Integrity and Corporate Governance:

What is it about?

As a social notion, integrity also refers to the degree to which people satisfy the legitimate expectations of the world around them. Corporate governance concerns the structure of rights and responsibilities among stakeholders. In this chapter, we focus those corporate governance issues that pertain to managers’ integrity. This is, corporate governance requires controlling the risk of opportunism by managers as well as ensuring their integrity. We argue that some of the assumptions of neo-classical economic theory related to corporate governance, such as managerial opportunism and shareholder value maximization, might have negative effects on managers’ integrity. We start by presenting governance systems based on an agency theory perspective and draw implications from its main assumptions. Then we relax some of those assumptions. First, we mitigate the idea that every manager is opportunistic and present stewardship theory. Second, we relax the assumption that managers’ sole responsibility is the maximization of shareholder value and offer stakeholder theory as an alternative. Third, we discuss how to expand firms’ corporate responsibilities from making a profit and creating shareholder value to encompass economic, social, and environmental responsibilities. Finally, we conclude with a discussion of the implications of corporate governance systems on managers’ integrity.

Featured Image

Why is it important?

Corporate governance pertains to the structure of rights and responsibilities among the parties with a stake (i.e., stakeholders) in a firm (Aguilera & Jackson 2003; Usunier et al 2011). In this chapter, we have argued that beyond shareholders, managers are responsible toward various stakeholders and society at large (Carroll 2001; Freeman 1984). A just society is constructed only when people, acting rationally, realize that their self-interests are inextricably intertwined with those of others (Rawls 1999), therefore, the assumption that managers’ sole responsibility is the maximization of shareholder value should be relaxed (Furrer 2011). Moreover, corporate governance must entail controls of the risk of opportunism by managers but also assurances that the firm will meet its corporate social responsibilities. Managers of integrity must make strategic decisions based on a compromise across a variety of considerations; shareholder value is just one of them. However, integrating integrity within firms’ corporate governance systems requires managers and shareholders to change their view about corporate responsibilities and several assumptions in management theory to be relaxed. In changing managers’ view and relaxing these theoretical assumptions, the role of scholars and business schools are primordial (Usunier et al 2011). As argued by Sumantra Ghoshal (2006) in a seminal article, bad management theories are destroying good management practices. Integrity should start in the classroom.

Perspectives