A Case for Global Governance Theory: Practitioners Avoid It, Academics Narrow It, the World Needs It

ABSTRACT

Manuscript Type: Perspective

Research Question/Issue: This paper promotes the furtherance of global governance theory with sufficient universal applicability to open up an entirely new area of corporate governance research, both in theoretical effectiveness and in competing practices stimulated by theory.

Research Findings/Insights: This paper does not arise from a research study, but from the argument that board governance suffers from lack of a theoretical base despite its crucial instruction and accountability function between owners and operators. Therefore, this paper is not to report research results, but to introduce a perspective on the need for conceptual coherence in the board's role, practices, and relationships – a perspective worthy of being called a global theory of governance.

Theoretical/Academic Implications: The central theme of this paper is that a global theory of corporate governance is needed, can be highly practical, and has already begun. The case is made that global governance theory will not arise from research into the elements of current board practices, but by studied attention to: (1) the purpose of boards; (2) the irreducible minimum elements of accountability among varied governance venues; and (3) the concepts and principles that would enable those universal characteristics to be optimized. The case is made that isolating the relatively few essential components of responsible governance yields a foundation that enables all other elements to vary based on cultural, legal, and idiosyncratic variables for each board.

Practitioner/Policy Implications: Any development of governance theory necessarily changes the light in which practices are viewed: board relationships with shareholders and with management; director discipline and training required to fulfill theory-based obligations; roles of chair and committees; advisability of combination directors/executives; distinction of directly board-controlled decisions versus those allowed to vary as management sees fit; nature and content of reporting and CEO evaluation; and a host of other issues of board practices and expressions of leadership.

INTRODUCTION

The elephant in the room – the board room – is a lack of interest in governance theory and even failure to recognize that sound governance theory would be a boon to the field, and an authoritative guide to practice.

The phenomenon of boards is found worldwide: a group of individuals, usually on behalf of other people, that exercises authority over an enterprise and are therefore accountable for that enterprise. That phenomenon is found in equity corporations, NGOs, and many governmental organizations. Governance theory – meaning specifically board governance theory – should be a carefully crafted and integrated set of concepts and principles applicable to all instances of the board phenomenon. In explication of that assertion, it is my intent in this paper to make several points:

• 1
  The board of directors, while clearly only one entity among many that affect corporate realities, is sufficiently pivotal to deserve our specific attention at the level of theory.
• 2
  Without a strong theory to identify and preserve the core practices of board governance, a number of factors threaten to lead to intrusive micromanagement. These factors include companies' increasing internal complexity and external relationships along with increasing public, legal, and investor scrutiny of board behavior.
• 3
  Because governance is a social construct rather than a natural phenomenon, theory must be driven by and anchored in the purpose of boards rather than derived from analyses of current practices.
• 4
  Governance theory will not be a “one size fits all” prescription as to structure and composition, but a coherent framework of fundamental, global principles upon which each board's individual practices can be left to vary in recognition of contextual and cultural particulars.
• 5
  Governance theory-building has the potential to transform today's familiar practices, going beyond incremental improvements.

“Governance” always suggests decision-making authority, but can be used in a variety of settings, including the governance of a nation-state, the governance of a process, or the governance of a corporate entity. In the latter case, governance can denote the entire external and internal structure of major actors and influences on those actors involving the legal system, the market for corporate control, ownership patterns, or the boards of directors (Denis & McConnell, 2003). It is not to deny or overlook this array of influences to recognize the board of directors as the pivotal corporate governance mechanism. Not only is the board the legally and morally authorized conduit of owners' authority over an organization, it is in a unique position to affect and coordinate all elements in the upper echelon decision structure.

Thus, it is board governance theory addressed here, the direct process by which owners' agents exercise ownership prerogatives over the corporate enterprise. Such a theory must be sufficiently comprehensive to yield a framework in which all possible board issues in all governance environments could be embraced providing consistency across the spectrum of governance topics and ensuring fidelity to the purpose for having a board in the first place.

