Why 'Best Practice' Corporate Governance Can Fail
29 Pages Posted: 15 Jan 2010
Date Written: January 8, 2010
This paper critiques corporate governance practices widely promoted as being “best” for Publicly Traded Corporations (PTCs). The criteria used to identify good governance are those that minimize the involvement of Regulators or Law Makers with PTCs. The different drivers of corporate evolution in Europe and the United States explain the development of some of the counterproductive practices in Anglophone countries. These include directors obtaining inappropriate powers and conflicts of interests for directors and auditors. These intrinsically flawed practices have become enshrined as “best” practices in governance codes, governance metrics, regulations, securities exchanges, and the law. The natural laws of requisite variety, identified by mathematicians who founded the science of governance in the 1940’s are used to explain why current practices are not “best”. Natural laws explain why the communication and control architecture of PTCs and corporate regulators do not permit executives, directors, and regulators to directly monitor or control on a reliable basis the complex workings of modern firms without co-regulators.
Keywords: Audit conflicts, Director conflict, Power, Network governance, Self-governance
JEL Classification: G34, G38, H11, K22, M14, P11
Suggested Citation: Suggested Citation