Marc Goergen, Christine Mallin, Eve
Mitleton‐Kelly, Ahmed Al‐Hawamdeh and Iris Hse‐You Chiu, Edward Elgar, 2010, 141pp
1
This book is academic. It is a meta study of what’s known about complexity theory and corporate
governance. Each chapter provides an assessment of the research and points out needs for further
research. And, it’s an expensive book ($100). The perspective is from the U.K. Never‐the‐less, a
practitioner can benefit from the insights in this book.
2
The Rubaiyat, Omar Khayyam, Written 1120 A.C.E., http://classics.mit.edu/Khayyam/rubaiyat.html
Ah, Love! could you and I with Him conspire
To grasp this sorry Scheme of Things entire,
Would not we shatter it to bits‐‐and then
Re‐mould it nearer to the Heart's Desire!

Paul Schumann, 512.632.6586, paschumann2009@gamil.com, http://insights‐

foresight.blogspot.com