S TAKEHOLDER T HEORY AND C O R P O R A T E G O V E R N A N C E:

THE

R OLE OF I N T A N G I B L E A S S E T S 1 Abstract (extended)

Since the beginning of the 21th century, a few serious financial scandals and many cases of corporate mismanagement have driven scholars and politicians to devote increasing attention to corporate governance, in a close relation with business ethics issues. In academic literature, as well as in public policy debates, corporate governance is nowadays acknowledged as a critical factor in economic development and financial markets stability. Actually, the recent phenomena represent the peak of a long-lasting widespread crisis of corporate governance. In the last decades, we observed a general disbelieving for those forms of corporate organization that played a fundamental role in the economic development of the leading industrialized countries: the public company in the US and in the UK, the bank or stateowned corporations in continental Europe, the keiretsu in Japan. In the Anglo-Saxon countries, public companies management, in order to comply with short sighted and diversified investors, tends to focus on short-term earnings, disregarding those long-term investments badly needed to enhance firm performance vis--vis competitors rooted in different systems. On the other side, economic systems based on closely held companies and financial intermediaries as primary financing source, are increasingly failing in providing an adequate equity base to finance successful competitive strategies in global industries. In both cases, the evolution in the nature of the firm is among the major causes for the crisis of established corporate governance models. The traditional manufacturing companies - vertically integrated and capital intensive which emerged at the beginning of the last century and had since then prevailed have been challenged by new organizational structures, based on intangible assets and networks, more appropriate to a dynamically changing environment, where competition is driven by the availability of distinctive competencies, based on firm-specific knowledge.

Arturo Capasso Universit degli Studi del Sannio Tel. +39-0824-305766 Fax +39-0824305777 email: capasso@unisannio.it.

Arturo Capasso - Stakeholders Theory and Corporate Governance

This paper, building on the resource based view of the firm, but also on stakeholder approach to strategic management, explores how the growing importance of intangible assets is reshaping, in many industries, the basic conditions of corporate governance. The aim is twofold: i) to explain logically why intangible assets modifies the allocation of residual claims, as company

performance can substantially affect the wealth of other stakeholders ii) to determine which constituencies should be considered as relevant stakeholders and contribute, to some extent, to the corporate governance. Company law says that shareholders own the assets and the free cash flows, but this only works on the basis of a primitive view of the nature of ownership and employment. The crucial intangible assets could be, in many cases, out of the direct control of either shareholders or management. They are, in fact, shared in common between the firm and some of its stakeholders, like employees, customers, suppliers. In order to build and enhance its intangible endowment a firm has to establish and consolidate a trustworthy fiduciary relationship between the firm and these stakeholders. The costs to establish and consolidate these relationships can be considered as subordinated claims on firms cash flow to remunerate the stakeholders for the irreversible investments and commitments that are the main drivers of intangibles assets. Therefore, stakeholder can be considered as virtual shareholders, participating to an extensive definition of equity value that could be defined stakeholder equity or systemic value. In this perspective, stakeholder theory can be extended in order to set the acknowledgment of relevant stakeholder claims within the framework of value maximization, although the value to maximize is not that pertaining only to shareholders but the value of the business system as a whole. With no ambition to give a formally rigorous contribution to the lively debate on the relation between business and ethics, the proposed model might enable to overcome those approaches regarding ethics either as an additional constraint for company decision making or, at most, as a sort of generic investment in establishing a nice-company image, to be valued in terms of expected returns.

Arturo Capasso - Stakeholders Theory and Corporate Governance

S TAKEHOLDER T HEORY AND C O R P O R A T E G O V E R N A N C E:

THE

R OLE OF I N T A N G I B L E A S S E T S

Introduction Since the beginning of the 21st century, corporate scandals and mismanagement cases have driven academic scholars to devote increasing attention to corporate governance, which is now acknowledged as a critical factor in economic development and financial markets stability1. This phenomenon is the emerging peak of a longstanding widespread crisis of traditional corporate governance models. In the last decades, as a matter of fact, we observed a general disbelieving for those corporate governance systems that played a fundamental role in the economic development of the leading industrialized countries: the public company in the US and in the UK, the bank or state-owned corporations in continental Europe, the keiretsu in Japan. The hypothesis discussed in this paper is that the crisis of traditional corporate structures, in the main industrialized countries, together with either local or contingent reasons, may have its common root in the growing relevance that intangible assets in the composition of firm's assets. Even if the relevance of intangibles is no actual news, as firm success has always been due to its distinctive business idea, there are some innovative aspects it is worth stressing: i) due to progressive fading of the residual barriers, competition is more intense in many industries, consequently the creation of competitive advantage depends on the availability of firm specific assets, ii) as a consequence of innovation in company and inter-company organization (lean organization, total quality, networks, industrial districts) relevant knowledge is no longer under the direct control either of the entrepreneurs or top management, as it is also spread at less prominent levels in the company hierarchy and, outside, by customers and suppliers who become an integral part of an enhanced business system (Jensen, 1993; Jensen and Meckling, 1992); iii) growing international market integration and a more intense competitive dynamics remarkably rise, in the main industries, the critical mass of intangible investments required to compete on wider and

Arturo Capasso - Stakeholders Theory and Corporate Governance

wider markets; therefore, in many firms the relative weight of intangible assets has reached levels by far higher than in the past. This paper aims to integrate the resource-based view (Barney, 1991) with the stakeholder theory (Freeman, 1984; Donaldson and Preston, 1995), looking at the most important intangible assets as entrenched in some of the firms stakeholders. This lens might be useful for examining the relevance that, in several cases, stakeholders should have in corporate governance. Furthermore, it provides a theoretical basis to investigate some noteworthy issues in the field of business ethics. The paper is organized as follows. After a brief description of the historical development of different corporate governance systems, in the next three sections we first discuss the role of intangible assets as a source of sustainable advantage in the economic value creation process; we then describe the impact of intangible assets on the corporate financial structure and the allocation of residual claims and finally we develop the idea of systemic value of the firm as the combination of shareholders value and stakeholders value. A section on the studys conclusive remarks and implications for future research concludes.

1. Historical background In the last decades of the 20th century, the economical and political collapse of central planned economies, concluding the long-standing diatribe between public or private ownership of the production means, has diverted the attention of management scholars, politicians and other interested observers on the meaningful differences existing within capitalistic world, among the various capitalist models2. The differences date back to the period when technological innovation, progress in transportation and communications, international trade growth, brought about, in the main industries, a remarkable increase of the firm minimum efficient size, conditioning the development of a modern industrial system to the availability of financial resources and managerial capabilities exceeding the endowment of the original entrepreneurs. In order to regulate the acquisition and the use of these resources, it was necessary to set up suitable legal, organizational and financial instruments, which caused the getting over of a perfect identity between the firm and the entrepreneur, with significant implications f corporate governance or (Berle and Means, 1932; Chandler, 1962, 1977).

Arturo Capasso - Stakeholders Theory and Corporate Governance

In each country, historical, economical, and political factors have got industrial development to follow distinctive routes that have not only characterized the ownership and organizational structures of the firms, but the evolution of the institutional and economic environment as well (Shleifer and Vishny, 1996; Pagano and Volpin, 2000). Nonetheless, even if the peculiarities of different countries have outlived the markets integration process, in the last decades, a widespread discontent for the traditional models of corporate governance has emerged together with a great interest in the experiences of other countries (Roe, 1993; Kester, 1992). In the US, such a phenomenon fully showed during the eighties, in a long season of hostile takeovers, leverage buyouts, proxy fights (Jarrel et al., 1988; Jensen, 1988). In Europe - with the notable exception of the UK - the takeover-mania has undoubtedly been less pervasive, but interest in the debate on corporate governance has livened up as a consequence of a general reconsideration of the State intervention in the economy. Privatizations have indeed characterized the economic policies of the leading European countries, even if outlined programs have not always been carried out, everywhere, with comparable resoluteness and results. Furthermore, even in Germany and Japan the typical governance models - grounded either on banks controlling interests or on intricate cross-shareholding webs - have proved largely inadequate, seriously deteriorating the myth of the general dedication of all firm's participants to the commonweal (Watanabe and Yamamoto, 1993; Tricker, 1994, Yafeh, 2000). At the beginning of the 21th century, we assist to a general disbelieving of those forms of business organization that played a fundamental role in the economic development of the leading industrialized countries: the public company in the US and in the UK, the bank or state-owned corporations in continental Europe, the keiretsu in Japan. The crisis of traditional models clearly demonstrates how corporate governance is the thorny question in the evolution of the capitalistic society: on the one hand the international integration process urges to accelerate a series of important changes, affecting firm ownership and organizational structures, on the other hand existing situations are so deeply rooted in the culture and institutional environment of each country that getting over them requires a long difficult process. Therefore, the growing interest in the topic of corporate governance is not simply academic, but gives evidence for the search of an explanatory theory in order to develop appropriate solutions to relevant practical problems.

