Christopher Søren Shann Turnbull

This paper grounds the theory of any type of firm in the science of control and communication described as cybernetics. It is also grounded in the physiological and neurological limitations of humans to receive, store, process and act upon data to coordinate their activities. To overcome limitations in the market failure theory of the firm identified by leading scholars, Transaction Byte Analysis is introduced. TBA is based on economising bytes rather than costs and is applicable to all types of organisations of any specie. TBA is shown to subsume Transaction Cost Economics and explain why firms exist as hierarchies or in other forms. Inconsistent and contrary behaviour in humans are recognised. Cybernetic laws show how to minimise these problems and allow people with limited ability to transact bytes to improve their ability and reliability to manage complexity in social institutions. TBA is used to provide answers to questions raised by Zingales in his search for “new foundations” to explain how different types firms arise in the new economy.

This article explores how both corporate governance and corporate social responsibility can be improved by using insights from complexity theory. Complexity theory reveals that decentralized governance architecture is required for firms to absorb competently the increased intricacies, variety of variables, and objectives introduced by CSR. The current predominant form of centralized governance based on command-and-control hierarchies copes with complexities by reducing data inputs. This approach results in firms reducing their objectives, concerns, and insights about CSR. Firms with a decentralized “network” form of governance architecture are used to illustrate how the data inputs of each manager can be reduced through the decomposition of decision-making labor to improve the capability of the firm to intelligently absorb and manage complexity. Network governance also introduces a division of powers with stakeholders to facilitate information flow and strengthen incentives to manage the enterprise to enhance both shareholder value and CSR.

This conceptual article suggests a reexamination of current governance structures, specifically those of unitary boards after the financial crisis of 2008.We suggest that the existing governance structures are based on an outdated paradigm of business, rooted in economics. We propose an alternative paradigm, a more humanistic paradigm, which allows conceiving alternative, network-oriented governance structures. As hierarchical firms grow larger and more complex, the risk of failure increases from biases, errors, and missing data in communication and control systems. These problems are exacerbated by information overload on senior managers, directors, and their respective regulators. In contrast to traditional corporate governance, network governance introduces a division of power via multiple boards, checks and balances, and active stakeholder engagement. We argue that those features could have prevented the stresses and failures of financial firms in 2008, since they were anticipated by both individuals within firms and external commentators. However, those exposed to risks possessed insufficient influence in either governing and/or regulating firms to take corrective action

Directors of corporations governed by a single board (i) Have excessive and unethical powers to become "Sources of risk" and (ii) Lack processes to systematically obtain information independently of management on the Strengths, Weaknesses, Opportunities and Threats (SWOT) of either their managers or the business to be "Managers of Risk". The removal and/or mediation of unethical conflicts can be achieved by amending corporate constitutions to separate governance powers from the power to manage business operations. Systematic independent information on the SWOT of managers and the business can be obtained by the corporate constitution introducing advisory councils appointed by those individuals on whom the business depends for its existence such as its customers, suppliers and other stakeholders. Besides mitigating the operating, reputational and financial risks of directors and the firm, evidence is provided how stakeholder councils have produced competitive advantages. The changes in corporate constitutions described in the paper protect the reputations and personal liabilities of directors by removing perceptions of unethical conduct and provides them with creditable evidence that they can carry out their fiduciary duties with due care and diligence to monitor managers and manage business risks.