Politics in Corporate Governance: How Power Shapes the Board's Agenda
Centre for International Business and Sustainability (CIBS) Working Paper No. 3
23 Pages Posted: 25 Jan 2009 Last revised: 29 Jun 2009
Date Written: January 1, 2009
While corporate governance theory has focused on agency theory and governance practice on ways of reducing agency costs on behalf of principals, another substantive body of literature has grown up looking at the role that power and politics play in the company law and formation of board policy. Like the agency literature, a lot of it is normative: how boards and board members should behave. Some of that is drawn from the experience of seasoned board members, and so has an empirical if anecdotal character. Some attempt to look at board actions more descriptively, albeit through the obscure lens we are constrained to use when observing the confidential discussions of powerful business people. What emerges from the literature is rather more complex picture of a political system of decision-making than in many accounts, with six overlapping layers of power: 1) how national political and social factors determine, at least in outline, the shape of corporate governance; 2) how issues between shareholders and the board shape corporate policy; 3) how shareholders, in some settings, attempt to circumvent the board and gain direct access to management; 4) how stakeholders attempt to secure recognition of rights from boards at the expense of shareholders; 5) how issues between boards and management influence how those policies are implemented; and 6) shareholders' attempts to wrest power from other shareholders. The first of these, the macro-political environment, shapes company law and the parameters under which corporations operation in society. The latter five inform the micro-political environment, where power and influence - more so than law - determine the direction of decision-making. The paper concludes with examples of how this system of power relationships has informed the codification of corporate governance, filling the gap between the macro- and micro-political spheres.
Keywords: Corporate governance, boards, power, politics, path dependency, company law
JEL Classification: A10, G10, G34, L10, L20, B10, B14
Suggested Citation: Suggested Citation