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P H I L O S O P H Y F O R B U S I N E S S ISSN 2043-0736
http://klempner.freeshell.org/businesspathways/
Issue number 50
16th December 2008
CONTENTS
I. 'Globalization and localization as feedback mechanisms -- Internalization of
economic externalities' by Subbu Kumarappan and Majd Abdulla
II. The Economics of Corporate Governance and Mergers by Klaus Gugler and B.
Burcin Yurtoglu, reviewed by Andrew Browne
III. 'Intellectuals -- Knowledge, Power, Ideas' -- Conference in Budapest,
Hungary May 2009
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EDITOR'S NOTE
With today's issue, the Philosophy for Business celebrates its half century.
Launched a little over five years ago, the e-journal has confounded the critics
who said that business people are too busy making money to care about philosophy,
as well as those sceptical academics who continue to question the idea that
philosophy can have anything to do with business.
Philosophy matters in business. And philosophy makes a difference to the real
world. Economic 'necessity' is so-called only when human beings are unable to
recognize alternatives. Philosophy teaches us to see alternatives. Never has it
been more urgent to see differently than now. When all around are predicting
doom and catastrophe, the smart money will always be on those who keep their
brains alert and their eyes peeled.
Subbu Kumarappan and Majd Abdulla are graduate economics students from the USA
who have addressed the question of competition versus co-operation in the
global arena with respect to the opposite and complementary processes of
globalization and localization. They have dared to question traditional
economic doctrine which the outcome of competition is always superior to the
outcome of co-operation.
Andrew Browne looks at the latest selection of readings on Corporate Governance,
raising the question, What's the point? The economic benefits in terms of
increase in economic activity are by no means proved. He concludes that,
'Proponents of corporate governance have had the ethical and moral high ground
for too long.' How much are you prepared to pay for corporate governance, in an
economic climate where marginal costs can mean the difference between the
success and failure of a business venture?
What is an intellectual? The organizers of a conference due to be held in
Budapest in May 2009 are calling for papers on aspects of the social and
economic role of intellectuals in contemporary society. The key idea is that of
'knowledge production', an activity which, arguably, started with the early
Greek philosophers. Does that mean that intellectual productions should be seen
as an intrinsic part of economic activity? why? or why not? -- Discuss.
Geoffrey Klempner
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I. 'GLOBALIZATION AND LOCALIZATION AS FEEDBACK MECHANISMS -- INTERNALIZATION OF
ECONOMIC EXTERNALITIES' BY SUBBU KUMARAPPAN AND MAJD ABDULLA
Abstract
While globalization has created changes across the social, cultural and
economic dimensions by challenging status quo positions, it has also led to a
call for more localization. This article analyzes how the opposing forces of
globalization and localization are interlinked with each other. These two
forces are shown to originate as a feedback to each other. The origin of the
feedback function of globalization is discussed followed by how globalization
itself is affected due to the feedback from the localization efforts. How
globalization and localization efforts would govern a new paradigm of One World
in the future with its philosophical implications are discussed.
Introduction
Globalization garners huge attention since it transcends the traditional
barriers across multiple dimensions. Globalization can be viewed as the
integrating force that reduces socio-economic and cultural differences and
bridging across political boundaries. The extant literature focuses on these
issues and how globalization affects nation-state polity, commerce, business
and trade practices (Aydinli and Rosenau, 2005, Holton, 1998). While many
interesting questions of direct impacts of globalization have been studied,
there are many secondary impacts that have 'feedback nature' have not been
explicitly analyzed yet. To understand these feedback impacts, various other
questions have to be understood: how and why there were differences to begin
with and how globalization plays a role of leveling activity? These issues
deserve attention since globalization effects provide and are a part of
feedback to socio-economic and political processes that operate now (and in the
past) across the globe.
In the process of uniting and developing common goals, globalization challenges
established norms and status quo positions in almost all spheres of activities.
As part of the necessity to retain the status quo, one of the reactions to
globalization is a widespread call for localization -- this can be seen in many
regional economic developmental efforts that try to save their local economy and
associated value systems (Almas and Lawrence, 2003). It also raises another
question whether localization efforts to improve sustainability is a divisive
force since it acts against the uniting force of globalization. Hence it is
imperative to study how these two opposing forces -- globalization and
localization -- can coexist together. This leads us to another set of questions
-- what kinds of connections exist between the globalizing and localizing forces?
do they move in tandem and how these opposing forces balance each other?
The interactions between globalization and localization forces have largely
been dealt with from a sociological view point (Almas and Lawrence, 2003). The
economic dimension of this debate is the focus of this article. We motivate the
differences between globalization and localization through a study of economic
externalities and how the feedback effects serve to remove those externalities
through a process of internalization. The two forces are shown to be providing
complementary feedback to each other. Both the forces keep a check on unbridled
power for each other which explain some of the outcomes including apparent
conflicts that we see in the world today. The economic basis of globalization
as an end-result as well as a generator of feedback is stressed to outline the
philosophical implications of globalizing and localizing forces.
