infonet-economy

Under conditions of growing interconnected- ness of the global economy, more and more stakeholders are exposed to risks and costs resulting from business activities that are neither regulated nor compensated for by means of national governance. The changing distribution of risks poses a threat to the legitimacy of business firms that normally derive their legitimacy from operating in com- pliance with the legal rules of democratic nation states. However, during the process of globalization, the regula- tory power of nation states has been weakened and many production processes have been shifted to states with weak regulatory frameworks where businesses operate outside the reach of the democratic nation state. As a result, business firms have to address the various legitimacy challenges of their operations directly and cannot rely upon the legitimacy of their regulatory environment. These developments challenge the dominant approach to corpo- rate governance that regards shareholders as the only stakeholder group in need of special protection due to risks not covered by contracts and legal regulations. On the basis of these considerations, we argue for a democratization of corporate governance structures in order to compensate for the governance deficits in their regulatory environment and to cope with the changing allocation of risks and costs. By way of democratic involvement of various stakeholders, business firms may be able to mitigate the redistribution of individual risk and address the resulting legitimacy deficits even when operating under conditions of regulatory gaps and governance failure.