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The Role of the Media in Corporate Governance  

Michael K. Bednar

Corporate governance scholars have long been interested in understanding the mechanisms through which firms and their leaders are held accountable for their actions. Recently, there has been increased interest in viewing the media as a type of corporate governance mechanism. Because the media makes evaluations of firms and leaders, and can broadcast information to a wide audience, it has the potential to influence the reputation of firms and firm leaders in both positive and negative ways and thereby play a role in corporate governance. The media can play a governance role and even influence firm outcomes by simply reporting about firm actions, giving stakeholders a larger voice with which to exert influence, and through independent investigation. However, despite the potential for the media to play a significant governance role, several barriers limit its effectiveness in this capacity. For example, media outlets have their own set of interests that they must strive to fulfill, and journalists often succumb to several cognitive biases that could limit their ability to successfully hold leaders accountable. While significant progress has been made in understanding the governance role of the media, future research is needed to better understand the specific conditions in which the media is effective in this role. Understanding how social media is changing the nature of journalism is just one example of the many exciting avenues for future research in this area.


Paradox Theory and Corporate Governance: A Systems Perspective  

Timothy J. Hargrave

Stakeholder-shareholder contradictions experienced by managers are embedded in complex corporate governance systems that are composed of firm-level corporate governance bundles as well as higher-level institutional arrangements. This is known as the paradox perspective. This relationship is also knotted with other contradictions. To effectively manage stakeholder-shareholder contradictions, boards should seek to create and maintain a balance of power between stakeholders’ and shareholders’ interests within the totality of the corporate governance system, and not just within the governance bundle. To do so, they must design firm-level governance bundles to complement existing institutional arrangements. Because stakeholder-shareholder contradictions are highly complex, boards should govern them by establishing “learning spiral” processes in which they experiment and use trial-and-error learning to progressively adjust the governance bundle. While learning spiral processes will tend to involve learning by testing and produce incremental changes in governance bundles, exogenous shocks and changes to the distribution of power within the board can result in learning by discovery and more significant changes in governance arrangements. Firm-level mechanisms that provide managers discretion while also holding them accountable for achieving particular outcomes are more likely to stimulate learning spirals than are policies that prescribe particular structures, processes, or practices. So, too, government policies that combine discretion with accountability will be more effective than more prescriptive policies. Finally, paradox research suggests that boards under pressure to prioritize one pole of the contradiction (either stakeholders’ or shareholders’ interests) over the other rather than maintaining a continuous balance between the two poles can do so—as long as they employ deliberative spaces to engage in learning spiral processes that restore dynamic equilibrium in the long term.


Constructs and Measures in Stakeholder Management Research  

James Mattingly and Nicholas Bailey

Stakeholder strategies, or firms’ approaches to stakeholder management, may have a significant impact on firms’ long-term prosperity and, thereby, on their life chances, as established in the stakeholder view of the firm. A systematic literature review surveyed the contemporary body of quantitative empirical research that has examined firm-level activities relevant to stakeholder management, corporate social responsibility, and corporate social performance, because these three constructs are often conflated in literature. A search uncovered 99 articles published in 22 journals during the 10-year period from 2010 to 2019. Most studies employed databases reporting environmental, social, and governance (ESG) ratings, originally created for use in socially responsible investing and corporate risk assessment, but others employed content analysis of texts and primary surveys. Examination revealed a key difference in the scoring of data, in that some studies aggregated numerous indicators into a single composite index to indicate levels of stakeholder management, and other studies scored more articulated constructs. Articulated constructs provided richer observations, including governance and structural arrangements most likely to provide both stakeholder benefits and protections. Also observed were constraining influences of managerial and market myopia, sustaining influences from resilience and complexity frameworks, and recognition that contextual variables are contingencies having impact in recognizing the efficacy of stakeholder management strategies.