When the term “corporate governance theory” does come up in published papers, it frequently refers to agency theory or, more recently, institutional theory. Neither of these theoretical frameworks is specific to board governance, but applicable to a much broader sweep of organizational applications. For example, agency theory is a theory of stewardship that certainly applies to boards, but no more than it does to one's solicitor. Although it does speak usefully to one aspect of board responsibility, considering it to be a theory of governance is like calling a theory of brakes a theory of automobiles. Hence, the challenge is not how to augment agency theory for corporate boards, but how to develop governance theory that, among other features, subsumes agency theory.

Institutional theory addresses human behavior within institutions (“institutions” sometimes widely conceived) with respect not only to rational or formal rules, but also to cultural variables like symbols, beliefs, and human will. Its central theoretical assumption that organizations pursue legitimacy above economic efficiency is useful, but still incomplete. Once again, the insights of the various forms of institutional theory are applicable to the behavior of boards as much as to any other institution, but like agency theory is not governance theory per se.

A rigorous theory of governance holds the key to boards' ability to grasp the complexity and expansiveness of modern corporations that increasingly span the globe. This seems particularly important in the current climate of greater public visibility of boards as well as more vehement public attitudes toward boards. Governance theory has been my interest for over 30 years. During those years I have been appalled at the negligible attention given the issue, explained perhaps by widespread failure to grasp that theory has practical utility. Governance suffers from what Thomas Kuhn (1996:2) called “development by accumulation.” It seems that persons in the field – academics and practitioners alike – can only focus on an intermittent slogging from one “best practice” to the next or, since the 1992 “Cadbury Report” (Committee on the Financial Aspects of Corporate Governance, 1992), from one code to its successor. Theory-blindness persists despite historical evidence that when any field finally develops, tests, and hones theory is when it graduates from single steps of improvement to transformation – witness, for example, aeronautics, medical treatments, and chemistry.

The current editor of Corporate Governance: An International Review called for “a parsimonious, generalizable, and accurate theory of corporate governance which can explain and predict corporate governance practices and outcomes throughout the global economy” (Judge, 2009:iii). Shareholders, directors, and other stakeholders have a right to expect nothing less. Leighton and Thain claimed that it is “impossible to frame a statement of board system rules that would be universally valid” (Leighton & Thain, 1997:64), although Cadbury disagreed, recognizing the possibility of a “fully integrated and coherent system of governance” (Cadbury, 2002a:xiii). Whether or not board governance theory is unattainable, there can be no doubt that it has been elusive.

SCOPE, SOURCE, AND DOMINANCE OF GOVERNANCE THEORY

The potential impact of governance theory on our familiar, even tradition-blessed practices of corporate governance is not to be underestimated. Governance theory, just as theory developed in any other field, has the capability of upending not only understandings that exist pre-theory, but relationships, customary processes, and vested interests (Carver, 2000b, 2000c, 2001a, 2002a, 2002b, 2007). Any pursuit of governance theory that does not have that degree of conceptual power would be a feckless exercise rather than a serious undertaking. Indeed, earnest construction of worthwhile theory in any field is carried out in the face of daunting ignorance of its eventual effects on established methods. While new theory does not set out intentionally to destroy what has gone before, neither can it be an apologist for the status quo.

In the interest of delimiting the argument, however, let me define two key terms. A governing board is a group that, usually on behalf of others, has legal authority over and commensurate accountability for an organization. While this excludes advisory boards and other non-authoritative groups, this definition nonetheless covers a very wide range of equity, NGO, and even some political boards (such as city councils and port authorities). Governance theory can address the underlying framework for all groups that meet that definition. Further reference in this essay to governance theory, then, will refer specifically to board governance theory.

By the term “governance theory” I mean a conceptual framework and set of principles for governing boards that provides a compellingly logical context in which all governance issues can be viewed as part of an integrated whole. A given board's approach to structure or its approach to policymaking would be developed consistent with this holistic approach to governance. Such a theory needs to be sufficiently broad to encompass all governing boards, yet flexible enough to embrace extensive variations by industry, culture, and unique company circumstances. Therefore, it would be comprised of the irreducible minimum of essential elements – just enough to be a complete theory, but no more than can be justified as universally applicable.

