Comtemporary issue

Corporate Governance in a Risk Society

Anselm Schneider • Andreas Georg Scherer

Received: 21 July 2012 / Accepted: 28 October 2013 / Published online: 10 November 2013

� Springer Science+Business Media Dordrecht 2013

Abstract Under conditions of growing interconnected-

ness of the global economy, more and more stakeholders

are exposed to risks and costs resulting from business

activities that are neither regulated nor compensated for by

means of national governance. The changing distribution of

risks poses a threat to the legitimacy of business firms that

normally derive their legitimacy from operating in com-

pliance with the legal rules of democratic nation states.

However, during the process of globalization, the regula-

tory power of nation states has been weakened and many

production processes have been shifted to states with weak

regulatory frameworks where businesses operate outside

the reach of the democratic nation state. As a result,

business firms have to address the various legitimacy

challenges of their operations directly and cannot rely upon

the legitimacy of their regulatory environment. These

developments challenge the dominant approach to corpo-

rate governance that regards shareholders as the only

stakeholder group in need of special protection due to risks

not covered by contracts and legal regulations. On the basis

of these considerations, we argue for a democratization of

corporate governance structures in order to compensate for

the governance deficits in their regulatory environment and

to cope with the changing allocation of risks and costs. By

way of democratic involvement of various stakeholders,

business firms may be able to mitigate the redistribution of

individual risk and address the resulting legitimacy deficits

even when operating under conditions of regulatory gaps

and governance failure.

Keywords Corporate democracy � Corporate governance � Globalization � Legitimacy � Risk

Introduction

With the power and latitude of firms in a globalized

economy rapidly expanding, their actions affect an ever

wider range of individuals, such as workers in complex

global supply chains, persons affected by pollution, or

other kinds of negative externalities, although the firms in

many cases are not legally accountable to these individuals.

Consequently, more and more stakeholders of business

firms are individually exposed to risks and costs resulting

from the operations of business firms in cases where the

regulatory power of national governments is incapable of

mitigating or socializing these risks. That is, the harmful

consequences of the activities of business firms are

imposed on individuals without their consent and without

protection through regulatory frameworks: ‘‘the burden of

risk migrates from the jurisdiction of institutions to the

individualized sphere of personal decision-making’’ (My-

then 2005, p. 130). This individualization of risks beyond

the reach of regulatory protection is a major feature of

contemporary society, which has been characterized as a

risk society by Beck (1992, 1999). Business firms are an

important source of risks in risk society (Matten 2004; see

also Gephard et al. 2009). Therefore, the individualization

of risks is a threat to the legitimacy of a firm, i.e., its social

acceptance (Palazzo and Scherer 2006; Suchman 1995).

Since legitimacy is a vital condition for an organization,

A. Schneider (&) CCRS/University of Zurich, Zaehringerstrasse 24, 8001 Zurich,

Switzerland

e-mail: [email protected]

A. G. Scherer

Department of Business Administration, IBW/University of

Zurich, Universitaetsstr. 84, 8006 Zurich, Switzerland

e-mail: [email protected]

123

J Bus Ethics (2015) 126:309–323

DOI 10.1007/s10551-013-1943-4

such cases potentially jeopardize the survival of the firm

(Meyer and Rowan 1977).

The dominant approach to corporate governance advo-

cates the primacy of shareholders (Daily et al. 2003; Judge

2009) due to the residual risk borne by them (Easterbrook

and Fischel 1996; Williamson 1985; see also, critically,

Stout 2002) and the efficiency allegedly accruing from the

concentration of corporate governance on the generation of

shareholder value (Hansmann and Kraakman 2001; Jensen

2002; Sundaram and Inkpen 2004; see also, critically, El-

hauge 2005). The first aim of this paper is to show that this

approach to corporate governance—as well as many

alternative approaches—considers adequately neither the

risks accruing from changing economic and political con-

ditions of business firms operating in a global environment

nor the resulting legitimacy problems of business firms.

The second aim is to develop an alternative conception of

corporate governance that can better address the individu-

alization of risk by means of a democratization of corporate

governance. We extend current research on the inclusion of

stakeholders in corporate governance (see, e.g., Driver and

Thompson 2002; Gomez and Korine 2005, 2008; Scherer

et al. 2013) in several respects: First, we identify an

increasing exposure of individual stakeholders to the risks

and costs that emanate from business activities and analyze

the incompatibility of this development with shareholder-

centered approaches to corporate governance. Second, we

elaborate on a selection criterion for stakeholders who

should be represented in corporate governance. Third, we

conceptualize the required democratization—by law and

soft law—of corporate governance as a means for gov-

ernments and transnational organizations to indirectly

tackle global governance gaps.

The paper is structured as follows: In the second section,

two central justifications of the shareholder-centered con-

ception of corporate governance will be delineated, and

their appropriateness vis-a-vis the shifting division of

power between economic and political actors and the

resulting individualization of risk will be explored. In

addition, we will discuss alternative approaches to corpo-

rate governance regarding their potential to address these

issues. In section three, we will argue that a shift in the

scope of corporate governance is necessary to appropri-

ately determine which stakeholders need to be included in

corporate governance. In the fourth section, we suggest

how democratic processes can be implemented in organi-

zations to guarantee a fair allocation of risk and to legiti-

mize corporate power. The approach of deliberative

democracy to corporations will be discussed as a possible

conceptual foundation of this endeavor. These ideas will be

exemplified by referencing the empirical example of

stakeholder panels. Conclusions and suggestions for further

research complete this paper.

Challenges for the Shareholder-Centered Approach

to Corporate Governance

In this section, we show that the shareholder-centered

approach to corporate governance is justified by the

residual risk borne by shareholders as well as by the

socially beneficial effects allegedly accruing from the

maximization of shareholder value. We suggest that both

argumentations become questionable due to the changes

resulting from globalization and the resulting reallocation

of risk from the producers of risk and the societal level

toward individuals.

Risk and Efficiency as the Foundations of Dominant

Corporate Governance Theory and Practice

The shareholder-centered approach to corporate gover-

nance can be traced back to problems arising from the

changing relation between ownership and control of busi-

nesses, first described by Berle and Means (1932).

According to their study, an increase in the number of

shareholders of corporations diminished the capacity of

individual shareholders to control corporations. Profes-

sional managers gained influence and the owners lost the

capacity to monitor the behavior of the managers.

Assuming utility-maximizing behavior of the managers,

shareowners ran the risk of managers utilizing the money

supplied to the company to maximize their own utility

rather than maximizing corporate value and, thus, the value

of shares. Consequently, a control mechanism, which pre-

vented the managers from shirking and misusing their

fiduciary function, became necessary (Shleifer and Vishny

1997). From this perspective, corporate governance can be

described as a mechanism aimed at minimizing the risk

borne by shareholders, who are regarded as the owners of a

firm.

