Organization Science

Vol. 19, No. 3, May–June 2008, pp. 381–385 issn 1047-7039 eissn 1526-5455 08 1903 0381

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doi 10.1287/orsc.1080.0361 © 2008 INFORMS

New Directions in Corporate Governance Research
Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802, dch14@psu.edu Technische Universität Berlin, D-10585 Berlin, Germany, a.werder@ww.tu-berlin.de Kellogg School of Management, Northwestern University, Evanston, Illinois 60208, e-zajac@kellogg.northwestern.edu

Donald C. Hambrick Axel v. Werder

Edward J. Zajac

n this essay, we seek to identify the contributions that strategy and organizational researchers have made, and continue to make, in enhancing our understanding of a wide variety of important corporate governance questions. We begin by discussing how these research contributions stem from a willingness to draw from and contribute to different streams of intellectual thought, and we provide an orienting framework to situate this work. Key words: corporate governance; boards of directors; top executives

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Over the last few decades, the topic of corporate governance has attracted substantial interest from scholars in a wide array of academic fields. Attention to governance can be found in departments of accounting, finance, management, organization behavior, and strategy, as well as departments of economics, sociology, psychology, and law. Some of this interest is undoubtedly due to the widely noted corporate scandals of the past decade (e.g., Harris and Bromiley 2007), but there are also more enduring reasons why corporate governance has been and will remain a central research topic for those seeking to understand the basic purposes and functioning of contemporary organizations. Specifically, there are a number of fundamental organizational questions that, while not unique to corporate governance, reveal themselves particularly well in the governance context. In this essay, we discuss some of these questions. Moreover, the domain of corporate governance is itself in flux; as corporations and societal norms evolve, so do the boundaries of what constitutes governance. In this essay, we also discuss this evolution of the corporate governance terrain. The vast contributions of scores of governance scholars cannot be easily summarized, and this is not our intent here. Rather, we wish to briefly introduce an orienting framework to highlight where strategy and organizational researchers have made key contributions to our understanding of corporate governance and to distinguish these contributions from those in other fields, most notably economics and law. Such was also our purpose for proposing this Organization Science Special Issue on Corporate Governance; therefore, we will note how the articles appearing in the special issue fit within our orienting framework. Throughout our essay, we highlight
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additional research questions that we believe will be fruitful for governance scholars. We see corporate governance as referring to the formal structures, informal structures, and processes that exist in oversight roles and responsibilities in the corporate context. Given this focus, the central unit of analysis in governance research is typically the corporation, or organization; but governance themes, and research on those themes, can span levels of analysis in both the micro direction (from the organization inward) and the macro direction (from the organization outward). We offer the orienting framework shown in Figure 1 to help organize our discussion of these research themes. The framework considers corporate governance work along a micro/macro dimension, as noted, and a dimension that considers formal structures, informal structures, and processes.

Formal Structure—And Beyond

When one considers these two dimensions jointly in a 2 × 3 matrix, it becomes clear that certain streams of research tend to be clustered into certain cells. For example, as Figure 1 shows, the law and the economics literatures tend to focus on the roles of formal structures in governance (note that we are attempting to be illustrative, not comprehensive, in our characterization of tendencies found in certain streams of research). Legal scholars, who are interested in socially desirable governance arrangements, have long assessed the pros and cons of alternative formal systems (both within country contexts and across them). These debates are often rooted in alternative philosophical conceptualizations of what constitutes a public corporation (Bradley et al. 2000).

