Pierre-Yves Gomez

Democracy and the Evolution of Corporate Governance

Under what conditions do stakeholders consent to a regime of corporate governance? We propose that consent by the governed in corporate governance cannot be satisfactorily explained without reference to the collective value of procedural fairness that underlies markets. Drawing on the social psychology of justice and the political economy of social choice, we highlight the critical role played by democratic procedures in achieving consent by the governed in modern society. This line of reasoning leads us to suggest that the evolution of corporate governance, too, can be understood in terms of Tocquevilles well-known hypothesis that democracy eventually prevails in all spheres of organised activity. Examining the historical record of institutional reform in France, Germany, the United Kingdom and the United States, we find that corporate governance has indeed evolved to make increasing use of democratic procedures. Viewed over the long-term of two centuries of capitalist development, corporate governance is seen to have successively incorporated enfranchisement, separation of powers and representation. In conclusion, we consider the implications of basing the study of corporate governance on the question of stakeholder consent and the practice of corporate governance on the procedures of democracy.

On the Discretionary Power of Top Executives : Evolution of the Theoretical Foundations

The history of corporate governance systems is now well documented. It is, however, necessary to better understand the link between the theories and the evolution of effective practices of governance. In this article, it is demonstrated that the development of theories (property rights, agency theory, stakeholder theory, etc.) parallels the evolution of the governance of corporations. Taking three main periods into consideration, I examine how economic theories offer rational frameworks for each period that give scope to and delineate the discretionary power of top management. These theoretical constructs answer the need for understanding both the governance systems and the legitimizing practices in use. As a result, I show how the evolution of corporate governance since the 1970s challenges the use of agency theory as the mainstream model and paves the way for new theories of corporate governance in an era of mass shareholding.

Strong Managers, Strong Owners: Corporate and business strategies

Significant changes in corporate or business strategy imply corresponding changes in capital needs, changes in management competence requirements, and changes in information processing structures. Therefore, such changes in strategy are always of interest to ownership, management, and corporate governance. In practice, the key step is to recognize what kind of changes in corporate and business strategy can take the firm into new territory and to adapt ownership, management, and corporate governance accordingly. As the case descriptions and the analysis in the following pages will show, significant changes in corporate or business strategy have the potential to undermine the long-run viability of the firm. Too often, the broader governance implications of changes in strategy are not recognized or are dealt with inadequately. Instead they should be seen as occasions for reviewing ownership, management, and making major adjustments to how the firm is set up. Change in corporate strategy A great deal of research in corporate strategy has been devoted to the question of diversification, with a particular emphasis on comparing the performance effects of related and unrelated diversification (where relatedness is a function of the extent to which the different businesses of the multibusiness firm share resources and markets).The study of why firms engage in corporate strategies of unrelated diversification despite the negative evidence on performance represents one of the few specific points of comparison between research in strategy and research in finance. Strategy explains the persistence of unrelated diversification in some cases by citing managerial competences in parenting, i.e., economies of scope in processes that can be brought to bear across businesses, such as finance, accounting, or planning. Finance is more skeptical about managerial competences and invokes managerial power over decision-making and managerial rent seeking to the detriment of shareholders who do not need management to diversify portfolio risk on their behalf (in the publicly listed firm). In the first approach, managerial competences are difficult to pinpoint and shareholders are not considered; in the second, management and shareholders have diametrically opposed interests. What if diversification in particular, and changes in corporate strategy in general, were analyzed in light of the interplay of the values among and between managers and shareholders instead?