Monday, November 21, 2011

 Governing governance

Recent events emphasize the need to reflect on our governance systems at different levels:

At the state level different EU countries, especially Greece but also Italy, were not able to govern their economic risks adequately. At the corporate level, this forced particularly system relevant banks to increase their equity ratio in EU countries. To succeed in increasing the equity ratio, without reducing the incentive bonuses of managers or dividends for shareholders, these banks are now even more conservative in lending money to small and medium enterprises (SMEs). However, SMEs are in turn vital for a prospering economy.  A spiral of interconnectedness has thus been activated that is obviously going in the wrong direction.  

It must be kept in mind that it is not simply single actors that are relevant, but rather networks of actors. One of the major challenges for governance systems under today’s conditions is developing mutuality and network interactions (see Sachs, Rühli 2011, p. 173-178).

At the level of corporate governance, this network view should also be incorporated in an appropriate way so that internal structures and processes are aligned to support mutual value creation with and for stakeholders. In a recent empirical investigation, it was demonstrated that different forms of stakeholder participation existed in the decision making processes of firms. (see Spitzeck, H., & Hansen, E. G. (2010), Stakeholder Governance: How Stakeholders Influence Corporate Decision Making, Corporate Governance, 10(4), 378-391). As an example, stakeholder councils could not only act as sounding boards for system relevant banks, but could also play a role in strategy development and implementation.

Such governance systems, rooted in a stakeholder perspective, will require adaptations of the current legal basis in areas such as property rights, competition law, bankruptcy law, taxation law, corporate law and the responsibilities of the diverse actors in firms and stakeholders. The recent adaptation to limit the power of a few worldwide rating agencies by the EU is an attempt in this direction (  ).

Governance at the state, but to a lesser degree also international level, can also be developed further in a stakeholder perspective. The corresponding steps in the political sciences merit more attention and support (see e.g. Reich, R. B. (2009), Government in Your Business, Harvard Business Review, July-August, 94-99).

Sybille Sachs

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