We prescribe a re-interpretation of economic externalities, from a
philosophical standpoint, where competition can lead to increased transaction
costs and may be interpreted as a welfare loss (compared to cooperation). We
show how the feedback functions of globalization try to reduce these costs by
redefining competition through the process of internalizing the externalities.
This is followed by a discussion on the development and mode of functioning of
the said Feedback Mechanism (FM). The coexistence of globalization and
localization forces is shown to be logically inter-related under our
re-interpretation of externalities.
1. Externalities Re-interpreted
Externalities are the consequences (costs and benefits) of an activity that are
not fully borne by the agents involved in the production of consumption of that
activity. Although they are generally known to be unintended, they could even
be intentional where the involved parties deliberately shun the responsibility
for the externalities. Externalities are common to all aspects -- economic,
political, societal and environmental. For a detailed classification of
economic externalities, see (Bromley, 1986).
There are two major types of economic externalities -- positive and negative.
When any economic activity generates a positive (negative) outcome elsewhere in
the economy, then it is said to be a positive (negative) externality. The
negative externalities are problematic because the agents who own and use an
asset do not pay for the indirect costs arising due to their usage. The most
straightforward illustration of negative externalities relates to pollution.
The power plant burning coal would pay for the raw materials, generation and
transmission costs. These form the components of 'private costs' which are paid
by the asset owners (power plant) and ultimately by the consumers. But burning
coal causes pollution (such as greenhouse gas and toxic emissions) which lead
to indirect medical expenses for all people in the society, including those who
do not consume the power generated from that coal. These indirect expenses are
not paid for by the coal plants (or the final consumers who demand it from the
producers) but are borne by the society to a larger extent. Hence, they become
'social costs' referring to the fact that these costs are not borne by the
asset owners.
The above illustration is the typical way how externalities are traditionally
expounded in economic literature. It can also be extended as following:
Consider a case where two states or regions (X and Y) in a country (A) that are
involved in the same economic activity. Their actions would be deemed
'externality-creating' only if there are observable, (un)intended, social,
environmental or other consequences. The activity of competition between X and
Y itself would never be viewed as an activity that creates externalities. This
is mainly due to the traditional economic notion where the competition is
viewed as a valid economic activity and the eventual results of competition are
acceptable economic outcomes.
The validity of competition is established based on the fact that no other
outcome would be more preferable (Mises, 2008). The energy, costs, time and
resources expended to compete with each other are considered to be valid
economic activities along with their outcomes. To compete with each other, the
firms have to expend certain amount of effort, energy and incur certain costs.
These costs that enable more competition are also a type of transaction costs
(e.g. advertising and strategizing expenditures). Thus X and Y have to expend
some resources in the process of competition between themselves. The success of
X in acquiring an economic asset or investment could lead to the outcome of Y
losing that same asset or investment. Consider an outcome where the result is
such that all benefits are delivered in favor of only one agent, X. When X
triumphs the losses suffered by Y are not considered as an economic externality
according to the traditional economic notions, since these losses are a result
of inefficiency of Y to compete and thus their losses are economically
justified.
The above outcome is justified on the grounds that no other outcome is superior
to the competitive outcome -- this seems to underestimate or invalidate the
benefits from a cooperative outcome. We call to redefine the implicit losses
and transactions costs associated with competition as externality creating
activities. Although the interpretation is different, the transactions costs
that are considered here are similar to those developed by Coase (Coase, 1960,
Williamson, 1981, Williamson, 1979). If our goal is to find a socially optimal
outcome, then it is not enough if only the production costs and direct costs
are taken into account. The indirect costs such as externalities, transaction
costs and losses suffered from the results of competition should also be taken
into account. The inclusion of these indirect costs will reduce externalities --
such an inclusive process is known as the process of internalization and it
promotes cooperation (Brandenburger and Nalebuff, 1996).
The composition of competition and cooperation would be determined by the
extent to which internalization can occur. As per our modified definition, the
competition causes unintended effects such as loss of livelihoods of people in
the victimized state or region and thus become externalities. Philosophically,
one man's freedom or success would be another man's failure (Schmid, 2006).
Countering externalities -- A philosophical answer
We conceptualize the philosophical answer as one that will be mutually
acceptable to both X and Y; irrespective of competition or cooperation, the two
agents X and Y would require no further changes once the best outcome has been
established and achieved. When the self-maximizing economic individual
encounters positive externalities, he or she would tend to avoid sharing the
benefits; this could lead to sub-optimal provision of that activity that
generates positive externalities. If they were negative externalities the same
agent would use existing social and institutional mechanisms to reduce those
externalities (Bromley, 1986). This shows the contradicting behavioral
difference of the same individual when posed with two different situations.