So what would the pursuit of an effective governance theory entail? The natural inclination would be to begin from what we already know about finance, accounting, law, economics, and management. But governance theory is not market theory or accounting standards any more than it is agency theory. Starting with these “givens” would not lead to theory any more than meticulous studies of typewriters would have led to word processors or of horses to motor vehicles. The ideal whole is not simply an accumulation of current parts, no matter how well developed those parts may be. Certainly, a theory can grow in integrity or comprehensiveness over time, but its beginning point is more like a carefully considered leap of creation than the product of data collected from an old paradigm.

I do not mean to denigrate current research that focuses on components of the governance task, for it promises to teach us more about corporate governance as it is actually practiced and point the way toward incremental improvements. Indeed, there are informative, frequently enlightening relationships being found in current research. Useful knowledge is produced by studying, for example, how industry context influences the relationship between board structure and cash holdings (Donnelly & Mulcahy, 2008), how CEO duality relates to IPO underpricing (Chahine & Tohmé, 2009), the effect of audit committee and director independence on auditor resignation (Lee, Mande, & Ortman, 2004), the relationship between board composition and diversification (Chen, Dyball, & Wright, 2009), the effects of emotion in the boardroom (Brunden & Nordqvist, 2008), how nationality diversity in boards is related to a country's governance regime (van Veen & Elbertsen, 2008), and limitless other learnings about boards as they exist today.

No matter how instructive it is within today's understanding of boards, even sterling research cannot be the route to an effective and integrated theory that is rigorous and relevant. (Once a theory is constructed, of course, research is the route to testing it.) Pre-theory research can be valued for its findings, but depending on it to lead toward theory is guaranteed to delay theory-building, for it can keep us forever ensnared in pre-theory mindsets, yet convinced we are making progress. It is illusory to think we can build a theory of the whole by assembling parts just because they pre-exist governance theory. Let me cite three not strictly independent reasons.

First, a credible theory of corporate governance will not arise by studying what is. Because we are accustomed to theory development in the natural world, that assertion may seem strange. In the natural world, scientists conduct exhaustive observations so that, bootstrap-like, they can mentally construct a framework – theory, itself unseen – able to explain those observations and be tested against observations yet to be made. The reality being studied is not one of the scientists' design, but the explanatory framework is. For natural phenomena like electromagnetism, gravity, and biological evolution that approach appropriately generates descriptive theory.

But governance is not a natural phenomenon; it is a social construct. We created it. Theory building in this case cannot be a matter of studying our own creation in order to tie together practices that grew in the absence of theory. Taking that course is to forever constrain tomorrow's possibilities by today's practices. Moreover, while some current practices and insights may not change at all when viewed within an all-embracing theory of governance, others are likely to change radically. Corporate governance theory will not arise from studying what corporate boards already do, but from designing what we need boards for, thereby treating all our familiar, even cherished, governance practices as dependent variables. The independent and dependent variable(s) for governance research sought by Judge (2008:ii) will be or be derived from the elements of governance theory finally accepted.

Therefore, it is not descriptive theory we need for governance but prescriptive theory. Theory development of this sort demands an approach 180 degrees different from trying to understand nature; it does not resemble research so much as social philosophy and the bold imagination of what should be, even though the ideal it holds up may be long and hard to achieve. Prescriptive theory would not, then, exist to “explain and predict” (Judge, 2009:iii) as would a theory in the natural sciences. As a normative model it would exist to discipline and guide.

Second, proper governance theory would be the superior or “meta” discipline against which all single disciplines taken one at a time and their prescribed practices would be tested. They are enfolded by a unified theory, not a determinant of theory. That is why theory – which by its nature would “cradle” all governance topics – cannot be derived from studies of how boards influence strategy, how compensation committee quality relates to CEO compensation, and company performance, and so on. Theory would become the pattern with which to judge the appropriateness of accounting standards, structural considerations, reporting methods, techniques of delegation, officers' roles, the choice of topics for board involvement, even statutes and codes. Therefore, governance theory must be not only larger in scope than any single element or consideration of the board job, but a construct so foundational and rigorous that all other governance matters become subordinate topics. Consequently, it would be folly to discuss CEO duality, audit committees, agenda control, shareholder relations, and a host of practical subject matter without tieing them to – and testing them against – theory.

