The strategic disconnect between governance reform and firm performance

The structural independence of directors has become the focal point of governance reform, and the trend continues unabated. The Sarbanes-Oxley Act introduced additional measures signaling the persistent belief that board conduct is shaped by structural solutions. Empirical results indicate that structural measures have been ineffective, and had a negative impact on firm performance. In this three part critical theory project, I first describe the evolution of the modern governance process through five distinct phases, each reactive to the prior phase, to demonstrate that the current dominant governance narrative was shaped by theories, assumptions, policies, and praxes responding to the mid-20 th century era of imperial management. The current narrative takes a gloomy view of human nature, and finds justification for its emphasis on oversight from Agency theory. In the second part, I critically address the Agency Logic that drives the current view of the firm as investment-system, and I take the interacting theory, assumptions, and metaphors that entrench structural regulations and praxes in the face of evidence to the contrary to task. I conclude that director independence is neither feasible, nor desirable, and that the shift towards the board as policeman has had detrimental consequences for ethical conduct, innovation, and growth. The final section of this project develops an alternative to the Agency Logic, namely the Value Logic, constructed from integrated assumptions and theory that lead to a conception of the firm as co-evolutionary network of value creation and uncertainty mitigation. I argue for a heterogeneous board of embedded stakeholder representative directors, where the social dynamics of the board rely on stakeholders' engagement in active discourse to address the three interdependent requirements for substantive governance – financial performance, ethical conduct, and the optimization of strategic opportunities within the firm's network. Two alternative governance constructs, namely the German two-tier model and a proposed dual board structure are evaluated, and I draw on elements of both to propose a third alternative. I conclude with a verdict on the future of the independent director, and address a variety of considerations that come to the fore under the Value Logic.

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