Digital Garden of Paul


Governance can be viewed from a theoretical and empirical stance. Theoretically it is what governments or organisations do tho their constituents or employees. Governance can be done via hierarchy, but also via markets or network of actors. They can govern, produce, coordinate, and make decisions. As an abstract, theoretical concept, governance refers to all processes of social organisation and social coordination.

Empirically, governance refers to a shift in public organisations since 1980's. Increasingly governments rely on private and voluntary sector actors to manage and deliver. Empirically the theory refers to changing organisational practices within corporations, the public sector, and the global order.

Important features of governance are:

  • It combines established administrative arrangements with the features of the market.
  • Often it is multi-jurisdictional and often transnational
  • Increasing range and plurality of stakeholders.

Bevir mentions the following typology of organisational structure.

Basis of relations among membersEmploymentContracts and property rightsExchange of resources
Degree of dependence among membersDependentIndependentInterdependent
Means of conflict resolution and coordinationRules and commandsHagglingDiplomacy

What is corporate governance

Corporate governance concerns the rules and practices by which companies are administered. Its main purpose is to ensure that the rights of the shareholders are properly safeguarded. Especially when ownership and control of a company are separate. Separation of ownership and control creates a potential conflict of interest between the owners and the managers. Most modern organisations have shareholders (owners) that have ownership of the organisation, but not daily involved with the operation of that organisation. Managers are responsible for the operation of the company, mostly free of scrutiny from the shareholders.

Principal-agent theory and corporate governance

The conflict of interests between shareholders and managers has been labeled as principal-agent theory. The theory largely is concerned with the delegation of responsibilities. As shareholder of an organisation I (principal) delegate my responsibilities to a manager (agent). The agent speaks and acts on behalf of the principal. Agency theory concerns the hazards and problems that can arise out of such delegation.

Economists provided a formal analyses of the agency problem. First, economist assume that individuals are rational actors pursuing their own preferences. As shareholders pay the manager, the manager needs to ensure they keep the shareholder content. Secondly, shareholders cannot oversee everything that managers do to incomplete information. Offering managers some leeway to pursue their own interest.

Delegation, according to economists, gives rise to three costs:

  • The principal has to pay costs of overseeing the agents. For example by hiring auditors
  • The agent has to pay the costs of proving to the principals that their actions are matching their interests.
  • The principals bears any costs that results from the agents nonetheless pursuing their interests, not his or hers.

Economists usually identify two main strategies to reduce these costs. The optimal response to an agency problem is a combination of these two.

  • Monitoring of the agents
    • e.g. CEO need to get approval from the board for certain key-decisions.
  • The principal can share the consequences of their actions
    • e.g. buy providing stock and/or stock options to the agents.

Insiders and outsiders determine success of governance

A successful element in corporate governance is the composition of the board of directors that oversees the managers. When the board consists of insiders and a majority of outsiders, performance is improved. Outsider meaning a member that is independent from the organisation. They can prevent group-think and collusion by insiders, therefore protecting the interests of the stakeholders. Insiders provide specific insights into the organisation.

Market mechanisms and compensation counter the hierarchic form of control as provided by having a board. A board does not necessarily protect the best interests of shareholders. It is suggested that financial incentives and other market tools are more effective. A well-functioning stock exchange is essential for this to work. If organisation A is underperforming and organisation B spots an opportunity they can take it over and become successful. The threat of a take over and the right form of executive compensation will provide enough motivation to take actions in the best interest of shareholders.

Stakeholder theory and corporate governance

Corporate governance originally aimed at the relation between shareholder and managers. Nevertheless, more parties have interest in certain behaviour and performance of an organisation. Stakeholder theory suggest that organisations should not only optimise for the shareholder, but also respond to the concerns and interests of other actors. Meaning, a shareholder not being the only principal. Environmental groups or employee representatives are principals as well.

Corporate social responsibility

Corporate social responsibility typically relies on non-binding agreements and understandings within networks. It is a voluntarily act to consider environmental and social factors when making business decisions. Moral and practical motives can apply. Moral motives are positive contributing to the common good. Practically CSR highlights the economic benefits of good relations with the network they are in embedded.

Examples of CSR are compensation CO2, installing an ethical code in your organisation or applying demands towards suppliers regarding their products.

Public governance

Public governance is surrounded with an image and recognition of bureaucracy. Early 20th century bureaucracy was presented as the stronghold of impartial knowledge and advice. Keeping a check on excesses of party politics. It was believed that bureaucracy would use its expertise to develop and implement policies to solve social problems. Approaches as Planning Programming and Budgeting were more 'scientific' approaches to management within the public sector.

In the 1960s and 1970s the belief in bureaucracy began to erode. Bureaucrats were not impartial experts, but self-interested actors who where intent to advance in their careers. As a consequence markets and networks grew as instruments of public governance.

New Public Management (market governance)

Public management is about making sure that the resources available are used as effectively as possible to realise state policy goals. The decline in belief of hierarchies led to a further adoption of networks. Policy-makers adopted market-based reforms in an attempt to downsize government and to make the remaining more efficient, transforming into New Public Management. Becoming most prominent in anglophone countries as USA, Australia and Britain.

Two beliefs are behind new public management.

  • Introduction of market prices and disciplines into the public sector
  • Public officials have the freedom to manage. Focused on steering the formulation of policy, not implementing it.

These beliefs led to a separation of defining policy and service delivery. Service delivery being contracted to third parties. Usually meaning the service delivery will be privatised. A prominent example in the Netherlands being the privatisation of the energy sector. The relationship between a policy formulator and service delivery is much like a principal-agent relationship. The public government being the principal and the delivery organisation the agent.

Selecting a service delivery agent is done most often by a call for proposals and bids. For these bids different selection attributes might apply. It is important for the principal to prevent 'favouritism'. For example by applying sealed bids.

Next to contracting-out, public management also involves the practices of financial management and performance review. Requiring service delivery agencies to provide evidence of their performance and their financial behaviour.

Network governance

Despite all of its promises, new public management failed to remove or replace bureaucracy. Most often hierarchic bureaucracy is still the dominant form of public governance. As a consequence the world became more complex as hierarchic and market governance now have merged.

Policy-makers introduced a second wave of reforms to promote coordination and strategic oversight, combatting bureaucracy and the unintended consequences of marketisation and managerialism. This second wave concentrated around partnerships, managing networks, and joining up governance.

For example by creating Public-Private Partnerships (PPP). Each PPP consists out of one or more public sector actors combining with one or more private or voluntary sector actor. An example could be a publicly built swimming pool that is being exploited by a private company. PPPs can vary from a loose alliance to more formal agreements. Key for PPPs os that they coproduce policies and services.

Network management is about influencing the organisations in that network. The aim of the manager is to promote their own goals, and hopefully the goals of the networks as a whole. Importantly, all members of the network try to steer the network. Resulting into a diffused and highly-negotiated network management. The absence of a single centre controlling activities is a characteristic of network governance.

Network managers need to ensure trust between among all actors in the network. Managing conflicts and maintain commitment among the actors. Keeping decision-making processes focused on the shared goals of network members.

Lastly, joined-up governance is used to increase the effectiveness, coordination and efficiency of public governance. Crime, for example, is not just a problem of a Justice department. Social work,


Mark Bevir. Governance, A very short introduction