This is a classic case of an ethical dilemma -- if agent X wins, agent Y
suffers consequences, but if agent Y wins, X suffers the same consequences; the
attitude of X (and Y) would be different in these two cases where X (or Y) would
prefer winning every time irrespective of the losses suffered by Y (or X). The
self-maximizing attitude (as conceived by competition) loses sight of the
losing agent's plight. Hence, the contradicting behavior of the self-maximizing
individual, as proposed by the economic competition theory fails to yield a
valid unique outcome. Since there is no unique outcome, the competitive outcome
between X and Y may not be relevant given the interpretation of philosophical
outcome above.
Globalization processes may help achieve that unique behavior; in fact, it
helps us move towards that unique situation by providing repeated feedbacks
about the costs and losses of externalities which are not internalized yet.
Globalization reveals the contradictory and inconsistent behaviors by providing
feedback and makes the systems reevaluate their status quo choices.
2. Globalization and feedbacks
There are various reasons for a feedback mechanism to develop: (i) it helps
ameliorate negative externalities or capture benefits from positive
externalities and develops sustainable functioning of economic systems; (ii)
the feedback responses guide the globalizing process in a particular direction;
(iii) it helps create a systemic way to account for the rights and privileges of
all agents in the system. Without these feedback mechanisms, the externalities
would go unaccounted for, and the remaining imbalances in the system make it
unsustainable. These imbalances lead to accrual of 'social costs' causing the
overall (socio-economic) welfare to decline. In case of positive externalities,
the stakeholders who create them can be properly rewarded only with the proper
operation of these feedback mechanisms. If those positive externality benefits
are not shared properly then it would result in the gradual erosion or decline
of those services that provide positive externalities leading to social welfare
loss.
Localization and feedbacks
Current globalization efforts are found to trigger two distinct kinds of
feedback responses -- one supporting the evolving changes (globalization trend)
and the other significantly opposing it (localization). Localization is the
process where the economic growth within a country's domestic boundaries is
favored compared to importing of goods in a globalized world. Localization may
be favored when there are diseconomies due to large scale operations or
clustered production practices, higher transactions and coordination costs
under globalization regime. Whenever the effects of globalization reach an
extreme with negative impacts, the feedback generated tends to reverse the
trend of globalization. Localization becomes the favored solution. In this
sense, globalization gives rise to localization. Hence the function of
providing feedback is critical to maintain the balance between globalization
and localization.
An illustrative economic example would be the loss of livelihoods in the
western countries due to Business Process Outsourcing (BPO) to developing
countries such as India, and China. Many businesses in the developed countries
strive to achieve efficiency by exploiting cost advantages and shifting
production and services to India, China and other Asian countries where the
labor costs are low. This is the process of globalization where the trade,
goods and services flow across the political boundaries at a higher frequency
with relative ease.
This response of globalization tries to correct the inconsistencies in the
valuation of labor (i.e. relative price of labor compared with capital) across
countries -- thus the differences in relative prices of labor are leveled.
Globalization results as part of different relative prices of inputs (labor, in
this case) -- with unfettered globalization, the labor would be valued according
to their marginal productivity which would be the same all across the globe in
the absence of artificial barriers; the intellectual property (IP) right
barriers can be considered to be artificial, in a philosophical sense, since
its interpretations are significantly different across the countries -- it has
to be unique according to our earlier description of philosophical outcome.
When many jobs are lost in the developed countries due to BPO, the local (or
domestic) labor and livelihood issues becomes important and thus there will be
a growth in localizing forces. Hence, globalization gives rise to its opposite,
localization.
This also shows that globalization is capable of generating two-way responses.
If the localization were to prevail, it would be a direct effect of the
negative effects (externalities) of exporting jobs due to globalization. If
globalization were to prevail, it would be geared directly to inform and engage
the local communities of the positive influences (externalities) possible due to
globally devised actions. Either way, the importance of feedback mechanism is
obvious (Lucas, 2003).
3. Feedback functions of globalization
The globalization process itself is a feedback response of incorporation of
externalities that were not incorporated previously in the global context. The
political disparities across the regions (communism vs. socialism vs.
capitalism) have been the major factor for people of different nationalities to
lead different levels of quality of life. Globalization enables better
information flow resulting in mass human action to counter negative outcomes or
enhance positive outcomes (Sen, 2002, Smith, 2007). Globalization serves the
purpose of questioning and modifying many status-quo perspectives -- for
example, the political disparities across the countries were brought upon
because of the leaders and influential personalities in the past in those
countries -- they need not be desirable in today's world of increased
international interaction.
Sen (2002) discusses the role of information flows in reducing the poverty in
developing countries; his key observation is that the type of political
governance is affected by the amount of information flow to and from the poorer
groups of peoples. If the information (and thus feedback impacts) is allowed to
flow more freely, globalization can be expected to spread a governance form
that favors democracy across countries and regions. The positive impacts of
human entrepreneurial nature have favorable externalities thus resulting in a
widespread rapid adoption of capitalism advertently as opposed to communism
(Schramm, 2006). Hence, part of the successes of capitalism and democracy at a
global level can be attributed to globalization; we may also surmise that the
lack of democracy can be attributed to the reduced impacts of globalization or
a blockage in the operations of feedback mechanism. Thus democracy and
capitalism would spread around the world due to their positive impacts
(increased social welfare) and favorable externalities created by sharing the
economic benefits of entrepreneurialism.
