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Corporate Governance Systems Diversity: A Coasian Perspective on Stakeholder Rights

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Abstract

We examine corporate governance diversity within a Coasian framework of stakeholder rights, where the central role of governance is to ensure that necessary firm-specific investments are made. This Coasian perspective on stakeholder theory offers a unifying framework towards a global theory of comparative corporate governance, bridging the gap between economic theories of the firm and stakeholder theory, also offering an economics-based alternative to agency theory that explicitly accounts for stakeholder rights. The Coasian perspective encompasses a diversity of corporate governance systems, but does not imply a unique global corporate governance benchmark. We posit that governance is firm dependent and endogenous conditional on the constraints imposed by a national governance system; consequently, there should be no systematic relationship between governance and firm performance once the national constraints are controlled for. However, the same national corporate governance system constraints confer comparative advantages to firms whose efficient levels of firm-specific investments are favored.

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Notes

  1. See, for example, Letza et al. (2004), Clarke (2007) and Aguilera and Jackson (2010) for more detailed descriptions of the various streams of thought on corporate governance.

  2. Another alternative to agency theory is the stewardship theory of management (Davis et al. 1997), which “offers managers a different set of motivations, which could potentially include the interests of all relevant stakeholders” (Preston 1998, p. 9). However, the focus of this theory is management and not stakeholder rights, whereas we aim at the broader governance context and integrating stakeholder theory with an economic theory of the firm.

  3. As noted above, this paper does not directly develop what should be the relevant performance measure(s), although clearly the single metric of shareholder value will be insufficient. However, shifting the focus of corporate governance to that of inducing firm-specific investments by the production team members suggests that the surplus of each such team member needs to be included.

  4. Comparative institutional advantage (Hall and Soskice 2001) refers to the concept that institutions supporting certain activities provide a comparative advantage for firms engaged in those activities.

  5. We assume that the firm-specific component can at least be conceptually isolated for each stakeholder and investment. We do this even though both physical assets and human capital are inseparable bundles of firm-specific and non-firm-specific investments.

  6. The terms surplus and quasi-rents are often used interchangeably (e.g., Zingales 1998). Quasi-rents in general are defined as the “difference between the value of an asset in its first-best use and its value in its next best use” (Castinias and Helfat 1991, p. 161).

  7. “Team production…is production in which (1) several types of resources are used and (2) the product is not a sum of separable outputs of each cooperating resource…[and] (3) not all resources in team production belong to one person” (Alchian and Demsetz 1972, p. 779).

  8. Explicit contracts are written contracts that can be enforced in a court of law. Implicit contracts are tacit agreements. If implicit contracts are self-enforcing (Bull 1987; Klein 1996), it is in both parties’ self-interest to fulfill the implicit contract. “Incentives to adhere to an implicit contract include the potential for sharing future profits that arise from the relationship. In contrast, penalties from violating such agreements can include the loss of future profits from the agreement or damage to one party’s reputation that can impede their ability to contract with others in the future” (Gillan et al. 2009, pp. 1630–1631). Career concerns also provide incentives to adhere to implicit contracts (Tirole 2001).

  9. Whereas the Coasian perspective focuses on the allocation of residual rights of control to ensure firm-specific investments, alternative means of motivating team members to make firm-specific investments may also be used in corporate governance. For example, customs and practices that foster long-term employment relationships also encourage firm-specific investments in human capital (Milgrom and Roberts 1992; Blair 1999). Job ladders, career paths, and seniority rules compensate employees over time for their investments in firm-specific human capital, implicitly protecting their investments (Blair 1999). Corporate culture and norms may foster trust, thereby promoting firm-specific investments in relationships and team building (Blair 1999). Finally, equity ownership by stakeholders such as employees, customers, or suppliers allows for surplus sharing and gives these stakeholders some “voice in governance,” but only as shareholders (Faleye et al. 2006; Zattoni 2011).

  10. In a partnership, a lead partner will need to ensure that firm-specific investments are made by at least another partner, and all the partners participate in some manner in the allocation decision of the ex-post surplus. In a corporation, private or public, governance needs to be designed such that at least two of the primary stakeholders in the firm—providers of capital, management, and employees—make firm-specific investments and thus are team members in the narrow sense defined earlier; as the scope of the corporation expands, other team members such as creditors, suppliers and even customers may have to be incorporated into the governance regime.

  11. Efficiency here refers to the optimal levels of firm-specific investments that can be achieved through the allocation of control rights (and/or other components of a corporate governance system), and not to the levels that can be achieved by a central planner with access to all the relevant information. In this sense, these efficient firm-specific investments are the second-best, constrained by the non-contractibility of firm-specific investments, relative to the first-best that would be achieved through frictionless contracts.

  12. Thus, the Coasian stakeholder theory is consistent with alternative theories of board performance—e.g., resource dependence or stewardship theories (Rashid 2015)—depending on the firm-specific investments that are to be induced.

  13. In our analysis, we consider the most commonly identified team members (sometimes called primary stakeholders) in the literature (e.g., Blair and Stout 1999; Lan and Heracleous 2010).

  14. Davies (2005) characterizes enlightened shareholder value as follows: “The interests of non-shareholder groups thus need to be considered by the directors, but, of course, in this shareholder-centered approach, only to the extent that the protection of those other interests promotes the interests of the shareholders” (cited in Clarke and Klettner 2009, p. 290).

  15. Donaldson and Preston (1995) suggest property rights as a basis for stakeholder theory but, lacking an economic theory of the firm that is consistent with stakeholder rights, limit their arguments to a series of general considerations.

Abbreviations

NGSC:

National governance system constraints

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Acknowledgments

We thank Vic Anand, Francesco Bova, Peter Jaskiewicz, David Pyke, Emilson Silva, and participants at the European International Business Academy meeting 2012 and the Academy of International Business meeting 2014 for their comments and feedback. We thank the Social Sciences Research Council of Canada for financial support.

Funding

This study was funded by an insight grant from the Social Sciences and Humanities Research Council of Canada.

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  1. University of Alberta, Edmonton, Canada

    Dorothee Feils & Florin Şabac

  2. University of San Diego, San Diego, USA

    Manzur Rahman

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Feils, D., Rahman, M. & Şabac, F. Corporate Governance Systems Diversity: A Coasian Perspective on Stakeholder Rights. J Bus Ethics 150, 451–466 (2018). https://doi.org/10.1007/s10551-016-3188-5

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