In the course of the advancement of the economic theory

of the firm, the conception of corporations was further

developed: Initially seen as the sum of the invested capital

owned by the investors, corporations were redefined as a

nexus of contracts (Coase 1937; Easterbrook and Fischel

1996)—bringing into equilibrium the conflicting objectives

of individuals (Jensen and Meckling 1976). While most

contractual partners such as employees, debtors, and sup-

pliers have well-defined claims on a firm and therefore bear

no risk due to the enforceability of their contractual claims

by legal sanctions, shareholders need to rely on the man-

agement to maximize their return by maximizing the firm

value, since profit cannot be determined a priori. The

relation of owners and managers of publicly traded cor-

porations has been explained by the principal–agent theory

(Jensen and Meckling 1976), highlighting the situation of

asymmetric information between shareowners (principals)

310 A. Schneider, A. G. Scherer

123

and managers (agents) and determining the optimal

incentives necessary to prevent managers from shirking

and thus motivating them to maximize firm value and

simultaneously the value of shares. The (residual) risk

associated with the uncertainty concerning the extent of the

residual claims is regarded as the justification for the

shareholders to have the right to appropriate the difference

between revenue and cost, namely, the residual claims

(profit) (Easterbrook and Fischel 1996; Sundaram and

Inkpen 2004), and therefore an important justification for

shareholder-centered approaches to corporate governance

(Stout 2002).

A further justification of the shareholder-centered

approach to corporate governance relates to the effi-

ciency alleged to result from the maximization of share

value. According to this view, corporate governance

focussing on shareholder primacy is justified in the fol-

lowing way: Shareholder value is regarded as a single

indicator by which shareholders and the market for

securities can assess managerial performance (Jensen

2002). The assumption central to this justification of

corporate governance is the view that market-based

allocation is most efficient in serving the public interest

if extra-economic interferences are minimized (Sundaram

and Inkpen 2004). According to this position, the

mechanism of corporate governance remedies the prob-

lems resulting from the separation of ownership and

control in the most efficient manner by means of the

market mechanism. The market for securities assesses

corporate performance by means of the share price.

Consequently, managers are induced to signal their per-

formance by the maximization of the value of the shares

of the corporation they work for. Further, the maximi-

zation of the value of a corporation’s shares maximizes

the overall productivity and value of the firm (Alchian

and Demsetz 1972). Maximal productivity of a firm, in

turn, is seen as the optimal contribution to social wel-

fare, assuming that the firm is a value-generating entity

and the output of efficient firms is higher than the input.

Since each unit of surplus (profit) adds to social welfare,

the latter is maximized by the maximization of profits

(Jensen 2002). That is, by means of market coordination,

private profit is aligned with the public interest as long

as the maximization of shareholder value takes place

within the borders of legal and moral obligations (Sun-

daram and Inkpen 2004). Both the residual risk borne by

shareholders and the maximization of social welfare

through the maximization of shareholder value can be

regarded as strong moral justifications for the primacy of

shareholders in corporate governance, as the debate on

the control of business firms throughout the twentieth

century illustrates (Berle 1932; Friedman 1970; Langtry

1994).

Globalization, Corporate Governance,

and the Individualization of Risk

The dominant shareholder-centered approach to corporate

governance relies on the fact that business activities take

place within the borders of legal and moral obligations.

However, this assumption becomes questionable in light of

the diminishing regulatory capacity of nation states and the

concomitant increase of power of business firms. In the

following, we analyze in detail how these changes, which

we regard as important facets of globalization and risk

society, challenge the justifications of shareholder-oriented

corporate governance theory.

Globalization can be understood as the process of

expanding social relations across national borders due to

declining costs of transportation, communication, and

coordination (Beck 2000). In the course of this process,

distances and borders are losing their significance and the

scope of action of multinational corporations has expanded

considerably (Chandler and Mazlish 2005; Strange 2000).

Concurrently, despite the state’s monopoly of the use of

force, the effectiveness of national politics can be doubted in

cases where corporate power and externality and public

goods problems transcend national borders and become

global. The increasing influence and power of multinational

enterprises on the one hand and the weakening of the power

of states on the other hand result in regulation gaps (Beck

2000; Chandler and Mazlish 2005; Kobrin 2001).

In the course of the shift of power between nation states

and business firms, corporations play an ambiguous role

(Scherer et al. 2009). On the one hand, they contribute to

the efficient solution of public goods problems and engage

in activities that were traditionally seen as the domain of

nation states. Private actors such as businesses, NGOs, and

civil society groups are engaging in the definition and

enforcement of global rules and the production of public

goods and thereby contribute to a new form of global

governance that partly compensates for the diminishing

steering power of national governance. Ranging from the

provision of infrastructure and education (Margolis and

Walsh 2003), to administration of rights (Matten and Crane

2005a), to involvement in rulemaking on the global scale,

and to the generation of soft law (Abbott and Snidal 2009),

corporations take on a political role besides their generic

economic role (Beck 2008; Scherer et al. 2006). On the

other hand, societal peace is threatened by the activities of

private business firms. Examples are political lobbying

benefitting corporations at the expense of the public

interest (Barley 2007), the complicity with human rights

violations (Kinley and Nolan 2008), and externalities such

as environmental degradation (Osland 2003).

The implications of globalization and the increasing

political power of business have been reflected in the

Corporate Governance 311

123

business literature (Scherer et al. 2006), but have been

considered in corporate governance research only to a

limited extent (Scherer et al. 2013). While there is at least

some work on the link between corporate governance and

CSR (Bhimani and Soonawalla 2005; Jamali et al. 2008),

the challenges of globalization for the dominant corporate

governance model have barely been addressed (for an

exception, see Boatright 2011): the growing incapacity of

national governance to regulate global businesses (Beck

2008), to comprehensively protect stakeholders, or to

provide global public goods on the one hand (Hertz 2001)

and the corporate engagement of business firms in public

tasks originally assigned to the state on the other (Matten

and Crane 2005a).

The dominant shareholder-centered approach to corpo-

rate governance is justified by the residual risk borne by

shareholders (Easterbrook and Fischel 1996; see also,

critically, Stout 2002) as well as by the allegedly optimal

effect of a shareholder concentration of corporate gover-

nance on social welfare (Hansmann and Kraakman 2001;

Sundaram and Inkpen 2004; critically, see, Elhauge 2005).