Is there an extent to the spread of (unregulated) capitalism or opportunistic
entrepreneurial behavior? This question can be interpreted as to what extent
one form of governance would be spread across the world by globalizing forces.
The answer lies in the amount of externalities created by the globalizing
forces. The feedback impacts of globalization have caused the initial move
towards capitalism and any reversal in the role of capitalism is possible only
through the feedback that it may not be suitable for certain situations or
market conditions. Hence globalization provides a common framework to compare
and contrast alternative outcomes -- be it in economic, social, political or
cultural framework.
It is important to note that when all possible alternatives are evaluated, in
many cases there will be unique outcomes which can be termed as philosophical
according to our earlier definition since it will be acceptable to all
stakeholders irrespective of power, economic or governance structure. The key
implication of this unique outcome is that the world will start to look more
similar. Hence, the feedback impacts of globalization will lead us to the
concept of 'One World' as propounded by (Singer, 2002). One World may be
defined as a single integrated entity that exhibits a consistent mix of various
social, economic, cultural elements where the consistency is achieved through
the feedback mechanism (both globalization and localization) among competing
ideologies, theories and practices.
One world -- illustrations
The following are some instances where the world looks more similar
irrespective of the present differences. The following examples are not
exhaustive but are provided only to motivate the idea of One World through
illustrations.
Global financial markets: The growth of global markets and financial
instruments in developing countries resembles that of the well developed
economies in the western hemisphere (Picciotto and Haines, 1999). Thus, the
achievements of one economic system in or in one part of the world are fed into
other economic systems across the globe. The recent global financial crisis has
called for a global effort to restore confidence where the countries and their
central banks have each to play a role that is consistent with that of others.
Such coordinated efforts to stem the financial crisis are the hallmarks of
internalization.
Global climate change: One of the most pressing problems of our times is coping
with greenhouse gases (GHG), global warming and climate change. As the name
suggests it is a global issue; it has been well perceived that participation of
all nation-states (as one whole community or as one-world) is a crucial
requirement for the control of global warming problems (Kuik and Mulder, 2003,
Nordhaus, 2007).
Business strategy: In business competition, globalization has enabled
'co-opetition' where the companies that compete in the one country (US) work
together elsewhere in the world (Brandenburger and Nalebuff, 1996). The
companies (for example, Intel and One Laptop Per Child) that were initially
competing against each other to market their product (inexpensive laptops for
children in the developing world) have decided to work together recently,
apparently in an effort to reduce the negative effects of competition and
delaying development (Krazit, 2007). Both companies have taken the welfare
losses suffered by the other company into account leading to 'internalization.'
Globalization can be viewed as internalization occurring at global level.
Integration across spheres: Globalization forces multinational businesses to
engage in political issues in the countries that they operate in cause a
merging of economic, environmental and social issues. A problem along
environmental dimension may be partly resolved through another dimension, say
economic. The need to find an amicable solution along different dimensions is
necessitated because of the merging of interests across the traditional
dimensions. Globalization serves that purpose through generating feedback
generation and helps us understand the relevance of unified governance
structures.
International investments: The concept of mass marketing (e.g. Walmart stores
in the U.S.) has forced populous economies like India to reevaluate their
policies on foreign direct investment (FDI) (The Hindu, 2006). The impacts of
such global companies have generated more similarities between India and China
in spite of their differences in political and socio-economic structures. If
the Indian economy were liberalized to accept more FDI, then it will make
Indian economy look similar (with respect to investments) to that of the
Chinese economy which is already open to foreign direct investments. These are
the two most populous nations on the globe with one-third of population
accounted for. This is another sign that the world governance systems and
supporting systems begin to look similar due to the incorporation of feedback
impacts generated from globalizing forces.
4. Internalization at global scale
Globalization forces gather momentum from externalities and differences that
exist in various dimensions of international trade and commerce. Thus, these
externalities at global scale require a solution (such as internalization) at
the global scale as well -- more often the integration occurs across multiple
dimensions. For instance, the negative externalities in using a country's
environmental resources have been responded with positive externalities in
economic, social and political improvements of a broader geographic region
(Woods, 2006).
European Union and Internalization
In its truest sense, the removal of divisions and differences suggests a
unitary economic system leading to 'One economy, One law, One atmosphere, One
governance structure, One social culture, and One community' (Singer, 2002).
Formation of this One World would naturally lead to global-level
internalization and contribute to reduction in transactions costs in multiple
ways. One remarkable existing example of such a global unique body is the
European Union (EU, 2007a).