Third, clarifying what boards are for must not be based on the needs of CEOs (as is all too common today). Because boards' prime fiduciary obligation is to owners, their organizational authority comes from owners, and their relationship to management is one of greater authority, boards are organs of ownership, not of organs of management. A theory of governance must confirm board dominance in the board-CEO dyad, eliminating the all-too-familiar CEO-centrism. Boards have been “an imperfect tool for enforcing [a proper board-CEO power relationship] usually because the board joins management on its end of the teeter-totter” (Ward, 1997:176). CEO-centrism or its flip side, failure of boards exert their rightful authority, has been recognized as a governance-crippling influence by many observers (Drucker, 1974; Geneen, 1984; Gillies, 1992; Icahn, 2009; Levitt, 1998; Lorsch & MacIver, 1989). However, just as proper governance is not for the benefit of CEOs, it is also not for the benefit of directors. Governance theory must spring from the needs of owners, not of those who work in their behalf.

Governance theory-building has to begin with constructing an irreducibly simple purpose for governance, creating the irreducibly simple concepts that would be demanded by that purpose, assembling irreducibly simple principles for the use of those concepts, and finally weaving these concepts and principles together into a conceptually coherent paradigm. This process resembles the Einsteinian “thought experiment” more than experimental research.

My foregoing repetition of “irreducibly simple” is to underscore the need for governance theory to constitute an all-embracing framework, but not to declare more than is applicable to all governing boards. Hence, the pursuit of governance theory is a search for principles that are, to rely again on Einstein, “as simple as possible but not simpler,” so simple as to exclude non-universal principles, yet not so simple as to exclude components required to assure conceptual wholeness. For example, governance principles that apply only to closely held companies or to manufacturers' associations or to pension funds would be excluded. This minimalist albeit comprehensive approach can yield governance theory that is not only straightforward and concise, but universally applicable, leaving wide areas for idiosyncratic variations due to culture, industry, legal frameworks, corporate history, and personal choices of directors.

The idea of building an irreducibly minimum framework (a theory) may sound unfamiliar when discussing governance, but it is well-known in other settings. So although most directors reject any “one size fits all” approach to governance (Ward, 2009), at the level of theory one size can fit all and it is generally recognized to be true. For example, we find it unremarkable that a physician's anatomy chart represents our bodies well even though we certainly have individual differences. A few aeronautical principles permit many designs of aircraft to fly. A finite set of engineering principles enables a near-infinite variety of bridge designs. Applying the same understanding to governance is to recognize that the aim of theory-building is not an exhaustive set of prescriptive details, but only the principles that, if respected, would leave all further specifics open to each board's judgment and each culture's influence. Hence, with Occam's razor firmly in hand, the aim for governance theory is the elegance of simultaneous simplicity and rigor.

So where do we begin? Since governance is a social construct, we must begin with the reason for needing the construct. The beginning point, then, referred to earlier as what boards are for as distinguished from what they do, must be the purpose of governance.

PURSUING THE PURPOSE OF GOVERNANCE

It may appear extraordinary to ask what boards are for, but this elementary question is neither trivial nor unambiguously answered. Still, beginning with purpose would seem to be a simple task – certainly any structure or process of human making exists to serve an identifiable purpose no matter how equivocal our elucidation of it. But finding agreement on what boards are for (a matter of essential values-added) is more difficult than listing what they do (a tally of activities in which they might be engaged). This is a crucial handicap to the development of governance theory, as Cadbury (2002b:xxix) expressed

The drawback of the spate of governance initiatives of recent years, however, is that they have lacked an agreed starting point. What has been missing is an agreement on what boards are for, whom they should be serving, and what distinguishes governance from management. Such an understanding is the essential building block on which advice on governance needs to be based if it is to be consistent and self-reinforcing.

Because construction of governance theory must begin with purpose, the first conceptual hurdle is the explication of purpose. In descriptive theory, beginning with purpose rather than searching for facts entangles the investigator in a teleological blunder. Flowers are not attractive to bees so that bees can make honey and bees do not seek flowers so that flowers can spread. However, in prescriptive theory-building purpose drives all further components of the phenomenon. Teleology is not only acceptable, but mandatory. So what should guide us in seeking a credible purpose as the point of departure for all corporate governance?