Arturo Capasso - Stakeholders Theory and Corporate Governance

2. Economic value creation and intangibles assets In business literature there is a widespread consensus in recognizing the economic value creation as the main objective of the firm, independently of its ownership and organizational structures. Maximizing the economic value created by the business system as a whole - seen as the capitalization of the expected return above that required to keep the resources involved available to the firm in the long run - is unanimously considered a neutral goal, all main stakeholders could share. I order to create and n maximize economic value firms have to develop and safeguard rent positions cutting off competition or, according to the strategic management terminology, a sustainable competitive advantage (Porter, 1985). According to the resource based view (RBV) of the firm, in dynamic and efficient markets, a realistically sustainable competitive advantage must inevitably be rooted in some unique or idiosyncratic resource controlled by the firm (Barney, 1991). This resource should be necessarily out of the market or, in other terms, not autonomously negotiable. For if the source of a competitive advantage - whether or not it consists of human, physical, locational, organizational or legal capital - could be expanded in its supply by competitors, the returns for the firm would be brought down to normal level by competitive pressure (Teece, 1988). This consideration leads to adjust the definition of intangible asset, restricting it to the sole resource that cannot be object of autonomous transactions, so excluding all those assets that, even if by nature intangible, can be, all the same, autonomously traded (i.e.: a patent or a trademark). According to such a definition, all intangible assets can be traced to the fundamental categories of knowledge and trust and the firm can be well defined - paraphrasing Sraffa - as a system to produce knowledge by means of knowledge (Penrose, 1959; Winter, 1987; Grant, 1996, 2002). Knowledge-based assets are promising as a source of sustainable advantage because firm-specificity, social complexity and causal ambiguity make them hard for rivals to imitate. The accrued intangible assets on one side contribute to increase the perceived value of good and service provided, on the other side can be either increased and renewed by means of the learning process or lost when the firm develop entropic processes spoiling its wealth of knowledge and trust. The knowledge embodied in the organizational systems and procedures and the trust placed by the markets in the firm constitute the intangible assets - in the strict sense - apt to ensure a sustainable competitive advantage to the firm.

Arturo Capasso - Stakeholders Theory and Corporate Governance

The hypothesis discussed in this paper is that the crisis of traditional institutional structures in the main industrialized countries, together with either local or contingent reasons, may have its common root in the growing relevance intangibles have taken in the composition of firm's assets. To be unambiguous, the relevance of intangibles is no actual news, as firm success has always been due to its distinctive business idea just the same way it has depended on the efficiency of such material activities as raw material acquisition, manufacturing, sale and distribution. Anyhow, there are some innovative aspects it is worth stressing: i) owing to progressive fading of the residual barriers to competition, in more and more industries, the possibility of creating economic value is qualified by the availability of firm specific assets, eluding the laws of supply and demand since they are not autonomously negotiable; ii) as a consequence of innovation in company and intercompany organization (lean organization, total quality, networks, industrial districts) relevant knowledge is no longer under the direct control either of the entrepreneurs or top management, as it is also spread at less prominent levels in the company hierarchy and, outside, by customers and suppliers who become an integral part of an enhanced business system (Jensen, 1993; Jensen and Meckling, 1992). iii) growing market integration and a more intense competitive dynamics remarkably rise, in the main industries, the critical mass of intangible investments required to compete on wider and wider markets; therefore, in many firms, the relative weight of intangible assets has reached levels by far higher than in the past. 3. Intangible assets and corporate financial structure The growing proportion of intangible components on firm total value radically affects corporate ownership and governance not only because of the absolute dimensions of the required investments, but also because of global risk increase due to the specific irreversible characteristics of intangible assets. In the economic systems based on financial intermediation, where closely held companies prevail, the rise in the volume of intangible investments required to compete effectively, can make the controlling shareholders unable to adequately finance firm development. Especially in those industries where competitive conditions demand conspicuous investments in intangible assets, the survival of companies with a limited equity-base or even controlled by single entrepreneurial families, has become more and