The European Union is an integrated economic, political and social identity
with 27 countries (currently) in the European continent. The formation of EU
helps coordinate activities which need to be coordinated at a continental level.
The purposes of EU are to enhance 'peace and prosperity' among member nations
where the members delegate 'some of their sovereignty' to the continental body.
The EU achieves its purpose by taking 'joint action' whenever they are called
for. Some of its actions have enabled one currency (Euro) for member nations
which has established itself as a major global currency, and one climate action
plan through the global cap-and-trade program for GHG emissions (UNFCCC, 2007a).
The movement of citizens of the member states has been liberalized to a certain
extent as well. Though the labor markets have not been fully opened yet among
all member states, the more open economic systems would help attain production
and allocation efficiency. If some of the citizens of a particular member
country were to suffer economic hardships, they would be addressed better in
the presence of EU than in its absence. The social dimension of the EU, on the
other hand, helps ensure that the continental systems do not exploit the
resources; they also ensure that the social costs (externalities) are
internalized at a continental level.
Such a continental coordination benefits all member countries by promoting
cooperation and limiting competition to an extent. The diminishing of
competition is not forced upon the member nations but brought upon by a
realization of all the involved parties. The formation and functioning of EU is
an example of how losing some sovereignty (on part of member nations) will help
internalization coherent with the integrating forces. In the EU, every member
nation has its interests accounted for, in principle. This discussion raises
some related issues such as: 'Can EU experience be replicated at a global level
?' 'What factors made it possible in the EU?' and 'How the changed institutions
of the EU would look like in a globally integrated platform?' -- are important
questions for future research.
Limits of Globalization
When globalization suggests integration of activities, there are limits to the
extent that can be integrated. For instance, it may not be possible to produce
all of a particular good in a single region or country and deliver it all over
the world for the sake of reducing costs of managing multiple plants in
different locations. There are diseconomies to size and lost livelihoods due to
enormous economic operations that are concentrated in certain parts of the globe
(Schumacher, 1989). These diseconomies also show why the same regulatory
authority in one part of the world may not be able to manage resources in the
other part of the world because of the unfamiliarity of the problem or the
inappropriateness of using the same solution to all problems (Hayek, 1945).
Hence, the suggested solution needs to be a mix of (i) integrated globalization
and (ii) disaggregated localization (eg. local management by local communities).
Globalization will provide feedback to localization forces in a repeated loop on
what level of integration is applicable for a given situation and vice-versa.
Conclusion
Human beings established early civilizations when there was no easy access to
the information on the nature and quality of another civilization's way of life.
These civilizations later evolved into nation-states that we see today. Each
and every nation or social group developed and largely built their own values
and ideas without much of international influence due to the lack of knowledge
and interaction. In today's modern world, especially since the second half of
20th century when information technology has advanced rapidly, the information
flow is so quick and extensive, that it is time to reevaluate every idea or
value with an equivalent idea or value of other countries or regions.
Over time, the invalid ideas of unsustainable origins, that were imposing
negative impacts and externalities need to be eliminated. Globalization and
localization will play the two opposing forces in identifying those valid ideas
by transferring ideas across borders and evaluating them in a global context.
This is one way how the human beings can acknowledge the impacts and
externalities of their individual actions. This could help achieve a more
egalitarian society favored by all human beings irrespective of national
differences. Hence, globalization and localization will help create 'One World'
characterized by one pluralistic culture. Thus, the internalizing effects of
globalization and localization themselves can be viewed as a philosophical
feedback response to the divisive nature that leads to divisions among men.
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(c) 2008 the Authors:
Subbu Kumarappan
Dept of Ag, Food and Res Econ
Michigan State University
E Lansing, MI 48823
USA
Tel: 515-520-7880
Majd Abdulla
Dept of Economics
Iowa State University
Ames, IA 50010
USA
E-mail: majd@iastate.edu
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II. THE ECONOMICS OF CORPORATE GOVERNANCE AND MERGERS BY KLAUS
GUGLER AND B. BIRCIN YURTOGLU, REVIEWED BY ANDREW BROWNE
The Economics of Corporate Governance and Mergers
Klaus Gugler and B. Burcin Yurtoglu (Eds.)
Edward Elgar Publishing, Cheltenham UK, 2008
What is the point of Corporate Governance?
Corporate governance has become a hallowed term. By this I mean that it has
become a 'good thing' in the same way that terms like 'freedom' and 'democracy'
have come to be evaluative terms rather than purely descriptive. Public
companies now devote considerable financial and personnel resources to jumping
through the various hoops required of them in terms of directors and audit
reports and information requirements.
The reasons why corporate governance is a good thing have been widely argued
both in terms of avoidance of financial scandals and also on a more ethical/
moral level. The need for adequate levels of corporate governance is seen as a
consequence of the division of ownership from management. Firms are held to
have duties to a range of stakeholders and managing a firm requires an ethical
acknowledgement of these duties which are taken to be manifested in a set of
rules and procedures that protect the interest of these stakeholders.
