THE GEOPOLITICS OF GOVERNANCE

THE GEOPOLITICS OF GOVERNANCE

Also by Andrew Kakabadse and Nada Kakabadse CREATING FUTURES: Leading Change Through Information Systems ESSENCE OF LEADERSHIP Also by Andrew Kakabadse CORPORATE GOVERNANCE IN JAPAN: A Paradox (with L. Okazaki-Ward) SUCCESS IN SIGHT: Visioning (with Frederic Nortier and Nello-Bernard Abramovici)

The Geopolitics of Governance The Impact of Contrasting Philosophies Andrew Kakabadse Professor, Management Development Deputy Director, Cranfield School of Management and Nada Kakabadse Senior Research Fellow, Cranfield School of Management

Andrew Kakabadse and Nada Kakabadse 2001 Softcover reprint of the hardcover 1st edition 2001 978-0-333-96127-8 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 0LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2001 by PALGRAVE Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE is the new global academic imprint of St. Martin s Press LLC Scholarly and Reference Division and Palgrave Publishers Ltd (formerly Macmillan Press Ltd). ISBN 978-1-349-42725-3 DOI 10.1057/9781403905482 ISBN 978-1-4039-0548-2 (ebook) This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Kakabadse, Andrew. The geopolitics of governance: the impact of contrasting philosophies/ Andrew Kakabadse and Nada Kakabadse. p. cm. Includes bibliographical references and index. 1. Industrial organization (Economic theory) 2. Corporate governance. I. Kakabadse, Nada. II. Title. HD2326.K275 2001 658.4 dc21 2001019440 10 9 8 7 6 5 4 3 2 1 10 09 08 07 06 05 04 03 02 01

For Phillip Reeves and Sophia. May you develop the criticality and openness of mind to see the totality of what embraces you, the wisdom to find and the robustness to pursue the pertinent pathways through the challenges that will face you. The future rests in your hands.

Contents List of Tables List of Figures Acknowledgements Introduction ix x xi xiii 1 Markets: Contrasts of Perspective 1 Exchange and competition 3 Downside of the free market 6 Theories of the firm 9 Competitive strategy 11 2 Governance 16 Corporate governance: purpose and aim 19 Corporate governance: theories and philosophy 20 Shareholder perspective 23 Stakeholder perspective 24 IT/IS influence on corporate governance 30 3 Geopolitics of Governance: Contrasts of Application and Control 35 Historical foundations 39 Corporate governance models 45 Anglo-American model: the USA 45 Anglo-American model: United Kingdom (UK) 48 German and continental European model 50 Japanese model 53 Comparison of fundamentals 57 4 Reform and Repercussion 61 Executive compensation 65 Broader social consequences 67 Equality, distribution and political stability 77 vii

viii Contents 5 Reflections on Geopolitical Impact 82 Corporate governance and firm performance 82 Governance debate: nation or enterprise? 88 Notes 95 References 102 Index 127

List of Tables 3.1 The influence of financial systems on corporate governance 40 3.2 Social-political-welfare state influence on corporate governance 43 3.3 Influence of the legal system on corporate governance 44 3.4 Corporate governance comparisons 57 3.5 Board composition 58 4.1 Pay ratio of CEO to workers 66 4.2 Income distribution by quintile 68 4.3 Share of household wealth 69 4.4 The underprivileged: poverty and unemployment (percentages) 70 4.5 Human poverty, 1997 71 4.6 Poverty and development, 1997 72 4.7 Gini index as a measure of income distribution (nationally published statistics) 73 4.8 Expenditure and access to healthcare, 1997 74 5.1 Impact of board roles on corporate performance 84 5.2 Board attributes: influence on corporate performance 85 5.3 Ownership of corporate equity, 1996 (percentages) 91 5.4 Financial sector composition, 1996 (percentages) 91 5.5 Change in ownership of corporate equity by shareholder sector (percentages) 92 ix

List of Figures 3.1 Anglo-American model of corporate governance 47 3.2 German/European model of corporate governance 51 3.3 Japanese model of corporate governance 55 4.1 CEO s estimated average total pay in medium-sized companies 65 4.2 Market capitalization versus gross domestic product (GDP) 80 x

