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Corporate governance theorising: limits, critics and alternatives

Stephen Letza and James Kirkbride
Liverpool John Moores University, Liverpool, UK

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Xiuping Sun
Leeds Business School, Leeds Metropolitan University, Leeds, UK, and

Clive Smallman
Commerce Division, Lincoln University, Canterbury, New Zealand
Abstract
Purpose This paper seeks to examine the mainstream theories of corporate governance in an attempt to suggest that their underlying assumptions and ideologies are misplaced and ought to give way to an emerging pluralistic view of the governing process in order to understand any governance contribution to the dynamics of the business environment. Design/methodology/approach The paper engages with the traditional literature and views on governance models from law, business and organisational studies perspectives. It then considers the environment and changes in the environment and how those challenge the relevance of the traditional approach, drawing upon the impacts on the fluidity of management and governance perspectives and practices in the global economy. Findings The reflections and analysis confirm the view that the underlying assumptions of existing models and regulatory frameworks for governance are misplaced and it is suggested, with reason, that a pluralistic view and framework are better than the current dualistic approach to provide a better understanding of corporate governance in todays dynamic business environments. Originality/value The paper develops a new model and framework for governance practice and regulation and seeks to persuade policy makers and commentators that the global business environment needs to recognise and engage with this new model and validate its assumptions. Keywords Corporate governance, Business environment Paper type Research paper

Introduction The corporate governance malpractice such as the scandals of Enron and WorldCom and the dramatic decline of stock markets at the beginning of the new century have fuelled an age-old debate on the fundamental issues of corporate governance: for what purpose the corporation exists and whose interests it serves. For example, in the third issue of Organisation Science in 2004, two articles with opposite views were published. Whilst Sundaram and Inkpen (2004) insist on the dominant paradigm of shareholder value maximisation, Freeman et al. (2004) reject this conventional ideology and instead argue for the value creation for stakeholders. Both sides have taken tit for tat arguments and rationalised the primacy of shareholder or stakeholder value creation and maximisation. Each side assumes that their own theory is superior to others and has better business implications and is easier for managerial application. Obviously, such a dialectical tension between shareholder and stakeholder paradigms is not new. The current debate is largely the reflection of two opposing conceptions of the corporation that have taken shape since the establishment of modern corporate system in the nineteenth century. Those conceptions have slightly varied terms used in the literatures of corporate law, economics, organisation studies and ethics, but have very similar ideas. They have been polarised between private property and social entity, contracts and communities, finance and politics and

International Journal of Law and Management Vol. 50 No. 1, 2008 pp. 17-32 # Emerald Group Publishing Limited 1754-243X DOI 10.1108/03090550810852086

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shareholding and stakeholding (see Prabhaker, 1998; Bradley et al., 1999; OSullivan, 2000; Friedman and Miles, 2002). Whilst the debate around these theoretical poles has generated some insights, neither has the validity of this dualistic approach been questioned nor have the ideological assumptions underlying the opposed theories been examined until recently (e.g. Letza and Sun, 2004; Letza et al., 2004a, b). Those papers have started to reveal the inadequacy of conventional approaches employed in corporate governance theorising, but the details of underlying assumptions, presuppositions and ideologies behind the shareholding and stakeholding perspectives still need further scrutiny and explorations. In particular, the common ideological ground of both shareholder and stakeholder views need to be deconstructed in order to see clearly their limitations in theorising corporate governance. By doing so, however, we are not attempting to abandon some merit of both perspectives. Instead, we conclude that both views are only a partial and limited understanding of corporate governance reality and ideal constructions, whereas the business environments and societal perceptions are continuously flowing and changing. We suggest that the pluralistic insights from various angles and lenses are better than any polarised or dualistic approach to provide rich understanding of corporate governance in todays dynamic and complex environments. We observe that in corporate governance practices a rough and general pattern and trend would be towards a mutual appreciation and absorption between the shareholding and stakeholding poles. The corporate governance debate Corporate governance is concerned with the regulation, supervision, or performance and conduct oversight of the corporation. The orthodox view is that corporate governors primary aim is to ensure that suppliers of capital get a return on their investment and that, in increasing its profits, business meets its social responsibilities. The focus here is on stockholders (literally the owners of stocks or shares some financial interest in a firm). The corporate governance dialectic generally offers the alternative view that the central concern of governance is to add value to as many organisational stakeholders as is practicable (Bain and Band, 1996). This reflects a movement that requires firms to take a more responsible and ethical role in their societal context focused upon the notion of corporate citizenship. The focus here is on stakeholders (people or organisations with an interest or concern which may or may not be financial in a firm). Shareholding perspectives There are two main theories of shareholder-oriented governance: the principal-agent or finance model and the myopic market model. The principal-agent model starts from an assumption that the social purpose of corporations is to maximise shareholders wealth (Coelho et al., 2003; Friedman, 1970). The principal-agent model regards the central problem of corporate governance as selfinterested managerial behaviour in a universal principal-agent relationship. Agency problems arise when the agent does not share the principals objectives. Furthermore, the separation of ownership and control increases the power of professional managers and leaves them free to pursue their own aims and serve their own interests at the expense of shareholders (Berle and Means, 1932). There are two problems occurring in the agency relationship with which agency theory is concerned. The first is that because it is difficult or expensive for the principal to verify what the agent is actually