I submit that the purpose of governance must be constructed beginning with the barest minimum that can be said with certainty about our need for a board of directors. We must take care not to clutter what boards must do with what they can do, that is, what is crucial for boards to contribute to the whole of enterprise versus what is discretionary. So to begin governance theory with a universally applicable purpose of governance requires the isolation of boards' obligatory values-added from values-added that are optional and therefore idiosyncratic for each board. The more potential board outputs that can be left optional without omitting those that are crucial, the more flexible the resulting theory will be for local tailoring. It is this optimal balancing between thoroughness and minimalism that enables theory to be both powerful and global. Without thoroughness it can hardly serve as a useful theory; without minimalism it cannot apply across the wide global range of diversity. Further, the more fundamental the theory's precepts, the longer it can serve as financial and social conditions cause shifts in law and other influences on governance.

So what is the most succinct statement we can make about the purpose of responsible governance? That question, necessarily preceding the development of any theory of governance, should be the subject of ongoing and serious discussion. The discussion is diluted by recounting the various purposes to which boards have been put, as if the purpose of boards is best expressed as a list of common activities. For example, many NGO boards will readily list approving financial statements, establishing personnel policies, and settling staff grievances. Many equity corporate boards will confidently list “asking good questions,” hiring the CEO, and agreeing to a strategic direction. Many political elected boards will list meeting with disgruntled constituents, inspecting budgets, and deciding staff compensation. Not only are such lists comprised of activities (what boards do) rather than values-added (what boards are for), but at their best reflect secondary or tertiary purposes that are ostensibly called for due to some overriding deeper purpose for having the whole board endeavor in the first place. In fact, the more such practices are treated implicitly as if they constitute board purpose, the more their apparent legitimacy conceals even the recognition that something critical is missing.

Starting governance theory-building requires getting beneath all such board engagements to find or create the singular purpose from which all further subpurposes and activities should spring. Although that pursuit deserves on-going debate, my experience in governance theory-building demonstrates the high leverage the explication of such foundational purpose can have for board practices and board relationships with other actors.

A word about treatment of the “other actors” is in order. It would not only be folly, but ludicrous to construct a theory of governance that does not relate the board to owners and to management, since the board is the connecting link between them. Owners-board-management are the stripped down, essential, corporate skeleton. Beyond this skeleton, even further actors exist, such as – depending on the type of organization – analysts, accreditation agencies, capital markets, unions, regulators, and so forth. But to determine who is to deal with them and what the relationships should be depends first on having an organization to relate, that is, having the skeleton in order.

My own theory-building, as an example, started simply with recognition that the board represents owners in the governance of enterprise. That is, since the board either is the ownership or carries the authority of ownership over an organization, its task is to ensure owner-accountable corporate performance. Although the definition of owners can sometimes be obscure (as with some charitable organizations, for example), it is normally quite distinct (as with equity corporations, membership organizations, and most political bodies). In any event, the board represents whatever population is owed accountability for performance. Other stakeholders (e.g., employees, vendors) are not forgotten in this pointed formulation, but the board's obligation to them is of an ethical nature rather than one of performance.

THE LEVERAGE OF PURPOSE

It is not my intention in this article to explain the governance theory I developed nor to argue the specific governance purpose from which it begins. But using that purpose by way of example can illustrate the implications of beginning with a highly summarized, focused purpose. The purpose, phrased in terms of the superordinate outcome of a totally successful board, one that is truly the voice of owners (adjusted by the board's greater knowledge) and the competent supervisor of management: informed owner values are transformed into corporate performance.

Starting, then, with the highly summarized purpose, what would logically follow? Clearly that purpose positions the board just under owners and just above any other persons to whom it chooses to delegate part of its – a not surprising implication. The agency obligation intrinsic in that purpose means that, the board's primary relationship is with owners, not operators. The board is owner-representative before it is the CEO's superior and, in fact, before it makes a decision to have a CEO to begin with. The necessary implication is that the board's job is an extension of ownership “downward” rather than management “upward”– a conceptual shift with enormous implications for what boards spend their time on, which skills they develop, and what topics they struggle with.

It is the board's necessary function, then, to define and demand what owners want the organization to accomplish and what risks it may take. It is only optional (and, in fact, potentially damaging) that the board help management deliver on its demands. Construed in line with this raison d'être, the board should be the most vigorous shareholder activist in sight.