However, the diminishing steering capacity of states and

the changing division of labor between the economic and

the political system challenge these justifications. In the

following, we show that the weak enforcement of contracts

in many countries, the increasing significance of negative

externalities such as global warming, and the involvement

of business in the provision of public goods render the

dominant conception of corporate governance

questionable.

Weak Enforcement of Contracts

One reason for the centrality of shareholders in the domi-

nant approach to corporate governance is the assumption of

the comprehensive protection of a firm’s stakeholders

(except shareowners) through contracts and the legal sys-

tem (Sundaram and Inkpen 2004). Accordingly, the

important role of the ‘‘legal system and the law play in

social organizations, especially, the organization of eco-

nomic activity’’ and the availability of ‘‘police powers of

the state (…) used to enforce performance of contracts or to enforce the collection of damages for non-performance’’

(Jensen and Meckling 1976, p. 311, fn. 14) are emphasized.

However, with corporations operating beyond the reach

of legal enforcement mechanisms, be it in weak states or in

undemocratic ones, the option of the legal protection of

stakeholders becomes curtailed. In countries where state

agencies are either unable or unwilling to protect the

legitimate claims of stakeholders, the claimants are often

exposed to the arbitrariness of powerful corporate actors.

The power of stakeholders is further weakened when they

have no choice other than to accept the terms determined

by the corporate actors. For example, the common

infringement of labor rights in the global supply chains of

major electronics brands (see, e.g., China Labor Watch

2011) illustrates that even if appropriate labor rights exist,

enforcement is weak in many countries. Still more unam-

biguous is the case of forced labor that accounts for up to

21 million workers of the global workforce (International

Labour Organization 2012; see also Crane 2013). These

examples illustrate that, even if there is some progress in

the field of business and human rights law (see, e.g.,

Clapham 2006; McBarnet 2007), the assumption of the

enforceability of contracts through the legal systems does

not apply to the lifeworld of many workers in developing

countries. More generally, they illustrate that many stake-

holders lack any protection through functioning legal sys-

tems and therefore are directly exposed to risk resulting

from the activities of business firms. Even if most multi-

national corporations are based in countries where the

enforcement of contracts is strong, in the wake of global-

ization, these firms potentially have some ties with coun-

tries where this assumption does not hold. Hence, the

problem of weak enforcement of contracts between busi-

ness firms and their stakeholders is of global significance.

Negative Externalities

A further aspect of the limited capacity of many states to

enforce laws relates to externalities such as environmental

pollution (Beck 1992). Within the constellation of national

economies, negative externalities could to some extent be

limited or compensated for by public policy and by means

of law. However, this option is often unavailable where no

or only weak enforcement mechanisms exist (see above).

Banning or preventing negative externalities by means of

taxation (Pigou 1932) and proposals for the internalization

of externalities by the allocation of property rights (Coase

1960) are only partially viable, since contractual obliga-

tions between stakeholders and firms cannot always be

enforced. Due to the transnationality of many problems of

externalities caused by corporations, as in the case of cli-

mate change and toxic emissions, and due to undeveloped

cross-border regulation (Bradley et al. 1999), specific

groups of stakeholders, or even all of humanity, are

increasingly exposed to risks resulting from externalities

generated by corporations, without the immediate chance

of legal protection or compensation (Rockström et al.

2009).

Public Goods

Strongly interrelated with the described developments is

the expanding power of business in general and of multi-

national enterprises in particular. Firms provide public

312 A. Schneider, A. G. Scherer

123

goods such as education and infrastructure; they engage in

the administration of rights (Matten and Crane 2005a); they

provide public security services (Elms and Phillips 2009);

and they participate in global governance through the for-

mulation of international standards (Scherer et al. 2006),

e.g., in areas such as labor rights and environmental pro-

tection (Haufler 2001). These examples demonstrating the

engagement of corporations in the provision of public

goods indicate that corporations exert significant power

(Coglianese 2009), which in many cases equals or even

exceeds the power of state actors (Beck 2008). While in

democratic constitutional states power exercised by the

state can be controlled by democratic processes, on the

global level, corporate power is often uncontrolled. In such

situations, individuals become exposed to corporate power

without sufficient democratic authorization and control of

corporate activities, and run the risk of unjust treatment.

The Individualization of Risk

In states subject to democratic rule of law, public author-

ities rely on their monopoly in the legitimate use of force.

All stakeholders of a firm—except for the shareholders—

either are assumed to be parties in explicit contracts with

fixed payments that are enforceable by means of legal

sanctions or are assumed to be protected by law and

regulations (Easterbrook and Fischel 1996; Sundaram and

Inkpen 2004). The state authorities secure compliance with

regulations and contractual arrangements and allocate the

costs of negative externalities either to their producers or to

the society as a whole. As the sole providers of public

goods, public authorities are controlled democratically and

thereby misuse of power is largely prevented. Furthermore,

due to its democratic entitlement and control, this exercise

of power by state authorities is regarded as legitimate. The

democratic state system acts as a mechanism for both

minimizing and mitigating risk by limiting and socializing

potential costs for the single citizen and for generating

legitimacy for the use of power. Under conditions of

globalization, due to insufficient state regulation and weak

enforcement, many risks resulting from corporate action

can no longer be mitigated by national governance and

therefore are becoming more of a threat to individuals who

are increasingly directly exposed to the harmful conse-

quences of corporate activity. That is, besides shareholders,

other stakeholders need to be regarded as bearing consid-

erable risks that result from a business firm’s activities

from which they are not protected by law (see, e.g., Blair

2003; Boatright 2011). In other words, the risk becomes

individualized (Beck 1992). The individualization of risk

resulting from business activities can be regarded as a

notable facet of a broader societal dynamic characterized

by an increasing significance of man-made risks that can

only insufficiently be tackled by regulatory frameworks. To

capture these developments, Beck coined the term risk

society (Beck 1992).

The reallocation of risk from the risk producers and the

societal level to the individual undermines the assumption of

shareholders as the sole group of stakeholders, which is

exposed to risks without protection through the law. Further,

the contribution of shareholder-centered corporate gover-

nance to social welfare needs to be reconsidered. Jensen

(2002, p. 246) explicitly relies on ‘‘… the government in its rule-setting function…’’ to create the conditions necessary to resolve externality problems and admits that maximization

of shareholder value does not maximize social welfare when

externalities exist. The incapacity of many governments to

enforce contracts between stakeholders and firms, to limit or

socialize negative externalities, as well as the increasing

power of business firms to unilaterally decide on matters of

the public good can be regarded as evidence for the incon-

gruence between firm-level efficiency and social welfare

(see also McSweeny 2008). By challenging two important

justifications of shareholder-centered corporate governance,

we expand the major current moral criticism of shareholder-

centered corporate governance that relates to the concen-

tration of control in the hands of shareholders (Boatright

2004).