and who has the least? Most current research tends to treat the board as a homogeneous unit. Who are these actors.. Werder. or those who have the closest social ties to the chairman? Just as Finkelstein (1992) found that accounting for power differentials within top management teams helped to explain variance in firm outcomes. In fact. But what about the pecking order among the other directors? Directors come from various groups. Beyond the obvious roles of regulatory authorities and stock exchanges. Oversight is not simply a task but instead is an activity that implies the loss of autonomy for those who are overseen. and academics. similar attention could be devoted to intraboard power issues. given their significant responsibilities as senior executives. research on what we characterize as “behavioral structure” (i. representatives of labor (e. the remaining four cells of our framework have more of a behavioral science orientation. backgrounds. entailing the expertise of researchers in strategic management and organizational theory. retired executives. Obviously. 381–385.S. in Germany). has provided a ubiquitous intellectual apparatus for addressing a variety of questions related to managerial behavior and the need for its oversight. Behavioral Structure Who has the most power and influence within the boardroom. Similarly. including current executives of other firms. whereas prior behavioral science research has focused considerable attention on power struggles between managers and their overseers. For example. we can similarly expect that a greater awareness of power differentials within boards will yield an increase in our understanding of board actions (and inaction). to which we now turn. and experiences of those involved. but usually with a more resolutely organizational focus—looking inward to managerial behavior. and the (in)completeness of contracts. Adapted from Zajac and Westphal (1998). We can readily anticipate that boards are like other social entities in that they possess status and power gradations. taking actions as a group on the basis of some sort of statistical mean of the characteristics. pp. informal structure) tends to focus on power issues between and among key corporate actors. One of the next frontiers for governance researchers is to generate theories and evidence regarding how power differentials within boardrooms affect board processes and outcomes. representatives of major shareholders. and a considerable body of research on group processes all tend to suggest that some directors have far more influence than others. In particular. the chairman (who in most U. firms is also CEO) will have a great deal of power. anecdotal evidence..g. and Zajac: New Directions in Corporate Governance Research Organization Science 19(3). with its emphasis on optimal incentive contracting and monitoring structures. Figure 1 also highlights that there are other important avenues of inquiry in the corporate governance domain. But logic. or those who hold the most prestigious jobs elsewhere.382 Figure 1 Perspectives on Corporate Governance Hambrick. one of the likely reasons that research on board composition has failed to generate interesting results is that it has not incorporated an awareness of power differentials within boards. v. © 2008 INFORMS Formal structure Economics Organization Designing optimal incentive and monitoring structures Inward Legal Organization Creating and enforcing governance rules and regulations for societal benefits Outward Note. Indeed. There is considerable opportunity and need to explore the extensive web of institutional actors that influence governance practices in contemporary societies. and such corporate actors as CEOs and other top managers are often loath to give up the discretion they feel they deserve. In fact. agents. While we recognize and accept the value of research on formal structure. a more macro perspective on informal structures (and their potential nonoptimality) opens up new questions regarding the roles of key institutional actors in influencing the public corporation. the rise of agency theory. Behavioral structure Power Showing how positions affect power/politics within organizations Social networks Showing how power and information flow in interorganizational networks Behavioral process Social psychology Revealing how decisionmaking processes may be biased Symbolic management Understanding how symbols and language can address normative compliance with societal norms and values Economists typically have focused their intellectual efforts on a similar search for structuring optimality in governance. and with what consequences for firms and for society? Corporate governance does not begin and end with principals. whereas the economics literature tends to view formal contracting as entered into voluntarily by transacting partners. we are .e. how are they linked. Who has the most say? Is it the directors who hold (or represent) the most shares? Or is it those with the longest tenures.