The Role of Board Leadership Structure in Firm Governance  

Danuse Bement and Ryan Krause

Boards of directors are governing bodies that reside at the apex of the modern corporation. Boards monitor the behavior of firm management, provide managers access to knowledge, expertise, and external networks, and serve as advisors and sounding boards for the CEO. Board attributes such as board size and independence, director demographics, and firm ownership have all been studied as antecedents of effective board functioning and, ultimately, firm performance. Steady progress has been made toward understanding how boards influence firm outcomes, but several key questions about board leadership structure remain unresolved. Research on board leadership structure encompasses the study of board chairs, lead independent directors, and board committees. Board chair research indicates that when held by competent individuals, this key leadership position has the potential to contribute to efficient board functioning and firm performance. Researchers have found conflicting evidence regarding CEO duality, the practice of the CEO also serving as the board chair. The effect of this phenomenon—once ubiquitous among U.S. boards—ranges widely based on circumstances such as board independence, CEO power, and/or environmental conditions. Progressively, however, potential negative consequences of CEO duality proposed by agency theory appear to be counterbalanced by other governance mechanisms and regulatory changes. A popular mechanism for a compromise between the benefits of CEO duality and independent monitoring is to establish the role of a lead independent director. Although research on this role is in its early stage, results suggest that when implemented properly, the lead independent director can aid board monitoring without adding confusion to a unified chain of command. Board oversight committees, another key board leadership mechanism, improve directors’ access to information, enhance decision-making quality by allowing directors to focus on specialized topics outside of board meetings, and increase the speed of response to critical matters. Future research on the governance roles of boards, leadership configurations, and board committees is likely to explore theories beyond agency and resource dependence, as well as rely less on collecting archival data and more on finding creative ways to access rarely examined board interactions, such as board and committee meetings and executive sessions.


Business Groups as an Organizational Model  

Asli M. Colpan and Alvaro Cuervo-Cazurra

Business groups are an organizational model in which collections of legally independent firms bounded together with formal and informal ties use collaborative arrangements to enhance their collective welfare. Among the different varieties of business groups, diversified business groups that exhibit unrelated product diversification under central control, and often containing chains of publicly listed firms, are the most-studied type in the management literature. The reason is that they challenge two traditionally held assumptions. First, broad and especially unrelated diversification have a negative impact on performance, and thus business groups should focus on a narrow scope of related businesses. Second, such diversification is only sustainable in emerging economies in which market and institutional underdevelopment are more common and where business groups can provide a solution to such imperfections. However, a historical perspective indicates that diversified business groups are a long-lived organizational model and are present in emerging and advanced economies, illustrating how business groups adapt to different market and institutional settings. This evolutionary approach also highlights the importance of going beyond diversification when studying business groups and redirecting studies toward the evolution of the group structure, their internal administrative mechanisms, and other strategic actions beyond diversification such as internationalization.


Familization of Lone-Founder Firms: Highlights from Asian Firms  

Yijie Min, Yanlong Zhang, and Sun Hyun Park

Family firms can either be “born” or “made.” Although previous studies suggest that most of the family firms in the US context are “born,” family firms can be “made” by the founder’s decision to invite family members to the management. We conceptualize this process of family firm emergence as familization, during which lone-founders’ family influence increases as more family members are appointed to director and/or executive positions. Transition from lone-founder-control to family-control is often accompanied by significant changes in governance structure, strategic decisions, and firm performance. This work documents the pervasiveness and heterogeneity of the familization process and proposes an analytical framework covering four research areas associated with the phenomenon: the antecedents that motivate founders to choose the familization path, the familization process involving internal and external firm constituents, the consequences of familization decision, and the potential moderators of the familization impact. To better understand these theoretical perspectives, an explorative empirical investigation is conducted based on a sample of Chinese-listed firms that experienced familization. Familization cases in other Asian emerging economies were also discussed in comparison with the family firms in Western economies.


Corporate Governance in Entrepreneurial Firms  

Julio De Castro, Jose Lejarraga, and Qiong Wu

Corporate governance unfolds in entrepreneurial firms, giving rise to concerns about the coordination and control of resources. Understanding corporate governance in entrepreneurial firms (CGEF) is important because of the challenges of liability of newness and smallness and issues of transition. In particular, two issues affect these firms: a diluted separation between ownership and control and the role played by boards of directors. As a result, most of the literature on CGEF revolves around the interrelations between these governance mechanisms and how they affect the outcomes of entrepreneurially driven firms. This combination of factors present in entrepreneurial firms gives rise to new theoretical perspectives that enrich the corporate governance literature.


Corporate Ethics  

Thomas Donaldson and Diana C. Robertson

Serious research into corporate ethics is nearly half a century old. Two approaches have dominated research; one is normative, the other empirical. The former, the normative approach, develops theories and norms that are prescriptive, that is, ones that are designed to guide corporate behavior. The latter, the empirical approach, investigates the character and causes of corporate behavior by examining corporate governance structures, policies, corporate relationships, and managerial behavior with the aim of explaining and predicting corporate behavior. Normative research has been led by scholars in the fields of moral philosophy, theology and legal theory. Empirical research has been led by scholars in the fields of sociology, psychology, economics, marketing, finance, and management. While utilizing distinct methods, the two approaches are symbiotic. Ethical and legal theory are irrelevant without factual context. Similarly, empirical theories are sterile unless translated into corporate guidance. The following description of the history of research in corporate ethics demonstrates that normative research methods are indispensable tools for empirical inquiry, even as empirical methods are indispensable tools for normative inquiry.


