Corporate governance has experienced numerous changes in tandem with the exigencies of the time during which it has been introduced or the context in which it has been practiced and now it should shed its old skin and shape-shift again to a more mature concept, what I call “Sustainable Governance”. With the growing chaos and complexity in the business environment, the analytical approach that dominated decision making for the last four hundred years is no longer a viable mindset for solving organizational problems and further development. Organizations are becoming more complex and interdependent and so will the ways to govern them.
Corporate governance gestation as a concept can be divided into three eras of Traditional Governance (past), Transitional Governance (current), and Sustainable Governance (future). Although, the features of these eras exist with varying intensity across time and space continuums, generally, we can define arbitrary lines to augment our understanding of the maturity of corporate governance as a concept. Similar ambiguities emerge when we want to position corporate governance among its sister concepts. For instance when we discuss the relationship between corporate governance and corporate social responsibility (See: Jamali, et al., 2008).
Traditional governance refer to the period before the industrial revolution when corporations, in their today’s sense, have not yet been formed but the governance structures were already in place in the existing entities at the time (e.g. in Rome). Transitional governance refers to a period between the industrial revolution and the information age when corporations started to rise as a new economic entity starting with the Dutch East India Company (VOC; Vereenigde Oostindische Compagnie) and the English East India Company (EIC) in the 16th and 17th centuries. At the end of the transitional governance era, a transmogrification in corporate governance is underway to prepare it for the upcoming age of sustainability. Sustainable Governance integrates the principles of systems thinking and appreciates the complexities of decision making environment, quite opposite to its predecessors that embraced oversimplification of interactive messes.
Sustainable Governance looks at the organization as a part of a greater system and environment that it operates in. Should we fail to recognize this fact, as we have done so far, the consequences would be irreversible. One significant sign post has been corporations’ longevity. At the centennial ceremony of Dow Jones Industrial Average in 1996, General Electric was the only company that remained operational from the ones listed in 1896 while interestingly the Hudson’s Bay Company (established in 1670) is still in existence. However, there is a diminishing trend in the longevity of modern corporations, many successful corporations have gone off the grid in a trice, mostly due to the complexity of the current environment, their incapability to adapt and respond (to the demands of stakeholders and the environment) and, the shortened cycles of creative destruction. The social reaction to the rising number of dying corporations is embedded in the diminishing public confidence in business across time (See: Frederick, 2006); rise of the start-ups (low-cost tech-based revolutionary trailblazers) and the inertia of the established businesses to respond; myopic mindset and opportunistic behavior of management and board of directors, etc.
Sustainable Governance can be introduced at different levels: micro, meso, and macro. At the macro level, with the growing force of globalization, borderless business, as well as the increasing number and magnitude of macro social, economic, and environmental challenges that can only be addressed through concerted global actions, the two previous eras fall short to provide the thinking framework through which we can overcome these challenges. To address them effectively, a multi-level effort is needed that would be organized by a global interconnected governance system. To put it into perspective the post-2015 SDGs (by the UN) and polycentric governance proposed by Ostrom (1999, 2010) are good examples. Meso level follows the same path.
At the micro level, however, organizations adopt a design thinking mindset to approach organizational governance. A design thinking mindset is not based on prediction rather it is predicated upon adaptation, a system that is designed to adapt itself to changes, to evolve. In this era, the long-term sustainability of the planet and welfare of the communities and the larger society would become more important than the short-term financial benefits of a few with their concomitant negative externalities.
Sustainable Governance, as a part of the geopolitical sub-system of sustainability, would play a crucial role in furthering sustainable development and it would tremendously affect other sub-systems of sustainability (techno-economic, social, and environmental) as the thread that connects them all.
Frederick, W. C. (2006). Corporation Be Good! the Story of Corporate Social Responsibility. Dog Ear Publishing.
Jamali, D., Safieddine, A. M., & Rabbath, M. (2008). Corporate Governance and Corporate Social Responsibility Synergies and Interrelationships. CORPORATE GOVERNANCE: An International Review, 16(5), 443-459.
Ostrom, E. (1999). Coping with Tragedies of the Commons. Annual Review of Political Science, 2, 493-535.
Ostrom, E. (2010). Polycentric systems for coping with collective action and global environmental change. Global Environmental Change, 20, 550–557.
More on Sustainable Governance© will be published in upcoming book(s) and articles.
Copyright © 2015 Amir Hossein Rahdari. All Rights Reserved.
Amir Hossein Rahdari
Director of Research, Corporate Governance and Responsibility Development Center