Arturo Capasso - Stakeholders Theory and Corporate Governance

more difficult. In the few cases it happens, the controlling shareholders, even when they can rely on remarkable wealth accrued during many generations, cannot benefit of an effective portfolio diversification. They are, therefore, considerably risk adverse, hindering intangible assets development, thence the crisis in governance structures where a single controlling shareholder maintains a leading role (Capasso, 1995). On the other hand, those systems based on the security market - though fitter to bear substantial equityfinanced investments - experienced the well-known problems due to the public company as a prevailing business organization model. Actually, an increasing presence of intangible assets adds further impediments to public company efficiency because: i) intangible assets enhance the information asymmetries, that are to a certain extent, irreducible because their removal could make the firm suffer greater damage due to the disclosure of confidential facts (Diamond, 1985; Myers and Majluf, 1984); ii) asymmetric information create a gap between the intrinsic economic value and the market value of companies, so producing adverse selection phenomena in the capital market (Brennan, 1990; Capasso 1995); iii) lack of active shareholders may cause deviant behaviours as executives could use their discretionary powers in order to maximize their personal utility and manage the company according to their peculiar risk-adversion, that is usually higher than the average risk-adversion of a well diversified shareholder (Amihud and Lev, 1981); iv) some investments in intangible assets are particularly apt either to operate accounting make-ups or to hide managerial perquisites and unscrupulous behaviours of controlling shareholders; examples can be provided by the capitalization of useless R&D costs or by those expenses justified by the rather vague definition of company image. Furthermore, either in the intermediary-based systems or in the market-based ones, since many intangible assets cannot be integrated in an autonomously tradable proprietary asset, they cannot be considered under the direct control of the company, as they are embodied in other stakeholders: managers, employees, customers, suppliers. This is probably the crucial remark: the inseparable connection between such relevant assets as knowledge and trust and some of the main stakeholders could actually subordinate the firm competitive

Arturo Capasso - Stakeholders Theory and Corporate Governance

effectiveness to the permanence of these stakeholders within the existing business combination. This is particularly observable in all the companies whose critical factors for success are represented by the professional capabilities of the staff, but also in those firms owing their competitive advantage to their belonging either to an industrial district or to a network of interdependent firms. As a rule, when the critical factors for success in a particular industry are embedded in the main stakeholders, the company's possibility of safeguarding its intangible asset-base depends on its capacity in fulfilling the legitimate claims of those stakeholders who are part of its competitive strength. Stakeholder claims can be, according to the circumstances: wage incentives, occupational security and good working environment; reliable products, after sale assistance, stable relationships; or more in general the respect of those implicit contracts and moral obligations that are a consequence of bounded rationality and contractual incompleteness ( Shleifer and Summers, 1988). The higher costs borne to satisfy such claims are the costs to produce, maintain and strengthen knowledge and trust (Kreps, 1984). They allow the main stakeholders to extract a quasi-rent, rewarding them with returns higher than the current market value of the resources provided or with products or services more valuable than the price charged. Obviously, this does not mean that the stakeholders contribution to the value created is lower than the return they get; it only means that in some circumstances stakeholders get a share of the economic value created by the business system, which can no longer be regarded as shareholders exclusive belonging (Myers, 1990; Charreaux and Desbrires, 2001). Summing up, the presence of intangible assets modifies the allocation of residual claims as company performance can substantially affect the wealth of those stakeholders embodying some of the critical factors for company success; at the same time, intangible assets qualitatively modify the company financial needs, as intangible assets' higher riskness and their reduced cautional value demand a larger equity-base (Williamson, 1988). In order to analyze the interrelation between the two problems and find out possible viable solutions, it might prove interesting to suggest a systemic approach the company financial structure. From that, analysis there could emerge reflections on the relation between the formal and substantial aspects of corporate governance as well as important insights for what concerns the evolution of ownership structures and governance models.

