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Introduction When a group of persons come together to act in unison under one banner , that resultant single entity qualifies as a corporate body . A corporate body has a recognised life and existence in law , separate from the individuals who jointly make it up . The dominant view of such corporates , where they are profit-making , has always been that they should act to maximise returns to their owners , with all other interests being secondary to that . In 1970 , Milton Friedman argued that the only social responsibility of business was to maximise profits ( Friedman 1970 ); in other words , “ the business of business is business .” Despite Friedman ' s passionate arguments , today , it is generally agreed that business owes a responsibility beyond its owners and shareholders to include host and broader communities , to “ do-no-harm ” in the pursuit of profits- Business is also encouraged to measure social and environmental impacts since we have seen the damage that the purpose of profits at all costs can do . Internally , companies are controlled by three organs , the Chief Executive , the Board of Directors and the owners acting in a general meeting .
In 1979 , the American researcher William G . Ouchi ( Ouchi 1979 ) outlined three precise mechanisms through which corporate bodies could be controlled : 1 . The market pricing mechanism - markets reward good performance with relatively higher prices and punish poor performance with relatively lower prices - within a norm of reciprocity . A consistently low price to the potential of a company given its assets and so on signals the opportunity of a takeover or buyout so that better management and control can be instituted . 2 . The bureaucratic mechanism - the firm retains a licence to operate in
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exchange for its adherence to bureaucratic rules and control exerted in the context of a norm of reciprocity and external authority . 3 . The clan mechanism - utilises the norm of reciprocity and external authority but includes shared values and beliefs . Firms must self-regulate strongly to comply with Environment , Social and Governance ( ESG ) principles , imitating the shared values and beliefs that underpin the requirements .
Corporate control by stakeholders looking from outside into the firm , though not easy to achieve , is at least straightforward conceptually . How do firms , looking from the inside outwards , exert control ? Sometimes firms have to put their trust in agents they do not directly employ ; they cannot monitor , and they do
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not have absolute power to sanction . This is a significant departure from the traditional ( Jensen and Wantchekon 2004 ) view of Agency Theory arising from the separation of ownership and control . For instance , firms invest in Mutual Funds ( Shapiro 1987 ), where they cannot choose the individual brokers who trade on their behalf , cannot assess their performance and do not have absolute power to discipline them .
Weak governance zones are defined by the UK Department for International Development in ( OECD 2005 ) as “ areas where the governments are unwilling or unable to carry out their responsibilities ”, such as that required for bureaucratic control of firms . In areas where the government is unwilling or unable to supervise firms properly , the weakness
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