Legitimacy Problems of Corporate Governance

In this section, we argue that the changed allocation of risk and

the weakening link between firm-level efficiency and social

welfare pose a severe threat to the legitimacy of firms and

identify these developments as a challenge for the share-

holder-centered approach to corporate governance. Legiti-

macy, as defined by Suchman (1995, p. 574), ‘‘is a generalized

perception or assumption that the actions of an entity are

desirable, proper, or appropriate within some socially con-

structed system of norms, values, beliefs, and definitions.’’

Organizational legitimacy can be based on three sources

(Suchman 1995): (1) the perceptions of beneficial outcomes

from the organization and its behavior (pragmatic legitimacy);

(2) the organization’s compliance with unconscious, taken-

for-granted societal expectations (cognitive legitimacy); or

(3) a moral judgment that is based on an argumentative pro-

cess (moral legitimacy) in which it is judged discursively

whether an activity is ‘‘the right thing to do.’’

Under conditions of a functioning regulatory framework,

the legitimization of business firms in the market sphere is

regarded to be ‘‘automatic’’ (Peter 2004, p. 1) due to their

contribution to social welfare (pragmatic legitimacy) and

their compliance of business with official rules (cognitive

legitimacy). However, as soon as the risks produced by a

business firm are no longer limited or mitigated by regulatory

frameworks, individuals exposed to these risks might suffer a

Corporate Governance 313

123

loss in individual welfare. Further, such cases are often

uncovered by NGOs, civil society groups, or activists (Spar

and La Mure 2003; den Hond and de Bakker 2007). Subse-

quently, information about corporate wrongdoing and cri-

tique can spread through media and the new communication

technology instantaneously, and corporate legitimacy can be

questioned globally, since a reduction of individual welfare

of specific stakeholders of the firm might be regarded as a

threat to social welfare by a concerned global public. Both

developments can lead to the questioning of the legitimacy of

this firm. That is, pragmatic legitimacy and cognitive legit-

imacy are becoming less reliable sources of corporate

legitimacy. For this reason, moral legitimacy is becoming

more relevant (Palazzo and Scherer 2006).

Several authors emphasize the importance of corporate

governance for the generation of organizational legitimacy.

Taking a narrow view, corporate governance can be

regarded as one mechanism legitimizing a corporation

through the appointment of a corporate board (Hillman and

Dalziel 2003). Taking a broader view, corporate gover-

nance can be conceived of as a set of rules aimed at

reducing business risks and thus as a guarantee mechanism

(Gomez and Korine 2008). By means of proper corporate

governance, a corporation signals to potential shareholders

that it practices sound risk control. Thus, corporate gov-

ernance enhances the trust of the shareholders in the cor-

poration and minimizes potential transaction costs resulting

from the collection of information about risks for invest-

ments. Building on this definition, we regard corporate

governance as a mechanism that signals the ability of a

corporation to control and limit risks for stakeholders, and

thus contributes to organizational legitimacy.

The dominant shareholder-centered approach to corporate

governance, which is adapted to the conditions of the pre-

globalization era, takes into account neither the individuali-

zation of risk nor the incongruence between shareholder value

and social welfare. Therefore, this approach to corporate

governance is no longer justified by the moral considerations

outlined above and is becoming less effective in contributing

to organizational legitimacy. Rather, due to its disregard of the

negative effects of business activities (Tirole 2001), it

potentially undermines corporate legitimacy. Therefore, the

question is whether alternative approaches to corporate gov-

ernance are available which have the potential to consider the

risks borne by stakeholders of a business firm and thus to

secure organizational legitimacy.

In Search of New Principles: Alternative Perspectives

Contesting conceptions of the purpose and objectives of a

corporation and of the appropriate focus of corporate

governance have been discussed for decades (Berle1932;

Clark 1916; Dodd 1932; Friedman 1970). With the aim of

finding corporate governance mechanisms to cope with the

challenges of risk society, in the following, we discuss the

most influential alternative approaches to corporate gov-

ernance (see also Gomez and Korine 2005, 2008; Scherer

et al. 2012) with regard to their capacity to take into

account the shift of risk toward stakeholders.

One attempt to modify corporate governance is team

production theory (Blair 1995). As described above, the

dominant approach to corporate governance has been

conceptualized to overcome the principal–agent problem

that is seen as threatening the efficiency of a corporation

defined as a nexus of contracts. The core argument of team

production theory is based on the increasing importance of

implicit contracts and the resulting shift of risk toward

stakeholders, particularly, the employees. They become

risk bearers by (in part irrevocably) investing firm-specific

skills in a team production effort—the firm—thereby

contributing to value creation, without proper protection

through explicit contracts. Consequently, team production

theory aims at motivating team members to actually con-

tribute to the process of value creation as well as increasing

the amount of information available for decision making at

the board level through participation of employees or

knowledge workers (Osterloh and Frey 2006).

However, regarding the increasing importance of nega-

tive externalities, team production theory is constrained by

the definition of organizations as teams and the resulting

focus on team members. From this, it follows that external

stakeholders such as individuals and groups affected by

corporate action who do not make some kind of investment

with which they voluntarily enter into a bilateral relation-

ship with a firm cannot be regarded as team members.

According to team production theory, risk imposed on

these stakeholders by a corporation cannot be considered

within corporate governance.

In line with the theory of team production, stewardship

theory (Davis et al. 1997; Donaldson and Davis 1991) is

based mainly on a critique of the dysfunctionalities of

principal–agent theory, the framework that constitutes the

shareholder primacy view. Instead of regarding managers

as opportunists, stewardship theory assumes that the

objectives of managers and shareholders correspond in

general. Accordingly, stewardship theory postulates that

governance structures that do not constrain the activities of

managers motivate managers to maximize shareholder

value. One advantage of stewardship theory lies in its

emphasis on integrity of managerial decision making.

However, stewardship theory seems to be unsuited to

respond to the challenges that corporations are confronted

with in the risk society. Being centered on shareholders as

the central group of corporate governance, the reallocation

of risk from the risk producers and the societal level to

individuals will only be taken into account if this issue is

314 A. Schneider, A. G. Scherer

123

taken into consideration by corporate managers. However,

a conflict between the interests of corporate shareholders

and stakeholders occurs (Friedman 1970) as soon as the

consideration of risks for stakeholders conflicts with the

financial interests of the shareholders.