Klaus Gugler and Burcin Yurtoglu -- both of the University of Vienna -- have
produced a book of readings from a wide international range of academic
economists that seeks to examine whether corporate governance brings any
demonstrable financial benefit to companies and whether vertical or horizontal
mergers bring about an increase in shareholder value. The articles vary between
'review of the literature' overviews to econometric models that ooze with
statistical equations and there is a commendable international representation
of views.
In their introduction the editors see corporate governance as 'the design of
institutions to make managers internalize the welfare of all stakeholders in
the firm' (p.1). Now, there seem to be a few loaded terms here but it probably
does not pay to get stuck on definitions. We all know what corporate governance
is even though we may not be able to define it to universal agreement. The
Editors note various empirical and theoretical research on the benefits of
specific components of corporate governance (board composition, information
flow, incentive mechanisms etc.), which have had far from conclusive results.
They do, however, propose that two conclusions can be drawn from the studies in
the book taken as a whole. First, 'corporate governance systems that better
align shareholders' and managers' interests lead to better corporate
performance' and, second, that 'there is an important relationship between
corporate governance structures and the quality of firm decision-making'
particularly in relation to takeovers and mergers (p.16). What is interesting
about these claims is that they do not seem to be justified by a careful
analysis of the papers in the book.
The first paper, 'Legal origin, shareholder protection and the stock market'
seeks to identify corporate governance in some measurable way, choosing to
focus on the legal shareholder protection rights enshrined in national law.
These include such things as the powers of shareholders in general meeting,
individual information rights for shareholders, performance based remuneration,
disclosure of share ownership, ability to disqualify directors and authorisation
for directors' share dealing. These 60 variables are then analysed against the
statutory requirements in France, Germany, the UK and the US for the period
1970 to 2005 with a view to linking national economic welfare to a quantitative
measure of shareholder protection.
Interestingly the research implies that relative positions of the countries in
terms of the strength of shareholder protection changes in the period. In 1970,
Germany had the highest measure of shareholder protection and the UK the lowest,
but towards the end of the period France climbs to have the highest levels and
the US the lowest levels of protection. Unfortunately the attempt to link this
with a measure of economic growth (questionably using surrogate measures such
as stock market turnover ratio) is not successful: 'Our study casts serious
doubt on a long-term relationship between laws protecting shareholders and
stock market activity' (p.45).
The subsequent paper, 'Corporate governance and the public interest: the way
forward' is one of those rather pompous think-pieces full of high sounding
moral principles that argues for the democratisation of corporate governance so
that there is greater public involvement. 'It is essential to nurture a civic
society in which all people develop and penetrate the processes of governance
that impinge on their lives... It is these citizens that can demand and assure
that good governance prevails' (p.72). That's fine then. All we have to do is
nurture a civic society, whatever that means.
Following chapters examine whether Boards of Directors should be reconstituted
as vigilant monitors or actively participate in day-to-day management of a
company. It is argued that 'corporate boards have been going from bad to worse'
as a result of their control by management 'which has usurped it [control of
boards]'. This control has to be returned to shareholders (or maybe even
stakeholders), where it belongs' (p.97).
'Corporate governance: a review of the role of banks' suggests that having a
major bank as financier or major shareholder -- a common practice in Germany,
Belgium and Japan -- may impact positively on corporate governance although
there is no correlation to profitability.
'Competition between profit seekers and non-profit firms: the case of German
banking' presents a case study of German banking where these profit seekers
like the main commercial banks compete with non-profit financial organisations
such as co-operative banks and local savings banks. The authors argue that
profit and non-profit seeking organisations can co-exist and compete, but the
eccentricities of German banking and different cultural norms call into
question the general applicability of this observation. In any case the
argument certainly needs revisiting in the light of the financial turmoil in
banking over the past few months that has seen so much carnage in this sector.
The theme of the next few papers is whether mergers and takeovers increase
shareholder value. In the review of literature included, it is clear that the
majority of research studies on specific mergers in a number of different
countries have found no post-merger improvement of relative profitability. This
applies to horizontal mergers, where competitors are joined together and
vertical mergers, where firms acquire suppliers or customers. In both cases
there are theoretical benefits from economies of scale, mass production or
ensuring supply lines but these do no not seem to feed through to profitability.
There is a strong suggestion that corporate activity is stimulated by macho
empire-building and that cost savings may be illusory: 'firms tend to
overemphasise the positive contribution of the merger not only to persuade the
[competition] authority but also to impress investors.' (p.221).
In 'UK corporate governance and takeover performance', the authors note the
improvements in corporate governance in the UK as a result of The Cadbury
Report and subsequent governance reforms. They note increasing compliance with
best practice amongst UK companies in such areas as the role and composition of
the board, remuneration, accountability, audit and relations with shareholders
and turn to the question of whether this can be linked to better performance in
making corporate takeovers. Their findings suggest no such link. Better
corporate governance has not manifested itself in more profitable corporate
takeovers. Interestingly, their findings did suggest one key correlate with
better performance and this was the CEO of the acquiring company owning a large
proportion of the equity.