doing, the principal cannot verify that the agent has behaved appropriately. The second problem is that the principal and the agent may prefer different actions because of the different attitudes toward risk (Eisenhardt, 1989, p. 58). Those two problems bring about a particular type of management cost incurred as principals attempt to ensure that agents act in principals interests: agency cost (Jensen and Mechling, 1976). To solve those problems, agency theory must determine the most efficient contract governing the principal-agent relationship and an optimal incentive scheme to align the behaviour of the mangers with the interest of owners. While the principalagent model agrees upon the failure of corporate internal control, it denies the inherent failure of market mechanisms, insisting that markets are the most effective regulators of managerial discretion, the so-called efficient market model (Blair, 1995, p. 107). The myopic market model shares a common view with the principal-agent model that the corporation should serve the shareholders interests only, but criticises that the Anglo-American model of corporate governance because of competitive myopia (Hayes and Abernathy, 1980) and its consequent pre-occupation with short-term gains in return, profit, stock price and other performance measures induced by market pressures. The myopic market model holds that what is wrong with corporate governance is that the system encourages managers to focus on short-term performance by sacrificing long-term value and competitiveness of the corporation. The financial markets often force managers to behave in a way divergent from the maximisation of long-term wealth for shareholders (Blair, 1995). The myopic market view contends that corporate governance reform should provide an environment in which shareholders and managers are encouraged to share long-term performance horizons. Shareholders loyalty and voice should increase, whereas the ease of shareholders exit should reduce. Policy proposals for the reform include the encouragement of relationship investing to lock financial institutions into long-term positions, restrictions on the takeover process and on voting rights for short-term shareholders, and the empowerment of other groups such as employees and suppliers that have long-term relationships with the firm (Keasey et al., 1997, pp. 6-7). Stakeholding perspectives There are two main theories of stakeholder governance: the abuse of executive power model and the stakeholder model. Current Anglo-American corporate governance arrangements vest 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 (Hutton, 1995). Supporters of such a view argue that the current institutional restraints on managerial behaviour, such as non-executive directors, the audit process, the threat of takeover, are simply inadequate to prevent managers abusing corporate power. Shareholders protected by liquid asset markets are uninterested in all but the most substantial of abuses. Incentive mechanisms, such as share options, are means through which managers can legitimise their abnormal overpayment (viewed by some as a symptom of the breakdown of governance (Keasey et al., 1997, pp. 7-8)). The abuse of executive power is particularly embedded in the problem of executive overpay since executive remuneration has risen far faster than average earnings and there is at best a very weak link between compensation and management performance (Conyon et al., 1995; Gregg et al., 1993). The only restraint on executive pay seems to be the modesty of executives themselves, and the creation of so-called independent remuneration committees by large companies is not effective. What is worse is that it legitimises self-serving managerial behaviours.