The concept of stakeholder democracy (Matten and

Crane 2005b), which can be regarded as an extension of

stakeholder theories (Freeman 1984; Freeman et al. 2010),

emphasizes the importance of democratic participation in

corporate decision making. According to Gomez and Ko-

rine (2005, 2008), corporate governance can be regarded as

a mechanism to secure the consent of the individuals

governed by corporate actions, e.g., all stakeholders. The

authors suggest that the democratization of corporate

governance is a means to achieve the consent of the

stakeholders of a firm. Therefore, stakeholder democracy

has the potential to take into account the interests of all

stakeholders affected by the reallocation of risks and to

thus maintain or restore the legitimacy of business firms.

Summing up, dominant corporate governance theory,

team production theory, and stewardship theory all have a

limited focus on specific stakeholder groups and therefore

lack the capacity to appropriately take into account the

reallocation of risks. In contrast, suggestions to integrate

stakeholders into organizational decision making directly

aim at internalizing democratic processes within the

boundaries of the corporation. Such openness to discourse

and external control potentially allows to extend the focus of

corporate governance beyond those stakeholders immedi-

ately involved in corporate value creation and makes pos-

sible to include all stakeholders affected by risk resulting

from corporate action, be it risk resulting from insufficient

enforcement of contracts, negative externalities, or corporate

provision of public goods. By submitting them to democratic

control, it becomes possible to insure that organizational

decision processes take into account the changed allocation

of risks and enable a concurrent resolution of conflicts

between a corporation and its stakeholders.

From Contract to Social Connectedness: Readjusting

the Scope of Corporate Governance

In principle, stakeholder democracy has the flexibility to

take into account the reallocation of risks, which charac-

terizes risk society by including stakeholders in corporate

decision processes, and to thus compensate for the loss of

corporate legitimacy. However, this flexibility makes it

necessary to determine (1) which stakeholders are exposed

to risk resulting from the activities of business firms and

therefore need to be included in organizational decision

making and (2) how the conflicting interests resulting from

this reallocation of risk can be reconciled in order to

constitute or maintain the legitimacy of corporate action.

While the dominant approach to corporate governance

theory as well as stewardship theory offers a simple cri-

terion for selecting the stakeholders subject to protection

by corporate governance—namely, the imperfect contrac-

tual relation between a corporation and its shareholders—

this criterion is not applicable in the face of the individu-

alization of risk, potentially including every individual.

Hence, another selection criterion needs to be found.

One appropriate starting point seems to be the concept of

implicit contracts, the criterion used by team production

theory to determine how worthy of protection the stake-

holders are. Implicit contracts are not formalized, but are

nevertheless vital elements of economic transactions. Taking

into account this type of contract in addition to explicit

contracts facilitates the formulation of the relation between

firms and an enlarged set of stakeholders in a systematic way,

since risk not accounted for in explicit contracts becomes

conspicuous (Boatright 2004, 2011). Nevertheless, despite its

potential to address numerous legitimate claims on a cor-

poration, the contractual view has its limits where relations

between a corporation and its stakeholders are unidirectional,

as in the case of negative externalities of the activities of

business firms and the resulting risk for individuals. Rede-

fining corporate responsibility by extending the notion of

property rights to ‘‘both the legal aspect of property rights

and the social conventions that govern (business) behaviors’’

(Asher et al. 2005) seems to be a promising way to recognize

the importance of a firm’s stakeholders (Blair 2005). How-

ever, the possibility of defining all stakeholder relations in

terms of contracts and property rights, especially under

conditions of complex global interdependencies character-

istic for risk society, seems to be limited.

Consequently, the contract concept is not suitable for

grasping the multiple relationships between corporations and

their stakeholders. A further starting point is the concept of

accountability. ‘‘An accountability relationship is one in

which an individual, group or other entity makes demands on

an agent to report on his or her activities, and has the ability to

impose costs on the agent’’ (Keohane 2003, p. 139).

According to Keohane (2003, p. 140), there are three nor-

mative criteria justifying and necessitating the accountability

of an actor to specific groups: authorization, support, and

impact. (1) Authorization defined as the conferring of rights

from one entity to another is seen as one normative reason for

the duty of the authorized to be accountable to the authorizer.

(2) Political as well as financial support is regarded as another

rationale for the obligation of the supported to be accountable

vis-à-vis the supporters. (3) The third criterion—impact—is

argued to further justify the agent’s obligation to account-

ability. As argued by Held (2002), actors who become

‘‘choice-determining’’ for others and restrict the autonomy of

these others need to be held accountable.

Corporate Governance 315

123

The issue of accountability in the shareholder-centered

approach to corporate governance theory is exclusively

centered on the criterion of support. Shareholders provide

financial support for a corporation and in turn the corpo-

ration is supposed to be accountable to these shareholders.

In the light of the growing economic and political power of

corporations, the criterion of impact is becoming more and

more relevant since corporations determine the choices of

many people. However, due to the complexity of global

exchange and power relations, the impact of specific

actions on the constraint of individual choice is increas-

ingly difficult to determine in a direct way. Impact in most

instances does not happen directly, but through intricate

cause–effect chains. Hence, to develop a concept of impact

capable of embracing this complexity and intermediate-

ness, we bring in the notion of social connectedness.

According to Young (2004), to counter injustice—and

therewith the constraint of individual choice—resulting

from social and economic connectedness in a globalized

economy, it is necessary to overcome a past-oriented lia-

bility logic. Instead, Young introduces the forward-looking

concept of social connectedness. According to her,

involvement in structures leading to injustice is regarded as

a sufficient condition to consider an actor responsible since

individual decisions are constrained due to the impact of

this actor’s actions. This becomes even more important

because corporations impact individuals not only by eco-

nomic exchange but also through externalities and the

provision of public goods. Under such circumstances,

impact cannot be determined following the logic of lia-

bility. Defining the impact of corporations according to the

social connectedness perspective seems to be a fruitful

approach with which to determine the scope of corporate

accountability. Corporate governance, which plays a cen-

tral role in securing corporate accountability, has to adapt

to the changing economic and political operating condi-

tions of corporations if it is to remain capable of fulfilling

this objective. Instead of being centered on the protection

of corporate shareholders, it needs to secure corporate

accountability to all those affected by corporate action,

even indirectly. The notion of social connectedness can be

the basis for formulating the specifications of such an

extended conceptualization of corporate governance, tran-

scending the narrow focus on contractual relations and

incorporating all risks produced by business and not cov-

ered by governmental regulation.

