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Corporate Governance and Complexity Theory

Corporate Governance and Complexity Theory

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Published by Paul Schumann
This book 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

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.
This book 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

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.

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Published by: Paul Schumann on Mar 11, 2011
Copyright:Attribution Non-commercial

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05/12/2013

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Corporate Governance and Complexity Theory 
Paul Schumann
This book
1
has six chapters:1.
 
Introduction2.
 
An introduction to complexity theory – some insights3.
 
The legal aspects4.
 
Corporate governance and corporate performance5.
 
Complexity and corporate governance6.
 
ConclusionIn “An Introduction to Complexity Theory”, Goergen, Mallin, Mitleton
Keyy, Al
Hawamdehand Chiu give a good description of some concepts in complexity science applied to socialsystems:
 
Complexity Theory
 
“All human systems and institutions are complex in the sensethat they are multidimensional with social, cultural, political, physical, technical,economic and other dimensions which interact and influence each other. They areable to adapt to and co
evolve with changing conditions and are able to create neworder. In a corporate governance context, new order may take the form of newrules, regulations, corporate governance frameworks, or a new culture; it may alsoinclude the creation of enabling environments that facilitate good corporategovernance within individual organizations as well as industries and economies.Complexity theory therefore studies social systems holistically; it does not focusexclusively on one aspect such as the legal framework or compliance, but looks atthe multiple, interacting dimensions that together create the social ecosystem.”An insight obtained by looking at corporate governance as a complex system “isthat regulators; institutional investors; listed companies and their employees,customers and suppliers; the financial press and analysts; and other such corporategovernance actors, are intimately interconnected through positive and negativefeedback processes. They influence each other through formal and informalrelationships in such a way that they change their behaviour
in complexitylanguage, they co
evolve. It is therefore essential to look at all the related actorswithin the whole corporate governance social ecosystem. For example, it is notenough to focus on the relationship between the board and the shareholders, as
 
2Paul Schumann, 512.632.6586,paschumann2009@gamil.com,http://insights
foresight.blogspot.com this provides only a partial view of the relevant dynamics that influence corporategovernance.”
 
Multiple Interacting Dimensions
 
“Complex systems are multidimensional, and all thedimensions interact and influence each other. In a human context the social, cultural,legal, technical, economic, political and global dimensions may impinge upon andinfluence each other. But not all multidimensional systems are complex; machine
typesystems for example may have many inter
related parts, but if they cannot create neworder then they are complicated not complex.Multiple dimensions in a social context, such as corporate governance, may also beseen in terms of government policy, the strategies and actions of individual firms,institutional and other shareholders, the financial press and analysts, regulation such asthe US Sarbanes
Oxley Act of 2002 (Sarbox) and EU regulation. These dimensions do notexist in isolation, they influence each other and are part of a multi
dimensionalcorporate governance social ecosystem within which single organizations, industries,national governments and the legal frameworks operate. Furthermore, eachorganization will have a set of endogenous dimensions such as its culture, organizationaland power structures and organizational norms that influence each other. Eachorganization in turn is influenced by exogenous conditions. All companies exist, forexample, within a specific political, legal, physical, geographic and economicenvironment; all these dimensions influence each other, as well as the company itself,the other companies within the industry, their customers, suppliers, etc. Both theendogenous and exogenous conditions are in constant flux, as they influence each otherand 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 andbetween a system and its environment. In a human system, connectivity andinterdependence mean that a decision or action by any individual (group, organization,institution, or human system) may affect related individuals and systems. That effectwill not have an equal or uniform impact, and will vary with the 'state' of each relatedindividual and system at that particular time. The 'state' of an individual or a systemincludes its history and its constitution, which in turn includes its organization andstructure. Connectivity applies to the inter
relatedness of individuals within a system, aswell 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 (inthis case the corporate governance ecosystem) become so intricately inter
connectedthat a change in one part has (usually) unexpected consequences in other parts of thesame system.”
 
Feedback
 
“An important element in connectivity is feedback. Feedback is traditionallyseen in terms of positive and negative feedback mechanisms, which may also bedescribed as reinforcing (i.e. amplifying) and balancing. Putting it another way, positive(reinforcing) feedback drives change, and negative (balancing, moderating, ordampening) 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 newpatterns of behaviour, which are more than the sum of the parts, in the sense that they
 
3Paul Schumann, 512.632.6586,paschumann2009@gamil.com,http://insights
foresight.blogspot.com arise systemically from a group as a whole. The same insights could not arise fromindividuals working in isolation and then simply adding their insights. Once newbehaviours 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 socialcontext) limits certain behaviours and at the same time opens up new possibilities. Inother words, we constantly create our context by influencing our environment, and inturn are being influenced by the environment that is created through the multipleinteractions 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 asthe spontaneous coming together of a group to perform a task (or for some otherpurpose) without external direction; the group decides what to do, how and when to doit; and no one outside the group directs those activities.”
 
Co
evolution
 
“Co
evolution may be described as reciprocal influence that changes thebehaviour of the interacting entities. In a biological context, as entities and organismsinteract and adapt within an ecosystem they alter 'both the fitness and the fitnesslandscape of the other organisms'. The way each element influences and is in turninfluenced 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, deforminglandscapes where the adaptive moves of each entity alter the landscapes of itsneighbors' .Another way of describing co
evolution is that the evolution of one domain or entityis partially dependent on the evolution of other related domains or entities; or that onedomain or entity changes in the context of the other(s).The main point, however, to note is that co
evolution involves reciprocal influenceand change within a co
evolving ecosystem. If influence and change are entirely in onedirection then that would be more accurately described as 'adaptation to' a changingenvironment. 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 possiblealternatives open to them. They can be quite creative and innovative and find new anddifferent ways of reaching an objective.Exploration of the space of possibilities also means that complex social systemsneed to generate variety and that the search for a single optimal solution may beneither possible nor desirable. Any solution can only be optimal under certainconditions, 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 thesystem is able to draw on these alternatives, which may have become more appropriatein the new circumstances.”A fitness landscape can help to explain why a single solution is not adequate overtime.“If a company has a very successful strategy, or a country has a successfulframework, its success is limited to a particular context at a certain time. As otherorganizations within the social ecosystem adjust their own strategies to compete, theyaffect and alter the industry fitness landscape and in the process the 'hill' showing highfitness of the successful strategy has transformed into a valley. If the organization hasnot been exploring alternative micro
strategies, it will be left with no alternative that fitsthe new environment.”

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