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The independence is generally a sham, not for restraining excess of pay, but for justifying it (Kay and Silberston, 1995, p. 85, 94). The supporters of this model do not believe that the main lines of corporate governance reform, such as non-executive directors, shareholder involvement in major decisions and fuller information about corporate affairs, are suitable monitoring mechanisms (Kay and Silberston, 1995, p. 94). Instead, they propose statutory changes in corporate governance, under which hostile takeovers are not possible to effect, since ownership of shares no longer brings the right to appoint executive management. The basic objective of corporate governance in this guise is managerial freedom with accountability, to allow executive management the power to develop the longer term business, while holding them rigorously responsible to all stakeholders involved in the business. Perhaps the most fundamental challenge to the orthodoxy is the stakeholder model, with its central proposition is that a wider objective function of the firm is more equitable and more socially efficient than one confined to shareholder wealth (Keasey et al., 1997, pp. 8-9). The well-being of other groups such as employees, suppliers, customers and managers, who have a long-term association with the firm and therefore a stake in its long-term success, is recognised. The goal of corporate governance is to maximise the wealth creation of the corporation as a whole. Specifically, a stakeholder is defined as any group or individual who can affect or is affected by the achievement of the firms objectives (Freeman, 1984, p. 25), and this is meant to generalise the notion of stockholder as the only group to whom management need to be responsive (Freeman, 1984, p. 31). These definition were formulated form the base that modern corporation is affected by a large set of interest groups, including at a minimum shareholders, lenders, customers, employees, suppliers and management, which are often referred to as the primary stakeholders, who are vital to the survival and success of the corporation. To these the corporation adds secondary stakeholders, such as the local community, the media, the courts, the government, special interest groups and the general public, that is society in general. From this perspective, corporate governance debates often proceed with a fixation on the relationship between corporate managers and shareholders, which presupposes that there is only one right answer. In fact, shareholders are difficult and reluctant to exercise all the responsibilities of ownership in publicly held corporations, whereas other stakeholders, especially employees, may often too easily exercise their rights and responsibilities associated as owners. This is a compelling case for granting employees some form of ownership. Proponents of the stakeholder model hold that its efficiency is demonstrable in two principal ways (Keasey et al., 1997). The first shows that firms developing a reputation for the ethical treatment of suppliers, customers and employees are able to build up trust relations, which support profitable investments and mutually beneficial exchanges. This is because ethical behaviour reduces the costs of social association. If firms build a reputation for ethical collaborations over a long period, they are able to substitute co-operative outcomes for unsatisfactory cheating ones. Hence, they are better able to pursue competitive advantage through both internal and external relationships (Jones, 1995). The second argument for the efficiency of this approach draws on Japan and Germany as examples of successful industrial societies in which extensive stakeholder involvement with the firm is pervasive, and typically, corporate goals are defined more widely than shareholders profits. In both countries, the corporation is viewed as an enduring social institution, with personality, character and aspirations of its own, with a proper public interest the interests of a wide range of stakeholder groups, and with public responsibilities (Kay and Silberston, 1995). In both