Tackling the Changed Allocation of Risk: The Role

of Corporate Governance

We have described the inappropriateness of shareholder-

centered approaches to corporate governance in the light of

the individualization of risk and the weak link between the

maximization of shareholder value and social welfare, and

the resulting legitimacy problems of business. Further, we

demonstrated the potential suitability of stakeholder

democracy to generate corporate legitimacy by including

the interests of all parties affected by a firm’s activities into

corporate decision making. While the stakeholder approach

argues that such an inclusion is conducive to the maximi-

zation of corporate value, we argue that this argument is

not strong enough to encourage corporate decision makers

to consider all stakeholders that are exposed to the risks

resulting from corporate activities. In the following, we

firstly show why corporate governance is crucial for

guaranteeing a fair allocation of such risks. Secondly, we

explain how corporate governance can be modified to

achieve this objective. In addition, we analyze the com-

patibility of a democratization of corporate governance

with law and illustrate ways to implement democratic

principles on the level of corporate governance by refer-

ence to the example of stakeholder panels that are

becoming popular among many multinational corporations.

Corporate Governance as a Guarantee for a Fair

Allocation of Risks

As shown by Gomez and Korine (2008), an identifiable

mechanism is necessary to signal trustworthiness and

establish confidence in the governance of corporations so

that investors are willing to invest in a corporation and

other stakeholders consent to the activities of a corporation.

In light of the shifting allocation of risks, corporate gov-

ernance structures that trustworthily signal the capacity of a

business firm to limit the risks for stakeholders are crucial

for securing organizational legitimacy for several reasons.

First, the upper echelons in corporations wield the most

power—in economic terms and increasingly also politi-

cally. At the top management level, fundamental directions

in the course of strategic decision making are selected

(Hambrick and Mason 1984; Schreyögg and Steinmann

1987), which shape the relation between corporations and

society (Kemp 2011) and therefore influence the allocation

of risks. Examples are decisions to make a foreign direct

investment in a country with a poor human rights record or

to engage in a highly disputed industry such as genetic

engineering. Second, responsibility for the allocation of

risks needs to be easily localized and identified by share-

holders as well as by the general public. While the general

capacity of a firm to limit the risks for stakeholders is

difficult to assess for external observers, the design of

corporate governance can serve as a clear signal that

business firms take into account their effects on share-

holders as well as on other stakeholders. Third, there is a

possibility of failure of processes aimed at a fair allocation

316 A. Schneider, A. G. Scherer

123

of risks at the lower levels of a firm. Distortions in moral

deliberation resulting from the hierarchical structure of

firms and causing a diffusion of personal responsibility

(Rhee 2008) cannot be ruled out. Hence, some kind of

guarantee equivalent to a court of last resort is necessary to

provide the possibility of changing the direction of cor-

porate activity and to insure that the risks resulting from the

activities of business firms are allocated in a way that is

perceived as legitimate by all stakeholders.

Mitigating Risks and Maintaining Legitimacy: The

Role of Deliberation in Corporate Governance

In the following, we suggest that the opening up of cor-

porate governance structures and corporate control pro-

cesses to communicative processes with civil society is a

suitable way to address the risks resulting from the activ-

ities of business firms in a procedural communication-

based way and to simultaneously safeguard corporate

legitimacy. As a response to the limited capacity of nation

states to address the problems associated with the emer-

gence of risk society, Beck (1992, 1997) proposed the

concept of subpolitics as a way to tackle risk that lies

beyond the reach of regulatory authorities. In subpolitics,

civil society actors such as communities and NGOs engage

in political processes with the aim to compensate for the

decreasing regulatory capacity of the nation state. Sug-

gestions to concretize mechanisms for assessing and gov-

erning risks within the scope of subpolitics (see, e.g.,

Bäckstrand 2004) build on the theory of deliberative

democracy (Habermas 1998; Dryzek 1999). In this theory,

deliberation is conceived as a network of argumentation

aimed at controlling administrative power by finding

rational and fair solutions for problems of public interest

(Habermas 1996). In the course of deliberative processes,

civil society actors can collectively assess and govern risks

in a legitimate manner (see, e.g., Pellizzoni 2001, for the

case of the assessment of the risks of gene technology).

With the increasing power of business, firms become

increasingly exposed to subpolitical protests (Scherer and

Palazzo 2007). While on the one hand such subpolitical

activities are potentially harmful for business firms, on the

other hand they open up a new arena for interaction

between civil society and business firms, where risks of

business activities can be collectively assessed and gov-

erned in a communicative way.

Indeed, Palazzo and Scherer (2006) suggested that such

an engagement of business firms with civil society might

be a way to manage the legitimacy of organizations in a

procedural communication-based way. Referring to the

threefold concept of legitimacy put forward by Suchman

(1995) and described above—pragmatic, cognitive, and

moral legitimacy—these authors argue that under the

conditions of globalization, the capability of business to

constitute pragmatic or cognitive legitimacy is decreasing.

Transferring the theory of deliberative democracy from

political science to the context of business organizations

(Palazzo and Scherer 2006; Scherer and Palazzo 2007),

deliberation is regarded as a means for corporations to

compensate for the loss of pragmatic and cognitive legiti-

macy. Switching to a mode of ‘‘moral reasoning’’ is

regarded as a measure to constitute moral legitimacy by

means of discursive processes when necessary and appro-

priate. The process of deliberation is seen as a way to

achieve legitimate outcomes by an active justification vis-

à-vis society through the exchange of good reasons

(Palazzo and Scherer 2006). These considerations illustrate

that the design of corporate governance according to the

principles of deliberative democracy has the potential to

tackle the risks that result from activities of business firms

and to thus safeguard their legitimacy.

Company Law, Soft Law, and Democratic Corporate

Governance

Obviously, even if the democratization of corporate gov-

ernance is an appropriate response to the changing allo-

cation of risks discussed above, the question remains to

what extent such a radical redesign of governance struc-

tures and profound reallocation of rights is compatible with

company law. Contrary to the common assumption that

company law requires the maximization of shareholder

value, the maximization of shareholder value is not a legal

principle (Stout 2008, see also Elhauge 2005; Rose 2007).

