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Theories of Corporate
The philosophical foundations
of corporate governance

Edited by
Thomas Clarke
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Preface ix
Acknowledgements xi

‘Introduction: Theories of Governance – Reconceptualizing Corporate Governance 1

Theory After the Enron Experience’
Thomas Clarke


‘The Managerial Revolution in American Business’ 34

Alfred D. Chandler Jr
‘The Impact of the Corporation on Classical Economic Theory’ 45
Adolf A. Berle


‘Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’ 58
Michael C. Jensen and William H. Meckling
‘Separation of Ownership and Control’ 64
Eugene F. Fama and Michael C. Jensen
‘Agency Theory: An Assessment and Review’ 78
Kathleen M. Eisenhardt


‘Directors: Myth and Reality’ 96

Myles L. Mace
‘Pawns or Potentates: The Reality of America’s Corporate Boards’ 108
Jay W. Lorsch and Elizabeth MacIver


‘Toward a Stewardship Theory of Management’ 118

James H. Davis, F. David Schoorman and Lex Donaldson
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‘The Resource Dependence Role of Corporate Directors: Strategic Adaptation 138

of Board Composition in Response to Environmental Change’
Amy J. Hillman, Albert A. Cannella Jr and Ramona L. Paetzold
‘Institutional and Strategic Choice Perspectives on Board Involvement in 149
the Strategic Decision Process’
William Q. Judge Jr and Carl P. Zeithaml
‘A General Theory of Network Governance: Exchange Conditions and 159
Social Mechanisms’
Candace Jones, William S. Hesterly and Stephen P. Borgatti


‘Ownership and Control: Rethinking Corporate Governance for

the Twenty-First Century’ 174
Margaret M. Blair
‘The Stakeholder Corporation: A Business Philosophy for the Information Age’ 189
Thomas Clarke


‘Corporate Leadership in a Globalizing Equity Market’ 206

Michael Useem
‘Corporate Governance and Globalization: Is There Convergence
Across Countries?’ 223
Mauro F. Guillén
‘Capital Unbound? The Transformation of European Corporate Governance’ 243
Martin Rhodes and Bastiaan van Apeldoorn
‘The Very Uncertain Prospects of . . . Global . . . Convergence in
Corporate Governance’ 259
Douglas M. Branson


‘Maximizing Shareholder Value: A New Ideology for Corporate Governance’ 290

William Lazonick and Mary O’Sullivan
‘Corporate Governance, Property and Democracy: A Conceptual Critique of 304
Shareholder Ideology’
Ewald Engelen
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‘What Enron Means for the Management and Control of the Modern Business 322
Corporation: Some Initial Reflections’
Jeffrey N. Gordon
‘What Caused Enron? A Capsule Social and Economic History of the 1990s’ 333
John Coffee

Index 355
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It is a pleasure to be asked to contribute a preface to this magisterial work. Its importance and usefulness lie
in the way in which Professor Clarke has selected his material to present a comprehensive survey of the the-
oretical foundations on which the practice of corporate governance has been, if not always consciously,
based. He has done this by allowing those who have played a key part in the thinking on corporate gover-
nance to have their say. More than that his excellent Introduction explains how the different governance the-
ories relate to each other and how they have contributed to the development of corporate governance in
Each of the separate theories discussed throws light on some aspect of governance, but is limited to that
aspect alone and thus cannot capture the theoretical basis of corporate governance as a whole. The trustee-
ship model arrives perhaps at the nearest we yet have to a general governance theory, since it addresses the
basic question of corporate purpose in relation to society. The Introduction, however, clearly illustrates the
difficulty of arriving at any general theory of corporate governance, given the inherent complexity of the
One feature of its complexity is that companies combine economic and social roles. Insights from the
social sciences, therefore, have their place alongside those from economics. Governance structures are
important, in the sense that they have to be clear and understood to be effective, but their precise forms are
less so. What matters in practice is the way in which individuals put these structures to work, so people, their
selection and their motives count.
Another feature of complexity is the diversity of governance systems and processes around the world.
Forms of corporate governance are shaped nationally by their economic, political and legal backgrounds, by
their sources of finance, and by the history and culture of the countries concerned.
Beyond all this, we are studying a process in motion and the practice of corporate governance has devel-
oped dramatically in the last two decades. The pace has been set by the introduction of governance codes,
first nationally and then internationally. These codes have usually been drawn up in reaction to events and
have been composed by practitioners, pressed for time and responding to immediate political and public
concerns. Ideally, we would call a halt to codes, laws and regulations in this field to give time for theory to
catch up with practical experience and illuminate it. This is a vain hope, but at least this book provides access
to the relevant writings on corporate governance, against which to analyse and assess the theoretical foun-
dations on which so much has been built so rapidly.
In addition, to changes in structure and process, the balance of power between the lead players in the cor-
porate field has shifted in the last half-century. At the start, boards of directors were generally weak, execu-
tive management was in charge and shareholders were dispersed. Gathering investor pressure on the
directors of under-performing companies, however, led to a strengthening of boards at the expense of man-
agement. This in turn developed into the present position whereby the concentration of shares in the hands
of institutional investors has increased their power in relation to boards and management and, at the same
time, drawn attention to their responsibilities in matters of governance. While these specific changes relate
to countries where capital is raised through the issue of shares, the balance of power is also shifting in coun-
tries where banks are the primary source of corporate finance. Here the focus is now on the governance of
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banks themselves and in turn on their responsibilities for the governance of the companies which they
The forces driving these changes have been mainly market based, a point which is relevant to the issue of
convergence internationally. It leads on, however, to another question of balance, this time the balance
between market and statutory regulation. That again is a moving picture, as was demonstrated by regulatory
reactions to Enron, and it is one which varies country by country.
A further source of movement and of complexity relates to the wider implications of corporate governance.
Governance codes began by focusing on the role of boards of directors, as the bridge between the providers
of corporate funds and those who put them to work. Their contribution to better governance was real, but lim-
ited to the purposes for which they were designed. National codes were followed by international ones,
whose aims were more inclusive. They were designed to encourage investment to flow where it could be
most productive by raising national corporate governance standards to acceptable international levels. This
chimes with my own view of the overall purpose of corporate governance, which is to align as nearly as pos-
sible the interests of individuals, corporations and society.
At whatever level corporate governance is studied and reviewed, there can be no doubt about the value
of Professor Clarke’s book in bringing together and clarifying the theories which have contributed to, and
have relevance for, the development of corporate governance. For students of the subject it is a one-stop
shop, which sets corporate governance squarely in its historical and theoretical context. For practitioners and
policy-makers it should be compulsory reading.

Sir Adrian Cadbury

May 2004