The final paper 'The impact of competition on macroeconomic performance'
involves a research study collecting 13 indicators of the toughness of
competition from 29 countries. These included the intensity of competition in
markets, the effectiveness of anti-trust law and so on. The authors then seek
to link the toughness of competition to the economic growth of the countries
concerned. Competition is of course another 'good thing' and a hallowed term in
free market economics. The results are far from conclusive and the causal
relationship between tough competition and economic performance is simply
assumed. Surely it is equally likely that strong economic performance leads to
tough competition?
Rather amusingly the authors then go on and choose a 'preferred model' that
demonstrates an even stronger correlation between competition and performance.
Their 'preferred model' involves ignoring results which contradict the link for
reasons apparently snatched out of the blue: Germany is excluded because of the
costs of reunification, Scandinavian countries because of high research and
development expenditure, Spain because of strong investment in housing. Where
results more closely conform to the model desired e.g. Ireland, Canada and
Australia, they are allowed to stand, although anyone could think up isolated
causes of why a country's economic performance has been impacted over the past
decade or so and toss them in to invalidate that particular country.
Australia's economy for example is heavily tied to commodity prices, Ireland
benefited hugely from EEC grants and farming subsidies and Canada's economy is
stapled to that of the US.
In my understanding the article leads to the conclusion that economic growth is
more likely to be related to the percentage of GDP spent on research and
development linked to the degree of financial investment -- in short the degree
of innovation. This does not stop the authors concluding that 'In the long run,
innovation plus competition [my emphasis] seem to be a good double strategy for
improving performance' (p.344) which really just boils down to a statement of
opinion. Anyway, as Keynes noted, in the long run the only thing we know for
sure is that we will all be dead.
The thoroughly entertaining and thought provoking research studies in this
absorbing book leave the case for corporate governance having a positive impact
on corporate financial performance as unproven. Indeed everything intuitively
suggests that corporate governance is a gross and net cost to business which
reduces profits and cash flow. At a time when the worst thing we could all
imagine was an accounting scandal such as Enron or WorldCom maybe this was a
price that boards of directors were willing to pay. Given the current gloomy
economic climate and the prognostications that many firms will be driven to
insolvency and closure, growing unemployment levels and a fall in everyone's
living standards, this whole area may be viewed in a new light.
Proponents of corporate governance have had the ethical and moral high ground
for too long. The world is in the middle of the worst economic crash many of us
have ever known. At one time there seemed a real risk that one of our main UK
commercial banks could go bust and millions would lose their savings and as I
write this, the US automotive industry appears on the edge of collapse. Maybe
companies need to carefully re-evaluate their approach to corporate governance
in such a climate; at an extreme the costs of corporate governance could be the
difference between going bust and surviving. At best they are a painful overhead
cost and waste of time that could be crucially spent on more critical business
activity.
(c) Andrew Browne 2008
E-mail: HemProps@aol.com
-=-
III. INTELLECTUALS -- KNOWLEDGE, POWER, IDEAS -- CONFERENCE IN BUDAPEST,
HUNGARY MAY 2009
2nd Global Conference
Intellectuals - Knowledge, Power, Ideas
Friday 8th May - Sunday 10th May 2009
Budapest, Hungary
Call for Papers
Following last year's very successful inaugural conference, the Intellectuals:
Knowledge, Power, Ideas Project will hold its second annual conference in
Budapest in May 2009. The conference is a keystone of the 'Intellectuals'
Inter-disciplinary.Net project that seeks to explore the role, character,
nature and place of intellectuals and intellectual work in contemporary society.
Whilst the 'intellectual' emerges as a particular category with the development
of modernity, the 'knowledgeable' and knowledge producers have been an important
historical agent and social actor since the early Greek philosophers, and
knowledge production, whether religious, scientific or philosophical, has been
important in shaping social, political, economic and cultural change.
Intellectuals and the knowledge they produce have been subject to competing
representations: from an 'elect' producing knowledge for its own sake to
different forms of philosopher king, servant of the state or dissenting
movement intellectuals connecting politically with change in the social world.
In contemporary 'knowledge' societies, much of the focus on the intellectual as
a 'public' figure, residing within the media intelligentsia or institutions of
higher learning, but competing theories of intellectuals and their work
identify elitist, meritocratic and radical alternatives about who intellectuals
are, what they do, how they are connected to and divided from other social
institutions, and why we understand them the way we do.
The Project seeks to build, by annual conferences and network activity, both an
evidenced and critical understanding of the intellectual and intellectual work
in the past and a critical understanding of intellectuals and intellectual work
in the present, and its prospects for the future. In doing so, it recognises
that the interdisciplinary basis of such an analysis will take in the fields of
cultural studies, education studies (with a particular focus on higher education
), history, literature, philosophy, politics, sociology, social theory and open
avenues to wider and more diverse disciplinary connections, and the project
welcomes interdisciplinary explorations. Some indicative themes are suggested
below to indicate the types of issues that might be addressed in conference
papers and workshops. The first of the themes is one we particularly wish to
emphasise at this conference.