Arturo Capasso - Stakeholders Theory and Corporate Governance

4. Systemic value and corporate governance A systemic reconsideration of company financial structure requires an in-depth analysis of the relationship between investments and financing decisions, thoroughly investigating the company financial structure as the premise for the allotment of ownership claims on its future cash flow3. Several interpretations can be given of this statement. From a simplified perspective, it is easily understandable that the value of the company investments belongs to shareholders and debtholders in proportions reflecting the respective contributions and the contractual arrangements. Anyway if we move our attention on the dynamic nature of value, regarding it as the total amount of future unlevered discounted cash-flows, we can observe that the debt-equity ratio set the share of operating cash flows to be assigned to debtholders and the residual amount available for managers. Managers, in their turn will use it - according to circumstances and in different proportions - either to remunerate shareholders or to plow back into the business. In other words, the presence of a managerial discretionary power on the use of free cash flows brings in a further group of agents competing for the allotment of the company economic value (Jensen, 1986). The growing importance given by the evolution of competitive dynamics to intangible assets complicates the problem even more. If the economic cycle of the company is based on accrued intangible assets, that are continuously utilized to produce new intangibles, attainable results will no longer be so appropriable and transferable as either monetary or monetary-measurable quantities are and their allotment will not be so easy. Business economists have traditionally focused their attention on the company value from the shareholder point of view (Rappaport, 1986), and even the most popular profitability indicators - such as net income, operating margin, ROE or ROI - measure the company performance in terms of increase in shareholder equity or in total value for both shareholders and debtholders (Donaldson, 1984). Truly it is not possible to claim that these approaches belong to an obsolete stage of the industrial development; there are indeed a lot of companies where - either because of the simplicity of the production process or because of the strong overlapping among different stakeholder categories - such parameters as net income, ROI or shareholder wealth, are still the fundamental landmarks for business management. Anyway, we cannot ignore that for many companies, intangible assets are, to a larger and larger extent, critical factors for success, and even in many industries usually regarded as traditional,

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hardware components are quickly losing moment with respect to the soft ones, if not in terms of absolute economic consistency, at least as source of competitive differential4. The analysis of those phenomena, in order to assess their impact on the evolution of ownership structures and corporate governance, requires an approach bringing the value of a business system as a whole within the traditional framework of the company balance sheet. In particular, this can be achieved by outlining a systemic balance sheet, comparing the value of all the assets included in the business system with its financial structure, considered in its twofold function of financing source definition and allocation of claims on expected future cash flows. The systemic balance sheet has no direct connection with the firm's book, where we find mainly tangible assets and, only on certain terms, the intangible ones. It is just a way of expressing the identity between the market value of assets and liabilities. More precisely the asset side displays the market value of all the resources contributing to the company development, including those intangible assets who are not directly controlled by the company, such as capabilities and trust it shares with managers, employees, customers, and suppliers. From this perspective, intangible assets can be divided into three main categories: firm-based, organization-based and people-based (Exhibit 1). Firm-based intangible assets are not particularly interesting for the present analysis: a company can use them at its convenience, as well as transfer them, either temporarily or forever, via autonomous transactions. The same for people-based intangible assets: since they are not firm specific, they have autonomous market value. In order to use them a company must remunerate their respective owners on the basis of what they could have earned if using the same resources in an alternative way (Hall, 1994). Our interest, therefore, focuses on organization-based intangible assets (shared by the firm's internal organization and its stakeholders); they are, indeed, the only ones that really fit in the restricted definition of intangible assets, as stated above. Among them we can distinguish (even if the distinction is not always clear) relational assets deriving from the relationship existing between the company and its shareholders and those assets that, even if not autonomously negotiable, can be regarded as parts of the corporate wealth in so far as they are parts of the company organizational and procedural structure and do not depend, in some cases, on people working in it. In the logic of valuation, such assets are the goodwill in the strict sense: it cannot be assessed apart, but must be added to the equity value. As a matter of fact a differential due to assets that cannot be autonomously assessed but that give an

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important contribution to value creation has always been observed by business economists (Guatri, 1994); anyway valuation models put into practice have only and always considered that part of the economic value increase pertaining to shareholders or, at the most, to shareholders and creditors (Copeland et al., 1994). If on the contrary we want to determine the value of a business system, we must figure out the present value of future systemic cash-flows, including the above-market returns transferred to the main stakeholders (quasi-rent5). The net present value of the so calculated cash-flows can be divided as follows: i) the market value of each single company-based asset; ii) the goodwill in strict sense, as the market value of the firm-based intangible assets (pertaining to equity-holders and debtholders); iii) the systemic goodwill as the present value of the expected future cash-flows produced by organization-based intangible assets (pertaining to all the stakeholders on the basis of formal or implicit contracting). The liabilities side will show the total amount of debt and equity, at their current market values, duly quantified on the basis of debtholders and shareholders expected cash-flows. In particular, for listed companies, equity can be subdivided in two parts: the former representing the market value of company share as calculated according to all publicly available information, the latter corresponding either to the higher or to the lower value inferred on the basis of information available only to insiders (management or controlling shareholders). The likely unbalance between assets and liabilities represents the systemic equity that corresponds to the present value of the quasi-rents that will be distributed to the stakeholders with whom the firm shares the critical intangible assets. Under this perspective, the systemic equity include the capitalization of those advantages obtained by major shareholders, executives or employees such as: managerial perquisites, fringe benefits, above-market wages, overstaffing, but also those benefits provided to customers and suppliers in terms of reduced transaction costs, as a consequence of a reliable and trustworthy cooperation. The capitalization of the stakeholders claims on a certain amount of the economic value created by the business system can be assimilated into an additional equity posting (systemic equity), with a lower seniority with respect to debt but in any case contributing to the financing of the firm systemic value.

