The Theoretical and Operational Parts of the Stage 1 Relational Approach and Model

In this Chap. 2 of this Stage 2 Key Code and Advanced Handbook the reader/user is introduced to the key components and tables of the Relational Corporate Governance Approach Model for Australian Banks. This comprises an introduction to how the components are combined to predict the relational proximity (relative effect) of ‘governance variables’ on the sustainability of the bank. Next, the reader/user is introduced to the ‘original’ four Key Fields which simulate the ‘real world’ sphere of corporate governance available to the reader in the First Stage of the Relational Corporate Governance Approach Model Project. They are (1) Principal Theories of the Firm; (2) Enron and Hastie Corporate Collapses; (3) Comparative Corporate Governance Codes and (4) Empirical Field Studies of the effectiveness of governance variables in reducing (or increasing) agency costs and enhancing (or reducing) the long-term efficiency and survival/sustainability of the firm/bank measured by firm/bank cost of capital, firm/bank operating performance/profit, firm/bank value/share price and the likelihood of earnings manipulation. Chapter 2 then moves to describe the principal components of the Model – ‘the three relational axes of good governance’, the governance variables and the eight ‘governance factors’. The theoretical ‘weighing mechanism’ of the relational approach and its results are comprised of four components – the three relational axes of good governance, the eight governance factors, the two interrelationship schemes and the relational effect path for each governance variable. The three relational axes of good governance are like a set of scales for weighing the objectives (Axis No. 1), behaviours (Axis No. 2) and positional conflict (Axis No. 3) of the insiders and outsiders (See Sect. 2.2 of this Chap. 2). The eight governance factors are the ‘backbone’ of the relational approach and so are critical to the theoretical components and the operational tables. The governance factors represent the most significant recurring and underpinning firm-specific or firm-level themes or aims of ‘good’ corporate governance represented by the four Stage 1 Key Fields (this Stage 2 adds the fifth Key Field) and thus the 39 original governance variables (Stage 2 has 1699 variables) to which the Fields give rise. The hypothesised or predicted interrelationships between the eight governance factors are set out in the interrelationship schemes. The number of, and manner and direction in which, these factors are affected, switched-on or influenced by the governance variables are depicted in relational effect paths. These paths determine the relative importance or strength – known as the ‘relational proximity rating’ or ‘rprox’ – of those variables in affecting the shareholder wealth measures.