A. The Intellectual, War and Conflict
How do we understand the rights, responsibilities and duties of intellectuals
in times of conflict and war? To who or what do intellectuals owe duties and
responsibilities in war and conflict? What constitutes loyalty and disloyalty
when intellectuals speak to truth? Should intellectuals be detached or
committed in their approach to conflict and war? What constitutes complicity
intellectual work about war and conflict and how should we judge both? How do
we distinguish intellectual honesty from strategic opportunism in intellectuals
' interventions in war and conflict? What is the scope and limits to free
speech and intellectual commentary during war and conflict?
B. The Making of the Modern Intellectual and Intellectual Work
How do we understand the role and impact of intellectuals and intellectual work
in the past in shaping intellectuals and intellectual work in the present? What
historical categorisations, roles, models and places in conceiving the
intellectual influence how intellectuals see themselves and their work today?
How have the roles, natures and places of intellectuals changed through history?
What do historical understandings of the intellectual tell us about the
intellectual today?
C. Intellectuals and the 21st Century Academy
What roles, functions and positions do intellectuals take within learning
institutions and what has the impact of change in learning institutions made on
intellectuals? What overlap and interplay is there between the academy and the
intellectual? What moral, cultural, political and educational principles
underpin the academy and the learning institution today? How has the
association between academy and intellectual been impacted on by recent change
in society, economy and politics in the 21st century?
D. Intellectuals and the Knowledge Society
How has the intellectual changed in their role, character and place in the
knowledge society? How have the internet and ICT's changed the way
intellectuals work and intellectual work is produced, distributed and exchanged?
How has the knowledge society changed our understanding of the intellectual
in society? Have we moved from the primacy of the mode of production to the
primacy of the mode of information?
E. Public Intellectuals and the Intellectual in Public and Political Life
What is a public intellectual and how is a public intellectual distinguished
from other intellectuals and knowledge producers? What roles and places do
public intellectuals have in past and contemporary societies? Are intellectuals
and is intellectual work always political? What political and public roles do
intellectuals play?
F. Intellectuals and Cultural Life
How have intellectuals impacted on cultural life, in shaping everyday
experience, providing frameworks for understanding and producing cultural
enrichment? In what ways have intellectuals played a role in shaping the
cultural milieu? What is the relationship between the intellectual and the
artist or producer of cultural knowledge and products? What is the relationship
between intellectuals and the aesthetic?
G. Intellectuals and the Development of Bodies of Knowledge
How do intellectuals produce and create knowledge? How should we understand the
processes of knowledge production and creation as social and political and well
as research processes? How should we understand notions of discovery,
exploration and speaking truth in the context of critical perspectives on
knowledge creation? How have particular bodies of knowledge developed
historically and come to play determining roles in social, cultural, political
and economic change?
These themes are intended as illustrative and proposals on related areas are
welcomed. Panel proposals, workshops and joint presentations are also welcome.
The conference aims to bring together people from different areas, disciplines,
professions and interests to share ideas and explore questions in a way that is
innovative and exciting.
Papers will also be considered on any related theme. 300 word abstracts should
be submitted by Friday 9th January 2009. If an abstract is accepted for the
conference, a full draft paper should be submitted by Friday 10th April 2009.
The draft paper should be of no more than 8 or 9 pages long and ready for a 20
minute (maximum) presentation during the conference.
300 word abstracts should be submitted to both Organising Chairs; abstracts may
be in Word, WordPerfect, or RTF formats, following this order:
author(s), affiliation, email address, title of abstract, body of abstract.
We acknowledge receipt and answer to all paper proposals submitted. If you do
not receive a reply from us in a week you should assume we did not receive your
proposal; it might be lost in cyberspace! We suggest, then, to look for an
alternative electronic route or resend.
Organising Chairs
Paul Reynolds
Social and Psychological Sciences, Edge Hill University
United Kingdom
E-mail: reynoldp@edgehill.ac.uk
Rob Fisher
Network Founder & network Leader Inter-Disciplinary.Net
Freeland, Oxfordshire OX29 8HR
E-mail: ikp2@inter-disciplinary.net
The conference is part of the Critical Issues programme of research projects.
It aims to bring together people from different areas and interests to share
ideas and explore various discussions which are innovative and exciting. All
papers accepted for and presented at this conference will be eligible for
publication in an ISBN eBook. Selected papers will be developed for publication
in a themed hard copy volume.
For further details about the project please visit:
http://www.inter-disciplinary.net/ci/intellectuals/int.html
For further details about the conference please visit:
http://www.inter-disciplinary.net/ci/intellectuals/int2/cfp.html
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November. To subscribe to the Management Philosophers list, please send an
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