How organisation theory supports corporate governance scholarship

This paper aims to show how organisation theory can be used to understand the controversy between the shareholder and the stakeholder perspectives. Rationalistic and open system theories may enhance research on corporate governance by offering well-defined concepts and by specifying core relationships.

This paper applies descriptions of the two perspectives in organisation theory as a “method” for illustrating how they are linked to and support the shareholder versus the stakeholder perspectives.

The controversy stems from the fact that the shareholder and the stakeholder perspectives address different relationships. The shareholder perspective captures two relationships that accord with rationalistic organisation theory: shareholders are managing the managers and the organisation, and managers are managing the corporation on behalf of the owners. The stakeholder perspective focuses on three relationships that are not concordant with system theory: managers are managing the shareholders (i.e. the symbolic management of stockholders), managers are managing the corporation (i.e. general management theory) and managers are managing the stakeholders.

Organisation theory provides suggestions for more fruitful definitions of the often-used concepts of direction, control, administration and influence. These terms may be substituted with the well-defined concepts of management, power and control.

Proponents of organisation theory find it theoretically difficult to deal with the topic of corporate governance, if they do at all. When they do, they do it only perfunctorily.

Organisation theory may strengthen research on corporate governance if we insist on both theoretical clarifications of major relationships and on the use of more strictly defined concepts.