there has been little consideration of the implications of shareholder heterogeneity for the design and implementation of governance practices. the paper by Kim et al. © 2008 INFORMS 383 witnessing an increasing influence from the press. institutional investors. the company and the other transaction partners may try to increase their benefits by opportunistic behavior. often very vocal. a class of group processes. and customers. including shareholders. including diversity among equity shareholders. majority and minority shareholders. Instead. as well as other stakeholders. In this vein. Because corporate governance mechanisms basically aim to regulate opportunism risks. should be thoroughly discussed in the boardroom before implementation. By the same token. Exploiting this expertise requires that the managers inform the board about their strategic intentions and invite the board to critique and comment on these plans. be measured? How efficient are different governance mechanisms for regulating opportunism risks? Answering such questions not only will be ultimately useful for managers and boards. central questions to be dealt with include the following: Which stakeholder groups (and subgroups within heterogeneous groups) have the greatest potential to behave opportunistically or. however. managers deal with dilemmas created by contradictory requirements. At the micro level. undiscussability (Argyris 1985). In addition. such as fair disclosure on one hand and insistent information requests from institutional investors on the other hand? What types of standards and regulations should be imposed on activist shareholders (such as hedge funds)? In sum. Werder. A corporation can be seen as a nexus of incomplete contracts with diverse transaction partners. (2008) in this special issue addresses how different types of owners give rise to different profiles of R&D spending by firms. and they need to be addressed much more intensively by future research. creditors. and who should run. 381–385. Growing shareholder activism raises questions that have been overlooked in the past: Who runs. (2008) in this special issue adds to our knowledge about owner profiles by demonstrating that an institutional investor’s mix of holdings affects how vigilantly the investor monitors a given firm in its portfolio. and consumer protection. employees. and how should. v. they find that corporate earnings restatements occur largely because of informal peer pressure rather than because of formal sanctions.Hambrick. concepts for evaluating opportunism might facilitate more profound comparisons of rules for shareholder protection. it is likely that both managers and shareholders. much more research needs to be done to address the issue of stakeholder diversity. shareholders? How should these conflicts be solved. all actors of the nexus bear the risk of opportunistic behavior by the other partners. the board should ask critical questions about the risks of the planned measures to determine their pros and cons. we now move from a focus on formal and informal structures to a focus on behavioral processes—at both the micro and macro levels. For instance. or multiplied. For instance. and Zajac: New Directions in Corporate Governance Research Organization Science 19(3). the corporation’s course of action for the future. Moreover. Behavioral Process Returning to Figure 1.and short-term-oriented shareholders. Ideally. Although the stakeholder approach to corporate governance has already pushed the field beyond the narrow perspective of the equity shareholder. In other words. there are long-term. the idea of heterogeneity within stakeholder categories. pp. as such. controversial or candid discussions seldom occur in boardrooms. the influence of institutional actors is often complemented. there is the question of decisions made by overseers and the rationality of such decisions. governance watchdog groups. which is becoming more and more influential. and pluralistic ignorance (Westphal . but less vocal. and of course they have a substantial effect on the behaviors of executives and boards of public companies. Although researchers have long been aware of different shareholder types. or the actual exercise of opportunism. the company—the board or the shareholders with the loudest voices? What types of conflicts arise between short-term-oriented. the members of a board of directors are highly qualified to provide professional advice to the managers of the firm. which has been developed by the managers. Because of the inevitable incompleteness of contracts. During this discussion. executive search firms. including groupthink (Janis 1972). beyond the well known principal–agent problem. the paper by Dharwadkar et al. the paper is a nice example of research on heterogeneous shareholder orientations. These various entities may have both symbiotic and antagonistic relationships among each other. shareholders and more long-term-oriented. taking into account that activist shareholders often exert influence through the press and other social intermediaries? How can. have wide variations of preferences within their presumed categories. the rise of private equity funds has created a whole new shareholder category. principal–principal problems also exist. conversely. will almost certainly take stronger root in future governance research. employee protection. and active and passive shareholders. 2008). according to abundant anecdotic evidence. In contrast to the typical portrayal of a divergence between interests of the shareholders and the managers. Similarly. In fact. by the influence of peer firms. suppliers. (2008) in this special issue reports. In practice. and executive compensation firms (Wiesenfeld et al. depending on the power distribution between them. but can inform policy makers as well. to be damaged the most by others’ opportunism? Can the likelihood of opportunism. This is essentially what the paper by Pfarrer et al.

