Enhancing Firm Sustainability Through Governance

Enhancing Firm Sustainability Through Governance

The Relational Corporate Governance Approach

Corporations, Globalisation and the Law series

Francesco de Zwart

This important book presents a fresh perspective on corporate governance and how the relationship between governance mechanisms, processes and variables should be understood through a new unifying theory: the relational corporate governance approach. The approach acts as a tool for analysing the governance health of individual companies and suggests the actions required to remedy sub-optimal governance arrangements. A wide selection of articles, empirical studies and literature have been translated into an original theory which complements existing law and economics models of the firm.

Chapter 2: The framework of the relational corporate governance approach

Francesco de Zwart

Subjects: business and management, corporate governance, international business, law - academic, corporate law and governance

Extract

The purpose of this chapter is to show how the relational corporate governance approach and its constituent components determine the relational proximity of governance variables. To do so, the additional purpose of this chapter is to construct the principal components of the relational approach and to introduce the 39 governance variables. This includes the following theoretical components introduced in the previous chapter: ● the ‘three relational axes of good governance’ – the theoretical weighing mechanism which weighs the objectives, behaviours and positional conflict of insiders versus outsiders; ● the eight ‘governance factors’ – the most significant and recurring themes and tensions underpinning the four Key Fields; and ● the two ‘interrelationship schemes’ which represent the hypothesised relationships between the governance factors under the shareholder primacy model and the stakeholder model of corporate governance – these are used to construct a ‘relational effect path’ for each governance variable. The relational approach’s principal terms and components are defined in Table A.2 of Appendix 2, Glossary of Relational Corporate Governance Approach Terms and Components. In short, each relational effect path depicts the number and identity of the governance factors affected by each governance variable and the direction of the effect. The more governance factors affected by a governance variable, then the greater is its relational proximity relative to other governance variables in affecting agency costs (in either direction) and the long-term efficiency and sustainability of the firm.

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