Academics endorse new vision for corporate governance

The Modern Corporation Project at Cass Business School has released five succinct statements prepared and endorsed by high-level experts versed in a variety of legal systems.  The statements on Company Law, Economics, Accounting, Management and Politics seek to foster the development of a wide-ranging debate on the nature and consequences of contemporary corporate governance, which has put radical shareholder primacy at the centre of corporate attention.  Endorsed by more than 250 leading international academics, the statements provide a cross-jurisdictional and cross-disciplinary consensus for the development of a new vision on corporate governance.

• Signatories include Lynn Stout, Professor of Corporate and Business Law at the Cornell University; Jean-Philippe Robé, Professor of Law at Sciences Po; Paddy Ireland, Professor of Law at Bristol University, Simon Deakin, Professor of Law at the University of Cambridge; William Lazonick, Professor at the University of Massachusetts; Charles Perrow, Emeritus Professor of Sociology, Yale University; Derek S. Pugh AcSS, Emeritus Professor of International Management, Open University Business School; Gerald (Jerry) Davis, Wilbur K. Pierpont Collegiate Professor of Management and Professor of Management and Organizations; Ross School of Business, University of Michigan.

• The authoritative statements have just been published in the Social Science Research Network. The work has been coordinated by Dr Jeroen Veldman, Senior Research Fellow at Cass Business School to support the Purpose Corporation Project, an initiative led by Frank Bold.

The Need to Rethink Corporate Governance

Since the 1970s, the theoretical framework of corporate governance has been narrowing and it now encourages excessive risk taking at the expense of corporate resilience and the ability to create long-term sustainable value.  This framework takes away a focus on investment in R&D and innovation, and in human and social capital.  It also diminishes the capacity of corporations to anticipate and mitigate systemic risks. In a broader sense, it contributes to rising inequality within firms and in society at large, and to a range of negative environmental and social impacts.  Rising inequality, in turn, is seen as a source of political and economic turmoil.

After the financial crisis, it has become broadly accepted that corporations – particularly the world’s largest publicly traded corporations – need to be governed with respect for the society and the environment.  The statements provide certain fundamentals applicable in almost all jurisdictions that can help prevent analytical errors and provide a broader basis for corporate governance theory and practice

“Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximise profits for their shareholders. This is reflected in the acceptance in nearly all jurisdictions of some version of the business judgment rule, under which disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity, even if this does not entail seeking to maximise short-term shareholder value. Where directors pursue the latter goal, it is usually a product not of legal obligation, but of the pressures imposed on them by financial markets, activist shareholders, the threat of a hostile takeover and/or stock-based compensation schemes”.

Statement on Company Law

The five statements were a first step to open up a broad debate involving all stakeholders in the corporate governance domain.  The discussion was then taken further by the Purpose of the Corporation Project. In a series of international roundtables over 240 thought leaders in business management, investment, regulation and academic and civil society communities were brought together with the aim of identifying desired outcomes and principles of corporate governance fit for the challenges of the 21st century.  The report “Corporate Governance for a Changing World” summarises the main findings of the roundtable series and was released on 28^th September in Brussels.

Statement on Company Law: https://ssrn.com/abstract=2848833

Statement on Management: https://ssrn.com/abstract=2863077

Statement on Accounting:https://ssrn.com/abstract=2863935

Statement on Economics:https://ssrn.com/abstract=2864246

Statement on Politics: https://ssrn.com/abstract=2864474