countries, suppliers and major customers are linked to the corporation through interlocking shareholdings and cross-directorships. The interests of labour receive particular safeguards in decision-making, which include the German co-determination system, and the Japanese lifetime employment guarantee, consumers-based decisionmaking (Keasey et al., 1997, pp. 9-10). The age-old common assumptions The contrasting perspectives discussed above attempt to define, in their own ways, what the corporation means and for what purpose, and to find the true causes of corporate governance defects and offer effective and optimal solutions. To understand corporate governance theories it is necessary to explore what underlies them, since when attempting to know whether or not the available solutions are appropriate, we need to problemise them to see how the thought processes have been structured in the first place (Foucault, 1977, 1980). After carefully examining and scrutinising those perspectives, we would see that despite competing and conflicting diagnoses of and solutions to the corporate governance problems, those perspectives share common assumptions about the nature of the corporation, governance structures and reasons for governance. The common presuppositions behind could be traced to the arguments on corporate governance at the beginning of modern corporate systems established in Britain in the middle of the nineteenth century. The debate took place in corporate law, which differentiated between the aggregate (fictional) or entity (real) assumption of the corporation as a legal construct (Mayson et al., 1994), from which the contemporary dichotomised debate between shareholding and stakeholding is derived. Aggregate or fiction theory claims that behind the corporation as a legal group lie the individual members of which the corporation is composed, and the unity of such a group is purely a pretence or fiction constructed by the state. Hence, a corporation is simply a collective name for its members and their aggregate rights. Individuals are not genuinely united when they act as a group, but are an aggregate, united legally by contract. Hence, the theory is also known as collective contract theory or the symbolist or bracket theory of corporate personality. Since the corporation comprises the aggregate rights of its stockholders, the prime duty of the board of directors is to protect the interest of said shareholders (Arthur, 1987; Barker, 1958; Mayson et al., 1994). The other side of the argument, nature-entity theory, or realist, organic theory, asserts that an association of persons has a personality, created not by the state or by law, but by the group in the process of incorporation. The corporation as a real, rather than an artificial, person exists apart from the aggregate rights of its members. It has a distinctive mind or will and capacity to act. It has its own rights and duties that do not derive from the rights of its members, and it is responsible for its own actions and their consequences. Though the separate wills in the group can only be carried out by individuals, they are not acting as individuals, but as organs of the corporate personality (Arthur, 1987; Barker, 1958; Mayson et al., 1994). Several common assumptions underlying the competing views of both aggregate theory and nature-entity theory can be found as follows. The corporation is a concrete, solid, clear-cut, enduring and permanent entity. Whereas the nature-entity theory regards the corporation as a genuine social or group entity, the aggregate theory regards it as an individually independent entity that unites under the name of the corporation for the shareholders self-interests. Herein, individual shareholders are self-contained, stable and atomistic units, and they have their own

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homogeneous identities, which are differentiated with a boundary-cut from other people. This entitative view of reality locates reduces the corporation to either the individual or the corporate whole. It explicitly asserts that the corporate entity or the individual entity in the corporation is self-identified, pre-determined and permanently existent and unchangeable on corporate formation, except for bankruptcy. The corporation is a bounded social system and is normatively rational (Cooper and Burrell, 1988). In the aggregate view, the corporation as an association and organisation is actually an extension of individual entity and thus socialised or contractualised with certain structures and goals and with multileveled principalagent relationships. In the nature-entity view, the corporation as a separate personality has its own will and capacity and pre-defined goals or purposes, performed and pursued rationally by corporate organs. The normative-rational model in orthodox organisational analysis is applicable to both theories: pre-conceived goals, rational actions, a linear causal relation between actions and outcomes, competing alternatives for choices, best solutions and satisfactory outcomes (Mayntz, 1976). The popular notions of rationality and efficiency are common to each side of the debate, although they have differing worldviews: individual interest vs corporate interest, individual rationality vs collective choice, market efficiency vs hierarchical efficiency and economic efficiency vs social efficiency for the economic purpose. The corporation is either the aggregate of individual units or a collective entity as a naturally existent entity. Such entities are independent of theoretical analysis, and are pre-defined and self-evident subjects or objects out there awaiting our observation, examination and theoretical formulation. Further, an ideally isolated system (Whitehead, 1929) of human experiences is a fundamental character of the corporate entity, which enables thinking and theory-building to articulate isolation as a causal relationship, and to systematically describe and explain such a social phenomenon. In relation to the above prepositions on the nature of the corporation, current corporate governance analysis also makes additional assumptions for governance mechanisms. It is assumed that there is only one ideal model in corporate governance in general: either shareholding or stakeholding. While the shareholding perspectives emphasise the priority of shareholders interest over stakeholders, by contrast, the stakeholding perspectives attempt to legitimise wider stakeholders interests by rejecting the priority of shareholder value. Both sides claim their own model as the ideal and consequently as the only objective truth in the world. They deem other approaches false. Furthermore, markets or organisational hierarchies are assumed to provide genuine alternative optimal or appropriate governance structures. From the principal-agent or finance perspective, the ideal governance structure is the market mechanism, where market failures can be satisfactorily solved (Blair, 1995; Mueller, 1995). In the case of the other three non-market models, a hierarchical-like governance structure arguably provides a better solution to governance problems. In corporate governance, hierarchy refers to various internal or mutually locked monitoring mechanisms imposed on corporate management by shareholders or stakeholders. Common to all the models, the ex ante design of governance structure for any given situation is seen as a priori from outside to corporations, rather than emergent from within and created by interdependent social relations and social interactions. Such a structuralist view denies the role of individual cognition and human relations in the governing process, and takes reality as objective and external to actors.

