Agency Theory: Explaining or Creating Problems? Good Governance and Ethical Behaviour for Sustainable Business

Corporate scandals (e.g., Enron, WorldCom) and the magnitude of the 2008 financial crisis has raised consciousness that Corporate Governance is an important issue for all institutions but particularly for corporate business. Weak internal controls, insufficient board oversight, and lack of supervisory impact on corporate governance were detrimental to the trustworthiness of business and financial markets. Since the financial crisis, all countries are more aware of the importance of strong governance structures and good governance systems. Corporate governance can be considered as creating an organizational environment of trust, ethics, moral values and confidence among the organization’s stakeholders, including government and the general public.  This is complicated by the fact that a corporation as a legal being has legal and ethical responsibilities, but without there being anyone explicitly charged with ensuring those responsibilities are fulfilled (Greenfield, 2006).    Many countries are now evaluating their legislation and regulatory policies pertaining to governance structures and taking steps to safeguard the sector and reduce the risk of severe financial distress in the future. . Getting the right governance principles, standards and tools in place to support and promote responsible business practices is important for securing a sustainable business environment. However, businesses themselves need to be proactive and implement good governance principles and practices.

The latest financial crisis is a negative lesson in how good corporate governance is essential for a sound economy and fundamental to the operations of any good corporate citizen. In this chapter we will focus on how we can implement good governance principles for a sustainable and sound business environment.  We will try to make the case that corporations conceived as merely a nexus of private contracts is inadequate as a perspective from which to consider how corporations should be governed.  Corporations’ role in the Great Recession, their role in the growing income inequality within even countries with advanced economies, and their role in climate change all suggest that we need to rethink the way we approach their governance.Many corporations are already adopting new perspectives motivated by their recognition that their long term survivals depend on new modes of operations.  Increasingly CSR, Ethics and sustainability issues are regarded as strategic with potential to generate important competitive advantages for companies that recognize their success depends on engaging in good business practices – or business practices that are good.

Basing corporate governance on economic presumptions that are empirically invalid will not contribute to corporations being constructive participants in reducing the threats posed by environmental decline and growing relative poverty.  We have provided an alternative, stakeholder based approach based on the principles of fairness and shared decision making, which hold out greater promise for sustainable societies than those proffered by the market triumphalists that delivered corporate scandals and financial crisis.