The relational corporate governance approach is a tool which complements and enhances the explanatory power of the existing principal ‘law and economics’ theories and models of the firm. It maps the effectiveness of corporate Governance Variables in use in corporate Governance Codes and laws around the world and assesses reform proposals in the field. The approach can be used by centres of corporate governance, academics, researchers, students, governments, securities and exchange regulators, policy-makers, law reformers and corporate actors as a diagnostic tool to analyse the governance health of individual companies and the governance actions required to remedy sub-optimal governance and management arrangements.
The principal aim of the relational approach is to describe and evaluate the interrelationships between the most significant fields of corporate governance study and practice and the Governance Variables to which these fields give rise. The relational approach can be used to make predictions in relation to the relative importance of Governance Variables inter se in reducing (or increasing) agency costs and enhancing (or reducing) the long-term efficiency and survival/sustainability of the for-profit firm. Classic agency cost theory posits that the bestowal of discretion on managers and directors will lead them as ‘rational’ self-wealth maximisers to engage in value-reducing behaviour – ‘shirking’ responsibilities (such as sitting on committees), ‘empire building’, over compensation and engaging in less transparent benefits in the form of perks. Thus ‘Governance Variables’ are used to counter these actions – these are the management and governance structures, mechanisms, processes and protocols in a corporation which seek to punish or deter management misconduct or which seek to align the interests of ‘insiders’ with ‘outside’ shareholders and are contained in Governance Codes such as those operated by the NYSE and ASX. Often, these Governance Variables are applied in a ‘checklist’ manner without understanding that these Variables have a ‘field’ or ‘zone’ of operation/effect that affects other Governance Variables and other management and governance structures within the company.
To remedy this, the relational approach is a completely novel approach to understanding the interrelationships between these Governance Variables. This approach introduces a new field of corporate governance analysis and a new unifying theory – relational corporate governance. It incorporates a detailed identification, development and justification for the theoretical and operational components of the new approach. Instead of mathematical formulae and statistical equations which alienate many academics, researchers, students, corporate actors and their advisors alike, the relational approach comprises detailed theory and explanation drawn from hundreds of articles, empirical studies and other works and a range of comparative tables and instructional diagrams. The approach culminates in two operational tables displaying the predicted relative importance of 39 of the best-known Governance Variables in enhancing (or reducing) the long-term efficiency and sustainability of the corporation measured on a new governance rating scale.
The unique virtue of the relational approach is that it translates hundreds of theoretical and economic articles, empirical statistical studies, international/cross-border and national Governance Codes and corporate collapse literature into an approach that can be understood and used by academics, researchers, students, governments, securities and exchange regulators and corporate actors and their advisors who are not versed in those fields. The approach is thus intentionally interdisciplinary representing ground-breaking research in modelling complex corporate governance systems to the widest possible audience.
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