There are universalist claims of governance structure and universal and enduring principles, which converge across organisational boundaries and societies, since globalisation seems to be forcing a convergence of organisational forms (Fligstein and Freeland, 1995, p. 23). However, evidence shows that there is not a market for corporate control. Instead of markets, . . . families, managers and state alternate in their domination of ownership in various societies (Fligstein and Freeland, 1995, p. 39). There is a unitarist entity of corporate governance that excludes all other possibilities of governance relationships and any individual differences in corporations. Shareholding or stakeholding is viewed as inherently homogeneous in all corporations and in any situations where various contexts are omitted. In the principalagent model, the principal-agent relationship, is assumed to exist:
in all organisations and in all co-operative effortsat every level of management in firms, in universities, in mutual companies, in co-operatives, in governmental authorities and bureaus, in unions, and in relationships normally classified as agency relationships such as are common in the performing arts and the market for real estate (Jensen and Mechling, 1976, p. 309).

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A unitarist hierarchical relationship is generally advocated as the most suitable for all corporations and every level of management. Such a univocal model of corporate entity ignores any individual difference and diverse context, and sees difference as a temporary phenomenon that can be solved through improved communications and involvement in the change process (Thomas and Pullen, 1999, p. 7). There must be a fundamental rationality underpinning social behaviour and governing action. For example, all the four models are justified on the basis of economic rationality and efficiency of organisational forms and governing mechanisms, with slightly different perspectives on short-term or long-term business importance. Thus, all analyses of corporate governance presuppose a pure economic condition (or non-economic condition in the case of social entity theory) isolated from other social processes to consider rational choices and decision-making in a corporation. From the above-observed assumptions shared by all four models of corporate governance, it is clear that the most significant assumptions are concentrated on the entitative view of the corporation, an optimal governance structure and the reason of economic rationality and efficiency for governance. Economic rationality: a narrow-minded conception Economic rationality and efficiency is a fundamental assumption prevalent in current corporate governance analysis. The principal-agent or finance model is deeply rooted in market efficiency theory. Although the other three models challenge the marketoptimum assumption and propose an organisational hierarchy structure such as various internal monitoring mechanisms, economic rationality, or bounded rationality a slightly revised version of rationality coined by Simon (1964) and Williamson (1975, 1985) is in general the same reason for their proposals and solutions. As Freeman et al. (2004) explicitly admit, bounded rationality is the common assumption shared by stakeholder theory and economics. On this account, even shareholder theory is, in fact, a version of stakeholder theory, both of which share the moral presuppositions of a respect for property rights, voluntary cooperation, and individual initiative to improve everyones circumstances, and economic freedom and value creation (Freeman et al., 2004, p. 368). Whilst stakeholder theory emphasises the importance of corporate ethical behaviour and social responsibility, it does not deny the principle of economic

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efficiency, rather, they argue that ethical business is more rational (or boundedly rational) and more efficient business. One problem with the efficiency theory is that it presupposes pure economic conditions under which rational corporate selections for value creation are simplified and isolated from other social processes (Roy, 1997). In so doing, efficiency theory assumes a singular decision-making entity one actor assessing a choice before making a decision. For example, stakeholder theory assumes that while stakeholder interests have to be joint, it is the managers job to guide stakeholder relationships and create as much value for stakeholders as possible. Stakeholder theory in inherently managerial (Freeman et al., 2004, p. 366). In fact, decision-making is a social process in which actors (owners, managers, customers, suppliers and workers) are involved in negotiating based on their mutual and conflicting interests. Furthermore, efficiency theory assumes a pure and free market in which resources are evenly distributed and actors have the same chances and abilities to utilise the resources. In fact, resources and economic power are unevenly distributed and controlled by key decision-makers. Moreover, when an actor makes a rational choice, efficiency theory does not explain why only this choice is available to them and how the actions of other business actors have created a chance or consequence for their rational choice. The social conditions and interconnections in making choices are ignored. Consequently:
Efficiency is an effective ideological resource because of the belief in efficiency cultivated by efficiency theorists. . . . efficiency is only one factor in mobilising resources that can be used in different ways, not the primary causal force in determining organisational change (Roy, 1997, p. 265).