Board Interlocks and Diversification Strategies  

Christine Shropshire

The board of directors serves multiple corporate governance functions, including monitoring management, providing oversight on strategic issues, and linking the organization to the broader external environment. Researchers have become increasingly interested in board interlocks and how content transmitted via these linkages shapes firm outcomes, such as corporate structure and strategies. As influential mechanisms to manage environmental uncertainty and facilitate information exchange, Board interlocks are created by directors who are affiliated with more than one firm via employment or board service and allow the board to capture a diversity of strategic experiences. One critical corporate decision that may be influenced by interlocks and strategic diffusion is diversification (i.e., in which products and markets to compete). Directors draw on their own experiences with diversification strategies at other firms to help guide and manage ongoing strategic decision-making. There is broad scholarship on interlocks and the individuals who create them, with extant research reporting that some firms are more likely to imitate or learn from their interlock partners than others. Prior findings suggest that the conditions under which information is transmitted via interlock, such as an individual director’s experience with diversification strategies at other firms, may make that information more influential to the focal firm’s own strategic decision-making related to diversification. A more holistic framework captures factors related to the individual interlocking director, the board and firm overall and the context surrounding these linkages and relationships, helping to promote future research. Understanding the social context surrounding board interlocks offers opportunities to more deeply examine how these interconnections serve in pursuit of the board’s fundamental purpose of protecting shareholder investment from managerial self-interest. Overall, integrating multi-level factors will offer new insights into the influence of board interlocks on firm strategies on both sides of the partnership. Expanding knowledge of how inter-firm linkages transmit knowledge influential to board decision-making can also improve our understanding of board effectiveness and corporate governance.


External Corporate Governance Mechanisms: Linking Forces to Behaviors  

G. Tyge Payne and Curt Moore

Corporate governance research has a long and varied history, having evolved from a broad number of scholarly disciplines, including sociology, law, finance, and management. Across these various disciplines, it is maintained that governance is essential to corporate success, as it provides strategic and ethical guidance to the company. While research has largely focused on internal mechanisms through which governance is enacted (such as ownership arrangements, board structures, managerial rewards and incentives, etc.), external forces and mechanisms are increasingly important to modern businesses. External corporate governance mechanisms emanate from outside the organization and support forces that promote governance structures, processes, and practices by top executives and board directors. Institutions, industries, markets, networks, and strong individual external stakeholders all work to influence corporate governance decisions and behaviors both directly and indirectly. The external forces induce mechanisms that influence desirable behaviors or intervene when internal mechanisms are compromised or ineffective. Recent literature on external governance mechanisms can help scholars and practitioners develop a better understanding of this important area of inquiry, and future research should consider three broad suggestions to move the field forward: differentiating between forces and mechanisms; recognizing unique stakeholders, boundaries, and levels of analysis; and improving empirical designs to better recognize and understand what factors matter in instituting governance adjustments and behavior changes.


Corporate Governance in Business and Management  

Erik E. Lehmann

Corporate governance is a recent concept that encompasses the costs caused by managerial misbehavior. It is concerned with how organizations in general, and corporations in particular, produce value and how that value is distributed among the members of the corporation, its stakeholders. The interrelation of value production and value distribution links the ubiquitous technological aspect (the production of value) with the moral and ethical dimension (the distribution of value). Corporate governance is concerned with this link in general, but more specifically with the moral and ethical dimensions of distributing the generated value among the stakeholders. Value in firms is created by firm-specific investments, and the motivation and coordination of value-enhancing activities and investment is protected by the power concentrated at the pyramidal top of the organization. In modern companies, it is the CEO and the top management who decide how to create value and how to distribute it among the relevant stakeholders. Due to asymmetric information and the imperfect nature of markets and contracts, adverse selection and moral hazard problems occur, where delegated (selected) managers could act in their own interest at the costs of other relevant stakeholders. Corporate governance can be understood as a two-tailed concept. The first aspect is about identifying the (most) relevant stakeholder(s), separating theory and practice into two different and conflicting streams: the stakeholder value approach and the shareholder value approach. The second aspect of the concept is about providing and analyzing different mechanisms, reducing the costs induced by moral hazard and adverse selection effects, and balancing out the motivation and coordination problems of the relevant stakeholders. Corporate governance is an interdisciplinary concept encompassing academic fields such as finance, economics, accounting, law, taxation, and psychology, among others. As countries differ according to their institutions (i.e., legal and political systems, norms, and rules), firms differ according to their size, age, dominant shareholders, or industries. Thus, concepts in corporate governance differ along these dimensions as well. And while the underlying characteristics vary in time, continuously or as a result of an exogenous shock, concepts in corporate governance are dynamic and static, offering a challenging field of interest for academics, policymakers, and firm managers.