Acknowledgements Our extreme gratitude to Dorothy Rogers for typing draft after draft and yet always displaying a friendly smile. Thanks also to Superintendent Robin Campbell, Royal Ulster Constabulary, and our colleagues from Cranfield School of Management, Lance Moir, Sean Rickard and Lola Okazaki-Ward, for invaluable comments which we have done our best to incorporate. Thanks also to the invaluable help and support provided by our ever friendly Cranfield School of Management library staff. A. K. N. K. xi

Introduction Historical evidence suggests that in previous distant and primitive societies, economic transactions were governed by social relationships rather than by markets, hierarchies or even what Williamson (1990) terms the hybrid model of organisation of combining market and hierarchy (North, 1985, p. 558; Turnbull, 1994, p. 83; 1997). More recently, Hollingsworth and Lindberg (1985, p. 221) have argued that there exist four distinctive forms of social organization, namely market, hierarchies, the clan (or community) and associations. Each of these institutional models for integrating human activities has a separate logic of collective action and social order (Streeck and Schmitter, 1985, p. 11), based on different types of information and control (Turnbull, 1994, 1997). However, only two of these models, markets and hierarchies, have received attention, because of the overwhelming influence of the current dominant societal philosophy, market discipline (Turnbull, 1997). The dominance of this philosophy has, in turn, sponsored a particular form of hierarchy, the firm, namely, an organization committed to the pursuit of profit through conducting particular economic transactions within everevolving market conditions (Jensen, 1993; Turnbull, 1994, 1997; Abernathy et al., 1983). Hence, current theories of the firm become most relevant in economies committed to competition, with strong anti-trust laws and large scale, impersonal, publicly traded stocks, and which are not strongly bonded through cultural, clan, trade, industry, vocational or other associations, including strong interlocking directorships (Turnbull, 1997, p. 186). This type of economy is exemplified by the US experience, where the theory of the firm was first conceived on the premise that firms exist because markets fail (see theories of the firm, Williamson, 1975). In contrast, present-day presumptions concerning the firm become less applicable when economic transactions are mediated by cultural priorities, business related associations, trade, vocational, family, social and political networks (Turnbull, 1997; Abrams, 1951), aspects of life that are particularly prominent in Europe, Japan and other Asian economies (Hollingsworth and Lindberg, 1985; Analytica, 1992; Hollingsworth et al., 1994; Hollingsworth and Boyer, 1997). However, supported by the strong political and economic standing of the USA over the years, the competition-based paradigm has become dominant and, as such, xiii

xiv Introduction has reinforced the hegemony of the ideology of the market. Widespread political interest has concentrated on privatization, based on the Anglo-American shareholder philosophy (Turnbull, 1997). Despite the limitations of the US competition-orientated model in the Anglo- American economies and revamped former socialist economies, US governance practice has emerged as the widely recognized role model for other economies that are trying to increase their competitiveness in the global marketplace (Jensen, 1993; Blasi and Gasaway, 1993; Turnbull, 1993, 1995). In examining why the US governance model is gaining in global influence, attention is given in this text to exploring the nature of present-day markets and their impact on society. Examination of how firms survive and prosper in today s markets is also undertaken, with particular emphasis being given to the nature of competitive advantage. Having explored markets as a fundamental influence on governance thinking, contrasting philosophies of corporate governance are then compared, principally those of stakeholder and shareholder values. Within such philosophies, the governance models applied in Anglo- American, continental European and Japanese organizations are contrasted, highlighting the Charkham (1994, p. 174) thesis that corporate governance holds up a mirror to society in general. Having analyzed the three key contrasting governance models, examination of the relationship between governance and performance at both societal and organizational levels is undertaken. It is argued that the varying governance structures have little impact on the performance of firms. What is emphasized as being important is the social, political and economic context within which particular governance structures are applied and whether the structure in question suits the nature of the particular contextual circumstances (Ackerman, 1975). Therefore, the perspective being promoted is that the adoption of different governance philosophies has a profound societal impact, which in this text focuses particularly on national wealth and income distribution (Achrol, 1991). It is argued that the ever-increasing adoption of the shareholder value philosophy has led, and will continue to lead, to ever greater social inequalities, which ultimately will foster unwelcome social and political repercussions (Aghion and Williamson, 1998). The emerging conclusion is that the governance debate needs to be pursued more at the societal/political level, rather than the enterprise level, as the burning issues surrounding governance are ones of social inequality and not of transparency in reporting economic performance for the purposes of greater enterprise economic gain (Ackerman and Bauer, 1976).