In the eyes of economists and others, rationality means utility maximisation they presuppose that actors are rationally committed to maximise a meaningful and measurable utility:
They commonly hold that the rational man always aims at a measurable utility correlative with satisfaction or well-being or some such, and always chooses among alternatives on this basis (Rescher, 1988, p. 107).

However, there are inherent difficulties with this notion of rationality. It asserts that there is a common and uniform measure that can objectively evaluate all the different items of value at issue and thereby maximise utility. However, a common measure of utility is over-simplified and unrealistic in describing the real world. This is so because:
. . . the realm of our experience is not all that congenial to measurement. It is full of colours, odours, and tastes, of likes and dislikes, apprehensions and expectations, loves and hates, pains and joys, that allow precious little room for measurement (Rescher, 1988, p. 108).

For economists, the market is an objective mechanism allowing for exchange and the provision of commensurability, in which economic actors can constantly make rational decisions on the basis of their preferences. The problem with this is that to measure anything objectively, some independently pre-existing, quantifiable attributes of things must be assessed. But this is purely hypothetical; preference quantification is not all that simple one person cannot exactly say by how much they prefer one colour than another; and there is no linkage between rationality and maximisation if one does not need to measure some utility like goodness, acceptability, or desirability. Utility is, as Rescher (1988) points out, simply an index of preference (the expression of the strength of a like or dislike) rather than a measure of intrinsic preferability, and:

There is no basis and indeed no justification for seeing wants and preferences as something final something outside the pale of appropriate examination and evaluation (Rescher, 1988, p. 110).

Hence, economic rationality and efficiency, as well as other rationality in a particular discipline, is an overly narrow conception which loses insight of the complex and many-sided nature of rationality. Whereas rationality makes use of ones intelligence to pursue the best possible results, it is not an inevitable feature of human life. Rather, it is our human survival instrument:
It is a means to adaptive efficiency, enabling us sometimes at least to adjust our environment to our needs and wants rather than the reverse (Rescher, 1988, p. 2).

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However, our wants or desires are not necessarily rational, nor always have good reasons or in ones best interests, and that very much depends on exactly what it is that one happens to want (Rescher, 1988, p. 5). Economic logic and the static approach Where economic analysis and reasoning in corporate governance are popular and dominant, a basic question arises: should social system in general and corporate governance structures in particular be purely justified and interpreted in economic logic? Many scholars doubt about the ability of economics or purely economic logic to explain complicated social phenomena. For some, economics is a value-empty discipline, which is only concerned with counting and itemising, and only in deals with the productive elements such as capital, land, labour, raw materials, equipment and information, and ignores the question of how these constituents are organised and constructed into products which are more valuable than the separate ingredients (Hampden-Turner and Trompenaars, 1994). Economics therefore neglects the human condition, which makes all economic activity possible, since economic transactions result from peoples choices, based on values and priorities (Hampden-Turner and Trompenaars, 1994, pp. 4-5). Furthermore, economics characterises people not as human beings, individuals members of families or as members of society, but in terms of their utility to capital as labour (Jackson and Carter, 1995, p. 877; Foucault, 1974). This implies that human beings are completely reducible to a kind of means and are no more than functional machines in the service of economic activities without consideration of their values, subjective meanings and social relations. In the eyes of economists, the social world seems to exist without the social. However, such a simplistic social world does not exist. Indeed, economics present us with myth, relating a static and non-human nature of knowledge, which poses perhaps the essential problem with the dominant economic logic in corporate governance:
. . . a static concept of governance which ignores the continuous interaction between choices made, and the context into which choices are embedded (Mueller, 1989, p. 1220).