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Arturo Capasso - Stakeholders Theory and Corporate Governance

Such an explanation can find an underlying rationale in the relevant idiosyncratic investments, made by the main stakeholders in order to enforce their relations with the company. As the value of these investments would vanish in case the company run into bankruptcy, stakeholders, just like shareholders, can be considered residual claimants too6. Moreover the contract incompleteness which can be credited to the intangible contents of exchanged products and services, has induced to try out new institutional settings in risk and return sharing among different stakeholders. So contractual or organizational formulas recently carried out can be seen as an attempt to give some stakeholders an ideal share in the company equity. Such an attribution, even if it cannot be consider as the allocation of actual ownership claims on company future cash-flows, represents the substantial (but not legal) premise in order to establish some particular stakeholder claims. Obviously a company in default towards its stakeholders does not run into legal consequences, as it happens in case of default towards debtholders, but it will probably suffer the loss of that part of company's wealth embodied in the relation between the company and those stakeholders whose claims have not been met. It is now possible to imagine the systemic balance sheet as it appears in Exhibit 2. Under this point of view, the stakeholders can be described as a virtual shareholder, contributing the most part of the systemic equity and getting a share of the economic value created by the company. Therefore, in analyzing real situations, the first problem consists in identifying those shareholders the firm main intangibles depend on. For instance, it is believable that in a medium-sized family business, intangible assets are primarily made up of the fiduciary relationship existing among the partners and of the entrepreneurial heritage, the founder left to her/his heirs. As far as there are no relevant interests of other people involved, the passing from a traditional vision to a systemic one could not be so important. Conversely, there are particularly complicated cases in which listed companies carry on business strongly depending on the competence of individual professionals7. This is, for instance, the case of advertising firms, merchant banks, newspapers, where conflicts of interests might rise between virtual and actual shareholders. The origin of these conflicts is mainly in the fact that virtual shareholders press for being acknowledged, according to circumstances, adequate relevance either in the allocation of created value, either in corporate governance. Even the liabilities side

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Arturo Capasso - Stakeholders Theory and Corporate Governance

must therefore be analyzed and weighted in order to distribute powers, risks, and returns, among different stakeholders. The knotty question consists in ensuring all the shareholders (both actual and virtual) the possibility to participate or, more plausibly, to control corporate governance. When professional managers are entrusted with the definition of corporate strategy and policies - and in the major companies no different solution seem workable - each part must be given, in proportion to contributions provided and risks borne, the possibility of somehow controlling managerial decisions. This is very important since the managerial role is actually delicate, as they have to mediate between shareholders and stakeholders. The obvious risk is that stakeholder theory might be used to cover traditional managerial opportunism, so largely described in literature (Berle and Means, 1932; Marris 1964; Fama and Jensen, 1983). From this particular point of view, the suggested methodology can reduce managerial discretion and set a legitimate limit to stakeholders claims. The acknowledgment of a systemic goodwill as the economic value created by organization-based intangible assets (due to stakeholders different from shareholders and creditors) could enable to control that stakeholders' returns exceeding the market value of either the work done or the resources provided, may take place within the limits of the systemic value that they originate inside the organization, therefore, without damaging either shareholders' or debtholders' legitimate claims.

