This paper seeks to show that Corporate Social Responsibility (CSR) can be used as an instrument of corporate governance, especially in what we call the ‘new firm’, which is defined as vertically disintegrated and intensive in human capital. Using Critical Resource Theory (CRT), the study advances that corporate governance has to be re-founded in order to take into account inalienable critical resources incorporated in the fundamental internal and external partners of the firm. After underlining the corporate governance issues raised by the ‘new firm’, it is argued that CSR can be useful as a means to regulate power relationships between key productive partners of the firm, beyond its legal boundaries. Based on the analysis of official reports and semi-structured interviews of the four major French operators of telecommunications, the study shows that CSR is voluntarily used by firms to maintain long-term wealth-creative employment and subcontracting relationships, through the deployment of formal and informal governance mechanisms. This analysis provides both a theoretical and a qualitative study support to challenge the shareholder value model of corporate governance. As such, it suggests new avenues of research for both the re-foundation of corporate governance literature, as well as for the comparative perspective. It also offers insights both to practitioners and policy makers interested in improving corporate governance based on the acknowledgment of the power of key employees and subcontractors. In addition, it provides examples illustrating the way executives use CSR for enhancing corporate governance mechanisms.

The ‘new firm’—vertically disintegrated and intensive in human capital—has dominated the industrial landscape since the beginning of the 1990s (Rajan and Zingales, 2000). The last 15 years have therefore been marked by the development of outsourcing, the increasing use of subcontracting and the concentration of firms on their core business (Langlois, 2003). Under these conditions, cooperative relations between firms have increased due to the reorganization of production processes and in search for productive complementarities (Richardson, 1972; and Loasby, 1996). These industrial reorganizations, the result of recent financial revolutions (Rajan and Zingales, 2001a) and technological revolutions (Hobijn and Jovanovic, 2001), stimulate a race to innovation and quality, a race essentially conducted by specialized employees. This is because technological advances and increased opportunities for finance and investment have shifted intangible assets, notably human capital, towards the heart of firms’ productive activity, to the detriment of physical assets, which are now easily reproducible (Appelbaum and Berg, 2000; and Zingales, 2000). The critical resources of interfirm relations are increasingly of an intangible nature, crystallizing in the human, social and organizational capital that cannot be subjected to contractible and enforceable rights of control (Asher et al., 2005). Thus, the role of the firm has expanded and consists in guaranteeing the specialization and complementarity of its critical human assets throughout the value chain (Gereffi et al., 2005). The economic coordination of all the assets decisive to the productive activity of the firm calls for a new analysis of the boundaries of the firm and a rethinking of the dominant approach to corporate governance (Zingales, 2000). While the importance of human capital constantly grows, power is slipping away from the senior executives who possess the residual rights of control, and getting dispersed among all the key partners of the firm, because of the key resources they constitute in the firm’s productive transactions. That is why the traditional definition of corporate governance is no longer adequate: it cannot be reduced to the system where the ownership and control of public listed companies (Berle and Means, 1932) is based on a rationale of strengthening the rights of the residual claimants. Corporate governance is destined to concentrate on the efficient forms of mobilization of firm-specific human capital to optimize the growth opportunities of the firm (Rajan and Zingales, 2000). Thus, in our view, the study of corporate governance must be extended to include the regulation of the exercise of power over firm-specific human capital based on a rationale of both the distribution and the creation of value.

Corporate Governance Journal, The Role of CSR, Governance, New Firm, An Empirical Study, French, Telecommunications, Industry.