Organisational economics uses this static approach when addressing the problem of corporate governance design. Organisational economists argue that the ex ante design of appropriate governance structures can largely solve governance problems such as the problem of co-operation. However, this fails to consider dynamism inherent in design choices (Mueller, 1989, p. 1217). Rather, appropriate governance structures cannot be pre-designed and universal, but must emerge from a dynamic process in which agents choices are not singularly determined. In essence, the static approach in corporate governance analysis inherits a priori principles, ready-made concepts and

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taken-for-granted notions, such as market efficiency and hierarchical effectiveness, and then identifies, classifies and simplifies the complex practices of corporate governance to those pre-existent conceptual templates for analysis and explanation. In so doing, the dynamic practice and lived experiences of corporate governance are forced to fit the theoretical models as abstracted, isolated, fixed, endured and which finally become static and dogmatic. The central feature of such a static approach is that it assumes an objective and relatively enduring social reality of corporate governance, which exists independently of peoples perceptions, beliefs and biases, and which, as a real object, is amenable to systematic analysis and comparison in the search for truth. The objective and permanent grounds of the static approach, require that research on corporate governance must not be distorted by researchers personal bias in the inquiry process. Hence, the research method is the most important factor in corporate investigations. Empirical research, rigorous observations and quantitative methods of measurement should best produce reliable and valid data and ensure an accurate reflection of the corporate governance reality. The static approach, as manifested in the scientificrealistic research agenda, also claims that unlike the physical world, the fundamental nature of corporate governance as a complex social phenomenon may not be directly detectable or observable (such as the nature of corporate personality and the essence of stakeholding community). However, this does not affect the essence of corporate governance being an extant reality or a theoretical entity, which could be understood by postulation and reasoning. The competing analyses of corporate governance can, therefore, advance the knowledge by discovering what the corporate governance is really like, and allow us to move toward the truth, toward one true theory about one real world of corporate governance. Therefore, the static approach in corporate governance is related fundamentally to the epistemological underpinning of representationalism, which believes that our knowledge represents the external world as it is. Our theory building is an attempt to genuinely mirror or copy a pre-existent real world that is beyond our cognition. Thus, the competing analyses of corporate governance seek the nature and optimal structure of corporate governance as the manifestation of the truth, as many analysts have explicitly claimed. For them, the justification of any valid theory or model rests on correspondence between theories and the corporate reality through our scientific minds and appropriately designed methodology. It is thus clear that the fundamental issues in corporate governance analysis are rooted in the philosophical commitments and modes of thought. Until the related philosophical issues are carefully examined, we cannot appropriately understand the problems inherent in corporate governance theorising. Concluding remarks: a pluralistic view of corporate governance In recent years, we have begun to address the underlying philosophical issues in corporate governance (Sun et al., 2004; Letza and Sun, 2004). We argue that corporate governance is a social rather than purely economic/mathematical reality, a processual rather than fixed and relatively enduring reality. As a business process (in both temporal and spatial dimensions), corporate governing cannot be isolated from social and other non-economic conditions and factors such as power, legislation, culture, social relations and institutional contexts. Corporate governance is constantly changing and flowing and its changes are always driven by both internal processual impetuses and external environmental dynamics. The processual changes in corporate governance fundamentally invalidate or limit the conventional dualistic approaches,