Unambiguous, vital leadership would preclude the board's delegating governance – its own job – to subordinates, which is to say that if the board cannot govern itself, it can hardly govern the company. Board agendas, for example should become the board's agendas rather than management's agendas for the board. Moreover, the unitary nature of board authority compels the board to own its group authority over all delegatees, not just the CEO. Hence, the board is the chairperson's superior. In practice, many directors might find calling the chair a subordinate to be unfamiliar if not uncomfortable. But if the purpose of governance is as I have stated there can be no ambiguity – the chair works for the board, not the other way round. The chair's authority is not only limited by what the board chooses to grant, but the chair position has no existence unless the board so decides.

Consequently, if the board fails in its performance, it cannot blame the chairperson, since he or she holds office only as long as the board chooses. Further, if there is conflict between the chairperson and the CEO, the problem lies with the board in the same way that role conflict between two managers is correctable by the manager who supervises them both. The job responsibilities and authorities of the board's subordinates can be legitimately determined only by the board, not by the office-holders, therefore the board is accountable for any conflict – a point that discredits arguments that CEO and chair roles should not be divided because there may be such conflict. Such a conflict is either of the board's making or of its indulgence.

Hence, any failure of the chair is a failure of the board; any failure of a board committee is a failure of the board; any failure of the CEO is a failure of the board. So, given the purpose of governance as proposed, it would follow as a universal truth that the board as the direct recipient of owners' authority is accountable for all positions and functions to which it chooses to grant part of its derived authority, for that is the only way those positions and functions receive it.

Incidentally, taking the board's accountability seriously in this way, we would find any code or law – such as Sarbanes-Oxley in the United States – that aims its requirements at sub-board units such as audit or compensation committees to be misdirected. Prohibition of opacity and conflict of interest not aimed squarely at the board itself demonstrates failure to recognize board accountability for all its delegatees. At no point within managerial operations would we so easily countenance one level instructing a subordinate's subordinates and pretending that this level-jumping interference is managerially respectable.

The foregoing comment raises the question why law itself is not a good candidate for providing a purpose for governance. First, law varies across jurisdictions and is therefore unable to provide theory with a unified starting point. Second, law itself should be consistent with good governance theory rather than theory development be guided by torturous route of governmental thinking. Third, law is much better at protecting from danger than instilling excellence; theory must provide for both. (Somewhat similar arguments can be made against existing corporate governance codes supplying the point of departure for theory).

Let us note another factor derived from the purpose statement proposed. Because the board as a body is the owner-representative, not individual directors, group accountability and group use of authority are called for. These are characteristics not easily developed and for which most business leaders have not been trained by either schooling or circumstance. It is more natural to follow or compete to be an individual leader, so directors can be tempted to treat their chair or even their CEO as their boss despite both being subordinates of the board. Authority held as a group acts like management upside-down, that is, instead of an individual directing a group of subordinates, a group directs a single subordinate. Without recognition or skills in exercising group authority (therefore, being unable to harness group accountability), defaulting on governance is assured.

These thoughts might be said to be obvious, but are regularly ignored in practice every time an audit committee, a chair, or a CEO receives the first finger-pointing when things go wrong. For example, in the Enron collapse, press coverage first castigated executives, the auditing firm, and the audit committee in that order before finally pointing to the board itself. “Board members have largely been let off the hook,”Icahn (2009) said in referring to later debacles. The press's behavior, however, was not as diagnostic as that of those engaged directly in corporate matters. The latter seemed more concerned with audit committee expertise, auditor independence, and executive malfeasance than with a governance process that allowed failure to fulfill the board's legal accountability to shareholders and moral responsibility to other stakeholders. Tellingly, the legislative cure dealt with committee structure and composition more than a reconsidered process of governance. And just as tellingly, rare has been the board that leapt to the fore and admitted its own primary culpability for the various corporate tragedies over the years. In fact, Welch and Welch (2009) argued that “the real fallacy of corporate governance” is that boards are being asked to do too much, a position Icahn (2009) sees as “apologists [rising] to the defense of boards, evidence that the process of obfuscation of the boards' guilt has begun.”