Rather, corporate law suggests that the purpose of the firm

is to ‘‘serve the interests of employees, creditors, custom-

ers, and the broader society’’ (Williams and Conley 2005,

p. 1190) and requires corporate directors to promote the

long-term success of a business firm for the benefit of its

various stakeholders (Lan and Heracleous 2010). As we

have demonstrated, the democratization of corporate gov-

ernance is an appropriate means for safeguarding the

legitimacy and thus the viability of a business firm in cases

where business firms operate under conditions of weak

regulatory frameworks. In cases where there is no other

means available for guaranteeing the viability of a business

firm, an opening up of corporate governance for democratic

processes therefore seems to be a lawful means to insure

that a firm can continue to serve the interests of its stake-

holders as well as a means to signal this capacity to pro-

spective shareholders (Gomez and Korine 2008). In

addition to the positive influence of stakeholder participa-

tion on corporate legitimacy, there is increasing evidence

that close interaction with stakeholders on the level of

corporate governance is conducive to the management of

business risks (Pirson and Turnbull 2011) as well as to

Corporate Governance 317

123

innovation (Spitzeck and Hansen 2010). These consider-

ations make clear that the representation of stakeholders in

corporate governance is not only compatible with legal

prescriptions but might also be helpful for maintaining or

restoring corporate legitimacy, thus guaranteeing the long-

term success of a corporation under conditions of ineffec-

tive or absent regulatory frameworks. Seen from this per-

spective, a democratization of corporate governance might

be in the economic interest of a firm and therefore in the

immediate interest of a firm’s shareholders. The idea of a

corporate governance model that is by default attractive for

stakeholder groups with allegedly diverging interests partly

corresponds with the ideas of Black and Kraakman (1996),

who propose a ‘‘self-enforcing model of corporate law’’ for

countries where the official enforcement of contracts is

weak. These authors argue that an appropriately designed

set of default rules for corporate governance might even

work under conditions of weak enforcement due to the

pressure of peers, threats to the reputation of a corporation,

and the danger of violent protests against decisions of

corporations. The same arguments hold as a rationale for a

voluntary democratization of corporate governance as a

means to tackle the shifting allocation of risks and the

concomitant legitimacy problems of business. As argued

by Turnbull (2000), the concept of a self-enforcing model

of corporate law might serve as the basis for the policies of

governments and development agencies to promote dem-

ocratic forms of corporate governance. Building on this

idea, in the following, we discuss the feasibility and

prospect of a legal and soft legal enforcement of demo-

cratic corporate governance.

As demonstrated by the case of Germany, the inclusion of

stakeholders in corporate governance can also be required

by law. German law requires the inclusion of workers’

representatives in corporate boards in firms of a certain size

(see, e.g., Jürgens et al. 2000). This example illustrates that

law can play an important role in enforcing the inclusion of

different stakeholders in corporate governance.

Beyond strictly legal approaches to the democratization

of corporate governance, it is also possible to conceive of

soft law approaches to the promotion of democratic cor-

porate governance. For instance, the demand of the OECD

Principles of Corporate Governance that the board of a

corporation ‘‘should take into account the interests of

stakeholders’’ (OECD 2004, p. 24) could conceivably be

complemented by a clause that requires the formal inclu-

sion of stakeholders in corporate governance. Further, more

indirect effects of soft law on corporate governance are

conceivable. For instance, as argued by Muchlinski, the

provisions of the UN framework on human rights and

business concerning the development of human rights

compliance systems have the potential to transform the

shareholder-centered model of corporate governance

toward a model of the corporation that builds ‘‘upon the

implications of stakeholder theory for the reform of cor-

porate law and regulation’’ (Muchlinski 2012, p. 167).

At first glance, it might appear somewhat paradoxical to

conceive required democratization of corporate governance

by law or soft law as one means to address problems in

areas in which laws are weak. However, at second glance,

the described law and soft law approaches might serve as

blueprints for indirect legal remedies of governance gaps.

While law is incapable of directly addressing governance

gaps per definition, it is conceivable to require business

firms to open up their decision structures in their home

countries as a means to address problematic issues in host

countries. For instance, the inclusion of the representative

of a civil society organization that promotes the protection

of human rights in the board of a European business firm

might be an appropriate means to avoid the complicity of

this firm in the violation of human rights in areas where

there is no proper rule of law.

Even if these considerations pose several essential

questions concerning the selection of stakeholders and the

redesign of governance structures, we hold that a democ-

ratization of corporate governance required by law or soft

law might be a way to indirectly tackle governance gaps.

Concerning the concrete form of such a democratization,

the emerging practice of stakeholder panels described in

the following section has the potential to offer insights.

Concretizing Democratic Corporate Governance: The

Case Of Stakeholder Panels

Suggestions to modify corporate governance structures

reach from the inclusion of outside directors into corporate

boards to the comprehensive redesign of corporate gover-

nance structures. Ideas to achieve the latter goal comprise

suggestions to increase the complexity of corporate gov-

ernance structures by raising the number of corporate

boards (Pirson and Turnbull 2011; Turnbull 1994) and to

create novel instances such as ‘‘stakeholder liaison groups’’

(Tricker 2011) on the one hand and proposals to connect

political decision making with societal discourses within a

‘‘chamber of discourses’’ (Dryzek and Niemeyer 2008) on

the other hand.

In practice, it can be observed that more and more busi-

ness firms interact with stakeholders on a regular basis, often

within the scope of stakeholder panels (AccountAbility and

Utopies 2007). In the literature (Scherer et al. 2013; Spit-

zeck et al. 2011) such stakeholder panels are described as

modifications of the corporate governance structures of

corporations. In what follows, we show that the emergence

of stakeholder panels can be explained with reference to our

considerations on the shifting allocation of risks generated

by business firms and the role of deliberative democracy in

318 A. Schneider, A. G. Scherer

123

the level of corporate governance for moderating these risks.

Basically, the inclusion of stakeholders in corporate gov-

ernance can either comprise information rights or partici-

pation in decision making (Williamson 1985). Concerning

the case of information rights, there is a range of business

firms that engage stakeholder panels in the process of

reporting information on social and ecological issues. For

instance, the External Report Review Panel of cement pro-

ducer Holcim has the task to ‘‘challenge the company’s

approach to sustainable development… as well as to form an opinion on the company’s sustainable development perfor-

mance and reporting’’ (Holcim 2012, p. 1). The statements

of the panel are publicized on the company’s website.

Similarly, Kingfisher, a large home improvement retailer,

publicizes the feedback of its External Stakeholder Panel as

well as the company’s response to this feedback (Kingfisher

2012). Such processes of review, assurance, and exchange

of arguments conform with the principles of deliberative

democracy insofar as they can be regarded as a form of

public discussion, since the comments of stakeholder panels

on sustainability reports of business firms are in many cases

published in a (purportedly) uncensored manner, allowing

the readers to form their opinion in an unbiased way.

The direct participation of stakeholders in decision

making of business firms is currently less developed. While

there are a number of stakeholder panels that are designated

to inform the formulation of corporate strategies, their actual

power to influence corporate decisions seems to be low (see

also Spitzeck and Hansen 2010). However, we regard the

emergence of forums for the exchange of information

between top-level managers and stakeholders as a notice-

able improvement of governance structures. Such forums

firstly increase the informational basis for organizational

decision making. Secondly, they constitute an arena for the

mutual exchange of information that is potentially condu-

cive to mutual understanding and a change of practices in

accordance with this. Interestingly, stakeholder panels

resemble the ‘‘stakeholder advisory boards’’ conceived by

Evan and Freeman (1988) as a transitional step toward a

stakeholder-controlled corporation.