i.e. the fixed mindset of shareholding vs stakeholding, to understanding and theorising corporate governance, as those ideal constructions cannot truly capture the fluidity of corporate governance reality. For example, the important features of corporate changes in the Anglo-American environment in the 1990s have profoundly altered corporate governance structures (Zingales, 2000; Rajan and Zingales, 1999). Those changes include the break up of large conglomerates, changed relationships with suppliers from vertical control to looser collaborations, easier access to financial capital and less unique of physical assets to business development, more vitality of human resources to a firms survival and development, and more available opportunities of employment and self-employment and new business start-ups fostered by globalisation and the advance of computing technology. All those changes make the boundaries of the firms unfixable and constantly floating. The change nature of the firms forces us to abandon the entitative and static conception of the corporations (Zingales, 2000), upon which the current mainstream theories of corporate governance have been built. As the current dichotomised and static approach used in corporate governance research cannot fully explain the complexity and heterogeneity of corporate reality, we have called for a more flexible and processual approach to the understanding of corporate governance practice and the search for effective governance (Letza et al., 2004a, b). Based on the full appreciation of the processual reality of corporate governance practice, this approach rejects the conventional assumptions of corporate governance as ideal, universal, permanent, absolute and taken-for-granted and explains the temporary, transient and emergent patterns of corporate governance on a historical and contextual interface in a society. It acknowledges that various corporate governance models around the world have been developed from their own cultural, political, social and historical circumstances and contingencies. Certainly, they may learn from each other, but one cannot replace the other. It also appreciates the interconnected nature of processual reality and sees shareholders value and stakeholders interests are not separate and isolated from each other, but interdependent, mutually influential and reciprocally supportive. More effective (though not optimal) corporate governance would be to consider about the interests of both shareholders and stakeholders and continually weigh and adjust the method of governing in practice. This processual approach to corporate governance favours a pluralistic view of corporate governance. It suggests that corporate governance is not only conditioned to the economic logic, but also shaped and influenced by politics, ideologies, legal systems, social conventions, philosophies, modes of thought, methodologies, etc. In recent years, some alternative views on corporate governance based on politics, culture, power and cybernetics offer fruitful insights from differing lenses and quite distinct from the mainstream analysis (for a useful review, see Turnbull, 1997). This new orientation towards a processual and pluralistic understanding of corporate governance does not completely abandon the mainstream theories. It admits that the shareholder and stakeholder views as social constructs do have their own merits within a local context at a time. For example, the popularity of shareholder model in the Anglo-American society and the prevalence of stakeholder orientation in the Continental Europe and Japan have their own historical and cultural legacies (in addition to other contingent factors). What the processual approach really objects is the static and mechanistic approach in addressing corporate governance issues and in theorising corporate governance reality. The shareholder and stakeholder views and models may be more or less real and true at a time. For example, Zingales (2000) argues

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that the traditional definition of the firm and ownership could be valuable in a society where intensive assets is far more significant for the exploitation of economics of scale and scope, such as during the industrial revolution. However, both perspectives have been shifting and continually changing. Although the shareholder model is the traditionally dominant ideology in the Anglo-American society, it is evidenced that corporate governance has been evolved and moved backwards and forwards between the shareholder and stakeholder models (Sundaram and Inkpen, 2004). And the recent shift from shareholding towards stakeholding since the 1990s has been demonstrated not just by scholars intensive arguments, but also by political, judiciary, and legislative supports for stakeholder interests (e.g. Stoney and Winstanley, 2001; Gamble and Kelly, 2001). On the other side, corporate governance in Germany and Japan has also slightly changed from the stakeholding perspective towards a shareholding and market-based model since the 1990s, due to the pressure of globalisation and world-wide competition, and the recession of national economies (Schilling, 2001; Stoney and Winstanley, 2001). Therefore, we may draw a pluralistic view by looking at corporate governance process as a continuum, at the two ends of which lie the shareholder and nonshareowning stakeholder perspectives. Both represent two extremes of corporate governance purposes, structures and mechanisms. Since the corporate reality and environments are processual (dynamic and changing), the effective framework of corporate governance is always moving forward and backward between the two ends, which is contingent upon local contexts and various factors (perhaps social crisis and power are two major triggers for changes, see Roy, 1997) with no pre-set equilibrium (see Figure 1). Hence, instead of polarising the views between two extremes shareholding vs stakeholding, corporate governance theorising need to reflect the shifting and swing process in the continuum. The recent enlightened shareholder model and enlightened stakeholder model are good examples of this balanced, but pluralistic approach to theorising. The former was presented by the Company Law Steering Group in the UK as one of options for corporate governance reform (see Gamble and Kelly, 2001). And the later was proposed by Michael Jensen (2001), who has been renowned for the principle-agent model (the shareholder view), but has begun to see enlightened stakeholder theory as identical to enlightened value maximisation, based on the preposition of the firms objective towards long-term value maximisation. In both theory and practice, we can observe a rough pattern and trend of corporate governance, which is not longing for the two poles in the governance continuum, but for mutual learning and absorption. Again, as process corporate governance is not aimed to stop at any fixed place in the continuum, it is continuously judging and adjusting. In this sense, corporate governance is truly an art, not a science (Allen, 2001).

Figure 1. The process continuum of corporate governance

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