It becomes obvious that an “activist board” is really the only responsible board to be if, in fact, the activism is about the right things. Exercising greater board autonomy and strength need not and should not cripple managerial vitality through invasive micromanagement. Because boards are unambiguously accountable to owners for corporate performance, they must be in control. Consequently, if boards are to fully exercise their controlling power and thus escape being “just another department for the CEO to manage” (R. Ward, personal communication), they must have more precise methods of delegating that are simultaneously rigorous, fair, and empowering.

In order to do that, governance theory must not only cover the board's relationship with owners, but the way in which managerial delegation occurs as well, lest the empowerment of boards lead to the disempowerment of management. Great pressures for boards to be more engaged, to be more active, to be more involved led Leighton and Thain (1997:101) to observe that directors are being driven into management's job and that this “this trend can probably not be reversed and the confusion and problems involved cannot be avoided.” Their solution was for directors to find “a new balance between unavoidable participation in and necessary detachment from management.” It is this “new balance” that a proper governance theory should provide. Theory must, in other words, provide principles of delegation that enable control without meddling, by which I mean the exercise of unambiguous authority without inappropriately delving into managerial details and prerogatives. The board should, in short, control all it must, not all it can. Theory can illuminate the difference and save governance from becoming increasingly an undoable job.

By taking the board's obligation as owner representative very seriously, governance theory would subsume and amplify agency theory, such that even widely accepted board practices would be discarded if necessary to uncompromisingly honor the agency obligation. Consider, for example, the common role of boards as advisors to their CEOs. While it is a mandatory obligation of the board to act as the ownership in microcosm, it is but an optional obligation to be an advisor to the CEO. Responsible governance theory cannot allow the mandatory to be sacrificed to or even potentially weakened by the optional. (Besides, nothing prevents CEOs from obtaining competent advice from any sources they choose.) After all, the board's unique responsibility is not to give good advice, but to ensure that the CEO produces good performance. In both defining and demanding that performance, the board must vigorously protect its fulfillment of informed and authoritative agency, a duty that forces upon it the undiluted role as commander, not advisor. That calls for any theory of governance to resolve the balancing act required for boards to become active leaders without becoming more meddlesome and thereby destructive of appropriate management latitude.

CONCLUSIONS

My confidence in the enormous potential benefit of prescriptive governance theory – as opposed to the never-ending, descriptive and piecemeal examination of improved practices – is due to my having developed such a global theory. Called the “Policy Governance”¹ model, it is explained for equity corporations in Carver and Oliver (2002a) and for NGOs and governmental organizations in Carver (2002c, 2006) and Carver and Carver (2006). The theory positions governance as an owner-representative function rather than a management function; provides for resolute board action despite diversity of views among owners and even among directors; balances overcontrol and undercontrol through a policy design that enables boards to control what they need to control and safely leave to the CEO what they do not need to control; avoids both rubber stamping and micromanaging; optimizes the values of CEO empowerment and board control; moves directors from advising on management's job to defining management's job; forces the practice of group authority by allowing no way to elude it; ensures that committees are aligned with dominant board accountability; positions the topmost of a two-tier board arrangement as the owner-representative (“governing” board), and illuminates any practice or structure that detracts from total board allegiance to agency responsibility (such as executive/inside directors and chair-CEO duality).

As an indication of the global prospects of governance theory, publications on my own theory have occurred in Southeast Asia (Carver, 2005), Australia (Carver, 1999), Brazil (Carver, 2002a), Mexico (Carver, 2001b), England (Carver, 1994a, 2001a, 2003d), India (Carver & Oliver, 2002b), Russia (Carver, 2002b, 2003b), and Canada (Carver, 2000a, 2003a; Carver & Carver, 2001), as well as in the United States lends some indication. An indication of the organizationally global prospects, the more than 200 policy governance publications relate the theory to equity companies (Carver, 2003a, 2003c, 2003e, 2007; Carver & Carver, 2006; Carver & Oliver, 2002a, 2002b); NGOs (Carver, 2006; Carver & Carver, 2006); financial institutions or specifically financial considerations (Carver & Carver, 1999a, 1999b; Carver & Oliver, 2002b); governmental or political bodies (Carver, 1997, 2001a); education entities (Carver, 1994a, 2000c); hospitals (Carver, 1989, 1994b; Moore, 2004); and even churches (Carver, 1995).