The reasons for setting up stakeholder panels are man-

ifold. On the one hand, the input of stakeholder panels can

be primarily regarded as an instrumental means aimed at

detecting factors that affect the success of a company, as

exemplified by the Sustainability External Advisory

Council of Dow Chemical that addresses corporate success

factors, business/portfolio success factors, public affairs

and stakeholder engagement, and trends and externalities

(Dow Chemical 2012). However, in some cases, the pur-

pose of stakeholder panels transcends immediate economic

considerations. There is evidence that the shifting alloca-

tion of risks described above seems to be increasingly

recognized on the part of business. For instance, one of the

stated purposes of the Sustainable Development Panel of

energy producer EDF is to assess how well the interests of

stakeholders are taken into account (EDF 2012). Similarly,

monitoring the efforts of business firms to protect human

rights is the focus of many stakeholder panels (see, e.g.,

Areva 2007; BP 2013). This can be taken as evidence that

business firms increasingly realize that stakeholders might

be in need of additional protection beyond legal protection.

Next, a topic that permeates many reports and mission

statements of stakeholder panels (see, e.g., Dow Chemical

2012; Holcim 2012; Shell 2012) is the issue of climate

change, which is the most striking example for negative

externalities generated by business firms. Finally, the pro-

vision of public goods such as healthcare, education, and

public transport by business firms is increasingly moving

into the scope of stakeholder panels, as the example of

BP’s Tangguh Independent Advisory Panel in Indonesia

illustrates (BP 2013).

The described involvement of stakeholders in corporate

governance illustrates that business firms increasingly rec-

ognize the risks resulting from their activities for their

stakeholders. The inclusion of stakeholders in organiza-

tional decision processes on a regular basis can be regarded

as the attempt of business firms to address the shortcomings

of a shareholder-centered approach to corporate governance

by transcending the casual consultation of stakeholders,

which are often characterized by unequal power relations

(Banerjee 2008). Through the inclusion of stakeholders,

corporate governance becomes a subpolitical arena, which

can (at least provisionally and partly) compensate for

lacking governmental and regulatory protection of stake-

holders from risks and contribute to the legitimacy of

business firms.

Concluding Remarks and Directions for Further

Research

In the pre-globalization era, non-shareholding stakeholders

of business firms were in many cases sufficiently protected

by law and regulation, negative externalities were (at least

partly) avoided or compensated by law and proper state

governance, and the provision of public goods was a public

task fulfilled by public authorities. With the diminution of

public steering power and the widening of regulation gaps,

these assumptions are becoming partly untenable. In many

cases, stakeholders of business firms lack protection by

nation state legislation. The limitation of negative exter-

nalities by state authorities is becoming increasingly diffi-

cult due to the global reach of corporate power, the range

of many negative externalities transcending national bor-

ders, and the weakening of national regulatory frameworks.

The distinction between the private and the public sphere is

Corporate Governance 319

123

blurring because corporations often participate or inde-

pendently engage in the provision of public goods. As a

result, many stakeholders of business firms are increasingly

individually exposed to risk that results from corporate

activities, and the assumed link between the maximization

of shareholder value and social welfare is weakening—

with adverse effects on the legitimacy and viability of

business firms.

Corporate governance has the potential to address these

issues. To successfully moderate among the interests of

individuals, corporations, and society and thereby maintain

or restore organizational legitimacy, corporate governance

needs to be open to contingent legitimate claims on a cor-

poration with the aim of controlling and mitigating risks

resulting from corporate action. The suggested approach

builds on stakeholder theory. However, we extend it insofar

as we not only claim the need to consider corporate stake-

holders in corporate decisions but also demand the inclusion

of all corporate stakeholders that are negatively affected by

corporate activities into organizational decision processes.

The transfer of the concept of deliberative democracy to the

corporate level in general and to corporate governance in

particular promises to tackle the risks which result from the

activities of business in a globalized economy and to realign

the objectives of business firms and society in a discursive

way. Thus, the moral deficiencies of shareholder-centered

corporate governance can be addressed and the legitimacy

of a business firm can be reestablished.

Our findings contribute to extant research on the

democratization of corporate governance (see, e.g., Driver

and Thompson 2002; Gomez and Korine 2005, 2008;

Parker 2002; Scherer et al. 2013; Spitzeck et al. 2011) in

several regards. First, we show that shareholder-centered

approaches to corporate governance that are justified by the

residual risk borne by shareholders or by the maximization

of social welfare allegedly accruing from the maximization

of shareholder value are not appropriate in light of glob-

alization and the individualization of risk in risk society.

For this reason, these approaches are a potential threat to

the legitimacy of business firms. We detail that democratic

processes on the level of corporate governance can help

avoid undue risks for stakeholders, insure the contribution

of business to the social good, and therefore help maintain

or restore the legitimacy of business. Next, we show that

reliance on contracts as a criterion for determining the

inclusion of stakeholders in corporate governance is

increasingly inappropriate in view of the complexity of

global exchange relations and the unilateral exercise of

power through business firms. Instead, we suggest that the

concept of social connectedness can serve as a criterion for

the selection of stakeholders to be represented in corporate

governance. Finally, we show that a legally or soft legally

mandated democratization of corporate governance of

business firms in home countries of a firm where law is

assumed to be relatively strong might be an approach

appropriate for indirectly tackling governance gaps in areas

where law and regulation are weak.

Further research is firstly necessary to find ways to

process and balance legitimate claims toward an organi-

zation and organizational efficiency. One promising step in

this direction is the further analysis of the compatibility of

cybernetics-based approaches to organizational design

(e.g., Pirson and Turnbull 2011; Romme and Endenburg

2006) and the principles of deliberative democracy (e.g.,

Dryzek 1999; Habermas 1996, 1998). Secondly, on the

level of global governance, effective schemes of regulation

need to be found to foster corporate commitment for goals

that transcend the generation of shareholder value and to

facilitate the adoption of more versatile forms of corporate

governance.

Acknowledgments We thank the acting editor and the anonymous reviewers for their helpful comments on previous drafts of this paper.

Anselm Schneider and Andreas Georg Scherer acknowledge the

financial support by the Swiss National Science Foundation under a

Grant to the National Centre of Competence in Research on Trade

Regulation, based at the World Trade Institute of the University of

Bern, Switzerland. Andreas Georg Scherer acknowledges the finan-

cial support by the SNSF Swiss National Science Foundation for the

project ‘‘Corporate Legitimacy and Corporate Communication—A

Meso Level Analysis of Organizational Structures within Global

Business Firms (Project No. 100014_129995).’’

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