Corporate Governance

Corporate governance refers to the way that companies are governed or run. Corporate governance is important because it refers to the governance of what is arguably the most important institution of the capitalist economy. Johnston Birchall argues that it is useful to focus on three main issues when considering how organizations are governed. First, which individuals or groups are provided with membership rights. Membership rights might only be given to one class of people. The shareholder system of corporate governance is probably the most prominent example of this approach within the corporate realm. In these organizations, membership rights are only provided to those who supply financial capital to the firm. Membership rights might alternatively be provided to more than one class of people or groups. In the corporate arena, these bodies are usually said to have a stakeholder system of corporate governance. Alongside shareholders, typical stakeholders include employees, members of the local population, representatives from supplier firms, customers, and local government.

Second, it is valuable to examine the content of the rights provided to members. Two broad sets of rights are of significance here. On one hand, it is useful to focus on the precise character of the rights members enjoy over governance. For example, do members only have a right to be consulted about the direction of corporate policy or are they allowed to make decisions alongside managers? On the other hand, it is important to examine the rights over the surplus generated by the organization. Not-for-profit companies do not permit any part of the surplus to be distributed to members. For-profit firms are allowed to distribute the surplus to members, usually in the form of dividend payments.

Third, it is useful to study the modes of representation available to members. Direct representation might be used to represent members' interests. Members might vote directly for a representative on the board of governors. Indirect representation occurs when organizations are used to represent members. For instance, a consumer council might be used to represent the views of customers. Proxy representation occurs when a self-appointed board is used to represent the stakeholder constituency.