Then attention can turn to understanding how institutional differences give rise to governance arrangements that are suitable. the paper is an excellent contribution toward advancing our understanding of boardroom processes. effort. v. we can envision an increased awareness among scholars and policy makers that there is no single optimal governance system. For most eligible candidates. Finally. as well as to changing interpretations over time. or outside. power. and. but also to be in normative compliance with institutional norms and values regarding what constitutes good corporate governance. attacks from the press. remain effective—and for how long? The paper by Hillman et al. a director’s attention. in times of difficulty. at first glance. directors. especially the CEO? How can a productive balance between controversial discussions and a constructive working climate be ensured? How should controversies between the board and the managers.g. and how do firms keep up with such changes? How do companies try to communicate that they are well governed? Are such communications accurate? Work by Westphal and Zajac (1994. and Zajac: New Directions in Corporate Governance Research Organization Science 19(3). (2008) in this special issue raises the intriguing question of how directors’ “identities. As more national economies expand. and as public firms proliferate around the world. 2008). As such. Their findings highlight that “good governance” is often a moving target. Our knowledge of top executives’ beliefs. for instance. not in a universal sense. is of profound significance in modern economies. politicians. The paper by Aguilera et al. So. Research questions arising in this context include the following: How can the intensity and openness of a board’s discussion style be measured? How can directors raise questions about possible drawbacks of managerial plans without seeming to criticize the managers. but it is largely unclear why outside directors serve on boards. and regulatory bodies. though.384 Hambrick. subject to alternative interpretations by different institutional actors. . 381–385. we can expect that a mix of these (and other motives) is at work. (2008) in this special issue. and prestige being most obvious). Although such barriers to open discussion are known to occur. or with fellow board members. there is a lack of insight as to how these barriers can be overcome and how open discussion cultures can be fostered. goals. In times of corporate success. as validation of one’s status in the world of affairs? For each director. as evidenced by the paper by Graffin et al. Not only do the constituents of firms stand to gain or lose greatly. and organizational context. which refers to the structures and processes by which an organization’s assets and activities are overseen. there appear to be far more reasons to avoid corporate directorships than to pursue them. A particularly intriguing question concerns directors’ motivations to even be on corporate boards in the first place. Lastly. 2007). investors. (2008) in this special issue. How do societal values regarding corporate governance change over time. A better understanding of these preferences and their influences is essential for governance theorists to consider. The question of directors’ motives is especially interesting because. © 2008 INFORMS and Bednar 2005) often prevail. Werder..” or how they conceive of themselves as directors. which demonstrates how executives benefit from the celebrity status of their CEOs. labor leaders. 2001) on symbolic management processes is relevant here. is increasingly one-sided. preventing board members from asking tough questions. provides a comprehensive framework for assessing how institutional context affects the appropriateness of alternative governance practices. Summary Corporate governance. we will have great difficulty in comprehending board processes or effectiveness. Top executives have several very clear motivations to rise to a firm’s highest echelons (wealth. there is the increasing risk of lawsuits. As is true for all humans. but rather specifically for the individual firm and the context in which it is situated (e. and the exact mix will differ between directors. which are often influenced by other drives. The authors suggest that an astute understanding of corporate governance requires recognition that an individual firm’s governance arrangements are situated in a particular historical. directors are faced with the unpalatable and onerous task of replacing the CEO. and choices will follow from his or her underlying preferences. and stigma (Wiesenfeld et al. As such. Our understanding of this relationship. One of the most widely studied corporate governance topics is the relationship between the CEO and the board. Until we understand directors’ motives. They suggest that corporations seek not only to be in legal compliance with governance statutes. can influence their behaviors in the boardroom. pp. little credit accrues to directors. as well as within the board. depending on the quality and nature of corporate governance. be handled and communicated? Should boards strive for unanimous decisions? Can board members who persistently disagree with the CEO. but entire national systems can be propelled or stymied as well. why do busy and talented people do it? Is it to learn about how other companies and boards operate? Is it because of the money? Is it a matter of social reciprocation? Or is it a desire to be part of an elite group. Board activities include a great deal of repetition and perfunctory ritual. we can consider how a focus on social processes is relevant at the more macro-societal level. But we know little about nonexecutive. Equally fundamental at the micro level is the basic question of director motivation. social. Yoshikawa et al. and behaviors continues to grow. the pay is not highly attractive. the topic of corporate governance is of substantial interest to corporate executives.

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