Conclusions In the last decades, corporate governance has become a highly controversial issue and traditional governance models are everywhere under a complex transformation process. In those economic systems traditionally based on financial ntermediation, governments have worked to strengthen the i security markets by promoting the efficiency and the transparency in negotiations. In market-based systems, institutional investors, already significant shareholders in many important public companies, have modified their traditional not interfering in corporate governance and have shown a growing activism as management interlocutors and controllers (Black, 1993; Bhide, 1993; Pound, 1994). Furthermore, in most countries, leaving aside prevailing financial models, there have been important initiatives to regulate the composition and the functions of company boards, aiming to increase their

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Arturo Capasso - Stakeholders Theory and Corporate Governance

representativeness and strengthen their controlling power on the managerial decisions (Cadbury, 1993; Lorsch, 1995, Pound, 1995). As a whole, it seems that different corporate models are converging towards a renewed public company model, with shareholding divided among active institutional investors and governed by an influential management-independent board. The convergence may be confirmed at least for companies working in global industries, since, for those companies, the size o the critical mass of intangible investments f demands such an equity-base hardly sustainable, either by a single entrepreneurial group, or even by a bunch of allied shareholders. In these companies, the institutional investors' involvement can offer outstanding contribution to the effectiveness of mechanisms that, by conveying to the investors credible signals, reduce the gap between stock market evaluation and the company actual economic value. Moreover, further advantages could derive from a clearer distinction between management and board functions. Executives should be responsible for the company strategy definition and implementation whereas directors should set goals and play a role of active well informed supervision on the managerial activities. In this regard we note a very animated debate about the opportunity of granting the main stakeholders board representation, according a procedure that is usually followed by many companies and that somewhere is required by the law, as in the case of the two-tier board system of the main German companies. The theme is controversial: as a general principle, power and responsibility should be closely correlated in each company. According to such a principle, corporate governance should be a privilege of those who bear the economic risk (apparently the shareholders). When examining this interpretation more deeply, we realize it can be shared only by companies where governance implies no delegation mechanisms and the production process makes use of easily available generic factors whose acquisition can be regulated by complete (or quasi-complete) contracts. In those organizations where ownership dispersion compels shareholders to delegate power and responsibility or where the contracts regulating the acquisition of production means and the sale of goods and services are, for the most part, incomplete, the economic risk is not exclusively borne by shareholders but by some stakeholders as well. The intangible nature of the main inputs and outputs of the economic process contributes to enhance contractual incompleteness and the number of people whose earnings are, residual (Fama and

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Jensen, 1983, Milgrom and Roberts, 1992). The need to reduce transaction and agency costs due to contractual incompleteness and the presence of intangible assets shared with third parties has made companies test new organizational solutions, consisting in strengthening relations with customers and suppliers in inter-company networks and in establishing contractual relations with managers and employees including the explicit or implicit sharing of risk and returns. The circumstance for which some intangible assets are not directly available for the company, as they are shared with other people (managers, employees, customers, suppliers) subordinates their effectiveness, and even their permanence within the existing economic coordination, to the satisfaction of those people's claims. The claims are, according to circumstances: wage incentives, occupational security and good working environment, reliable products, high service level, the respect of tacit agreements and implicit contracts. The proposed systemic approach to corporate governance is a working hypothesis, to be integrated and improved, in order to provide a theoretical framework to evaluate the impact of the growing importance of intangible assets. Furthermore, the model might allow discriminating the importance of the different stakeholders and the legitimization of their claims on the economic value created according to their specific contribution to the corporate systemic equity. From this perspective, stakeholders can be regarded as virtual shareholders whose legitimate claims have, with regard to the company systemic equity, a relation similar to the one linking the shareholder expected returns to equity value. The company that does not meet its stakeholders' claims, could lose all the capital of competencies and trust that is a basic condition to create economic value. Eventually, it can be interesting to observe how reshaping the stakeholders theory from the point of view of the systemic value, can help to define possible development ways to the multifaceted debate on business ethics. First of all recognizing stakeholders the role of virtual shareholders gives the possibility of making clearer the relations of correlation and opposition among the various interest focusing on the business, handling them always within an economic logic. In particular defining systemic value creation as the firm capacity to continue its production of new resources by means of the previously produced resources, gives managers a goal that is either sharable by the main stakeholders either ethically correct, since it can

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secure the firm's survival, optimize the use of scarce resources, and maximize the total value produced for the benefit of the whole economy. Moreover, the adopted framework could help to identify a fair criterion to classify the stakeholder interest (Donaldson and Preston, 1995). To such a purpose assigning virtual shares of the systemic equity in proportion to the contribution given by different stakeholder groups, or by individual stakeholders to the firm's global value, could reveal possible imbalance in the division of created economic value. All that, makes the directors' task particularly difficult since, even if they could be interested party, they are called to draw up the main contracts, setting up, this way, mechanism to distribute created systemic value (Aoki, 1980). In this prospective the problem of boards' formation and empowering must be differently reviewed, that is renouncing to set prearranged representation rules. It is, instead, necessary to identify those companies or industries where, for certain categories of stakeholders, it is recognizable a specific significant contribution to the process creating systemic value, so the presence of own representatives in the board could be regarded as the formal acknowledgment of a virtual participation in the company equity.

