Complexity Theory & Corporate Governance Failures

Catching up on a couple of noteworthy reviews from recent issues of Corporate Governance: an International Review.

Corporate Governance and Complexity Theory by Marc Goergen, Christine Mallin, Eve Mitleton-Kelly, Ahmed Al-Hawamde and Iris Hse-Yu Chiu.  Reviewer Diane Denis was hoping the application of complexity theory would lead to insights concerning how and where problems arise, allowing corporations to manage more effectively. Instead, according to Denis, the authors use complexity theory to advocate stakeholder governance. Like other such efforts, they fail to establish a workable model. 

The very complexity of the many interrelationships in the typical public corporation make such dialogue infeasible and increase the need for decision-making that is informed by a relatively clear and objective goal. It is ironic that after having argued against a shareholder primacy model of corporate governance, the book concludes by suggesting that the alternative governance framework being advocated by its authors depends fundamentally on the active involvement of long-term shareholders.

September issue. Corporate Governance Failures: The Role of Institutional Investors in the Global Financial Crisis, edited by James P. Hawley, S. J. Kamath and A. T. Williams.

Reviewer Kenneth A. Merchant finds persuasive arguments and examples that in some cases empirical analyses demonstrate the pursuit of “alpha” led to significant errors of both commission and omission. Managers didn’t understand the risks they were taking and corporate governance monitoring systems failed them.

“The authors of the chapters, each an expert, raised as many questions as they answered.” The reviewer, like many of us, was hoping for a more integrated analysis but, instead, found a well-written, informative and thought-provoking volume with a lot of information reflecting “the incomplete and imperfect set of understanding that currently exists.”

See also, this review by Martin S. Fridson, CFA, posted at Seeking Alpha.

 

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