Corporate Governance and Accountability

Neil Crombie (University of Canterbury, New Zealand)

Pacific Accounting Review

ISSN: 0114-0582

Article publication date: 16 May 2008




Crombie, N. (2008), "Corporate Governance and Accountability", Pacific Accounting Review, Vol. 20 No. 1, pp. 77-79.



Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited

Jill Solomon's second edition of Corporate Governance and Accountability is a timely update of the first edition that skilfully integrates traditional and contemporary issues in corporate governance. The first edition was published in 2004, perhaps too early to determine the impact of reforms in the UK, USA and other countries. While the structure of the first edition remains, the second edition contains over 60 pages of new content, concise summaries of recent reforms and research, and spirited debate on the efficacy of stakeholder theory. Each chapter contains a plethora of facts, insights and analyses, as well as “grey box” illustrations which summarise important events and academic research. Thus, the second edition is a superb, up‐to‐date book on corporate governance, and will clearly be valuable to academics, students, directors and regulators.

To summarise, the book presents two perspectives. First, agency theory advocates increased monitoring, improved reporting and carefully designed incentive schemes. Much attention is devoted to the role of institutional investors in improving corporate governance, particularly because their influence over boards of directors has increased significantly in the last two decades. Second, stakeholder theory advocates the inclusion of all stakeholders' interests in the decision‐making process. The environment is also a stakeholder as the embodiment of future generations of humanity. Solomon attempts to show that there is a positive relationship between corporate social responsibility and corporate financial performance. She argues that, “only by taking account of stakeholder as well as shareholder interests that companies can achieve long‐term profit maximization and, ultimately, shareholder wealth maximization” (p. 29).

The thesis of Solomon's book is that stakeholder theory is a natural extension of agency theory. According to stakeholder theory, directors and executives must consider the needs of all stakeholders in order to maximise shareholder wealth (Sundaram and Inkpen, 2004). In practical terms, Solomon points out that stakeholder theory requires a balancing act. In the short‐term there will be trade‐offs between the interests of customers, employees, shareholders, and society, but in the long‐term ethical decision‐making can maximise societal value and shareholder wealth. Solomon shows that socially responsible investment is becoming mainstream driven by institutional investors. This mainstreaming is evident as social and environmental factors are becoming inseparable from corporate governance. However, Solomon does highlight the dangers of corporate image management and slack regulation. For directors and executives to change their thinking and behaviour from short‐term profitability to long‐term sustainability requires government, customers, and institutional investors to have a united voice.

There are three parts to Solomon's book. In part one, frameworks and mechanisms of corporate governance are discussed in chapters one to six. Chapter one defines corporate governance and discusses theoretical frameworks, although Davis et al.'s (1997) stewardship theory is omitted. Chapter two examines the corporate failures of Enron and Parmalat, and concludes that both corporate governance mechanisms and ethical executives are required to prevent future corporate scandals. Chapter three discusses the UK experience from the Cadbury Report 1992 to present and is well‐balanced with arguments for and against the UK reforms. Expanding on chapter three, chapters four, five and six discuss the role of boards, institutional investors and transparency in corporate governance, respectively. In part two, global corporate governance is described (chapters seven and eight). Of particular note is a reference dictionary of corporate governance systems; 36 countries from Argentina to the United States are included, although New Zealand is omitted. In part three, the broadening corporate governance agenda, such as stakeholder theory, corporate social responsibility and sustainability, is reviewed. Chapter nine introduces corporate social responsibility from a philosophical and historical context (including Milton Friedman's (in)famous argument), as well as discussing issues about social and environmental reporting and verification. Chapter ten examines socially responsible investment by UK institutional investors, discusses the changing terminology and discourse of directors and executives, and argues that the stakeholder approach leads to value creation. Chapter eleven presents future directions with a brief discussion of institutional investor activism, the convergence of global corporate governance systems, and assesses the effectiveness of recent reforms. Solomon concludes that “codes are not enough…Boards, institutional investors need to take the codes to heart and comply in spirit” (p. 311).

Since the collapse of Enron societal interest in corporate governance has grown rapidly. Solomon has captured the most pressing issues in her book and succinctly presented them in a manner that will appeal to all. Academics will find the book to be a valuable, up‐to‐date guide to research, regulation and practice in corporate governance and could easily use the book as the basis for a course in corporate governance. Students will find the book's style and language to be easy to follow and thought provoking. Directors and regulators will find the book translates many insights from research into practical guidelines. This book is clearly aimed at those interested corporate governance in the UK, but it is still relevant to Pacific nations. Companies in the Pacific could certainly improve their practices and performance if they adopted the stakeholder approach advocated in the book. Overall, Solomon's book is an excellent resource to anyone interested in corporate governance.


Davis, J.H., Schoorman, F.D. and Donaldson, L. (1997), “Toward a stewardship theory of management”, The Academy of Management Review, Vol. 22, pp. 2047.

Sundaram, A.K. and Inkpen, A.C. (2004), “The corporate objective revisited”, Organization Science, Vol. 15, pp. 35063.

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