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Arturo Capasso - Stakeholders Theory and Corporate Governance

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Arturo Capasso - Stakeholders Theory and Corporate Governance

Exhibit 1

INTANGIBLE ASSETS CLASSIFICATION

firm-based
Patents Licences Trademarks Data-base Copyright Industrial designs

organization-based
embodied in the organization Systems and procedures Organizational routines Corporate culture shared with stakeholders Supplier/customer networks Total quality Learning capabilities Innovation capabilities Product differentation Customer satisfaction

people-based
Professional skills Generic capabilities Standard know-how

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Arturo Capasso - Stakeholders Theory and Corporate Governance

Exhibit 2 SYSTEMIC BALANCE SHEET

ASSETS Tangible Assets
* current market value of tangible assets * current market value of autonomously negotiable intangibles

LIABILITIES Debt
* present value of expected future payments to debtholders

Equity
* present value of expected future payments to shareholders on the basis of publicly available information

Goodwill
* firm-based intangible assets

Control Premium Systemic Goodwill

* organization-based intangible asset * increase or decrease of the equity value on the basis of insider information * present value of controlling shareholders benefits and perquisites

Systemic Equity
* present value of expected future quasi-rent of the firm stakeholders

= VALUE OF THE BUSINESS SYSTEM AS A WHOLE

= VALUE OF THE BUSINESS SYSTEM AS A WHOLE

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Arturo Capasso - Stakeholders Theory and Corporate Governance

FOOTNOTES
1

For a recent survey of theorethical contributions in this field see Becht et al.(2002) Academic scholars and practitioners usually discuss of different capitalist models distinguishing the Anglo-Saxon model, based on security market and public companies, from models based on closely held companies, long term shareholders and massive bank financing, like those developed in Germany, Japan, France and Italy (Roe, 1993; The Economist, 1994). 3 The concept is well expressed by Jensen and Meckling at the beginning of their well-known contribution on agency costs. "We do not use the term capital structure because that term usually denotes the relative quantities of bonds, equity, warrants, trade credit, etc., which represent the liabilities of a firm. Our theory implies that there is another important dimension to this problem - namely the relative amounts of ownership claims held by insiders (management) and outsiders (investors with no direct role in the management of the firm)." (1976, p. 305). 4 Johnson and Kaplan acknowledge this when they affirm: "A company's economic value is not merely the sum of the values of its tangible assets, whether measurable at historic cost, replacement cost, or current market value prices. It also includes the value of intangibles assets: the stock of innovative products, the knowledge of flexible and high quality production processes, employee talent, and morals, customer loyalty and product awareness, reliable suppliers, efficient distribution networks and the like....reported earnings cannot show the company's decline in value when it depletes its stock of intangible resources." (1987, p. 202). 5 The concept of quasi-rent, originally introduced by Marshall (1920) is thoroughly explained in all the main textbooks of industrial economics, in particular see Milgrom and Roberts (1992) 6 In this perspective it is particularly explanatory to compare the situation of a supplier, who deeply invested in transaction-specific assets to develop a stable relation with a particular company, with an investor, who owns a certain amount of company shares, holding them in a well diversified equity portfolio. Likely, the supplier's n worth will depend on company performance even more than the et investor's one. Furthermore a possible bankruptcy would hurt with major strength the supplier than the investor who can sell his/her shares in a liquid and efficient market at the very beginning of the crisis (Bhide, 1993).. 7 According to a respected economic newspaper "The particular problem is how to handle the stock market relationship of 'people' business, where not only do all the assets walk out of the front door every evening saying 'goodnight' to the security man, but often the business has to be continually recreated because innovation and relationships are more important than franchises or contracts." (B. Riley "When shareholders own less than they think" Financial Times 19/7/1995).
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