The effect of the theory is boards' capacity to have, as the saying goes, “its arms around the company without its fingers in it.” As Cadbury (2002a:xiii) observed, it originates in “first principles” rather than from existing governance practices, it is applicable “to any type of board” (Cadbury, 2002b:xxx) and constitutes thereby “a unifying theory of governance [capable of covering] both the corporate and voluntary sectors” (Cadbury, 2002b:xxix). Even the classic paper by Denis and McConnell (2003) did not address theory at the level of board purpose and fundamental role, the very core of what governance is. However, I do not make the case that the Policy Governance model is the only governance theory possible, just that it fulfills the requirements of theory and in doing so repudiates any argument that global governance theory is unattainable.

Assuming general agreement is possible on a globally-applicable theory of governance, what difference would it make? A conservative estimate, I believe, would include progress of six types.

First, a global theory introduces a common language of governance, facilitating the sharing of experience and transfer of learning across various cultures, industries, and organization types. This could accelerate insights and challenge poor practices more quickly.

Second, public perception of corporate boards as competent, ethical, accountable stewards stands to improve – a particularly important effect at a time when political considerations in some sectors press toward greater government curtailment of board prerogatives. This could enhance boards' freedom from unnecessarily burdensome legislation and political control worldwide.

Third, an effective theory should either clear up or significantly diminish a number of persistent governance stumbling points, such as the distinction between governance and management, the proper role of the CEO in board proceedings, content of board self-evaluation, and balancing empowerment and accountability of management. This would more clearly delineate roles and responsibilities so as to enhance overall organizational effectiveness, while avoiding both rubber stamping and micromanagement.

Fourth, the conduct of research in any field has typically become more focused and more productive of useful new knowledge after the introduction of theory than before; there is no reason to think governance research would be an exception. As such, an integrated theory of governance would raise the stature and impact of scholarly activity.

Fifth, a rigorous governance theory offers a conceptual arrangement for boards – pressed by popular demand, law, and codes to become more active – to know what to become more active about and what can be safely left to vary as the CEO sees fit, thereby escaping the inappropriate descent into managerial details predicted by Leighton and Thain (1997:10), cited earlier. It is instructive that the old Theory X versus Theory Y controversy was addressed by learning that the proper question was not tighter versus looser control, but what to control tightly versus what to allow more variation (Peters & Waterman, 1982). Similarly, robust governance can be achieved by theory-based techniques to actively control without harmful intrusions into management.

Lastly, if it is true that investors' perception of good governance works to a firm's benefit, boards will have an additional tool to aid in investor confidence. Booker (2004) judged that governance theory (in this case, the one I developed) “can enhance the ability of corporations to compete in the market. [It] should deliver ever greater and lasting returns to shareholders… . BP [British Petroleum] provides a case study of such an application.”

Theory is still largely perceived in the corporate governance field to be an unrealistic, ethereal subject. Some day the theory-phobia by practitioners and theory-minimalization by academics will evolve into theory excitement, as it happily has in many other human pursuits. We will have approached Tricker's (2000:195) vision of a “vibrant alternative way to ensure both effective performance and appropriate social accountability” and will have rediscovered Kurt Lewin's (1952:169) assertion that “nothing is as practical as a good theory.”

ACKNOWLEDGEMENTS

I am indebted to William Q. Judge, editor of Corporate Governance: An International Review, whose considerable encouragement and counsel not only aided in the development of this article, but in its initial inception. I am grateful to him for his patience and suggestions for improvements, as well as thankful for helpful comments by Sir Adrian Cadbury and R. I. “Bob” Tricker.

NOTE

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  Policy Governance is a registered service mark of John Carver in Canada, the European Union, and the United States.

Dr. John Carver is principal of Carver Governance Design, consulting internationally with corporate, governmental, and NGO boards. He holds a bachelor's degree in business and economics (1965) and a master's degree in educational psychology (1965) from the University of Tennessee, as well as a Ph.D. in clinical psychology (1968) from Emory University, Atlanta. He has authored or co-authored five books and over 180 articles and monographs on governance. His major interest is in global governance theory and its implementation. He and his wife, Miriam Carver, also a governance author and consultant, live in Atlanta.