Corporate Governance in Action

Regulators, Market Actors and Scrutinizers

Lars Engwall

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351977289
• Edition: 1
• Topic: Business
• Subtopic: Corporate Governance
• Index: Business

Over time we have seen large corporations, in many cases with multinational operations, begin to play an increasingly significant role in modern society. This in turn has put the governance of these corporations into focus.

Against this background, Corporate Governance in Action helps provide a framework for examining corporate governance through a focus provided by external pressures on large corporations. It also brings together the approach of economics and finance with theories in organization studies, such as aspects of resource dependency theory. This framework takes into consideration not only the market relations of modern corporations but also their dependence on regulators and different kind of scrutinizers.

This thoughtful book is a complete research guide that provides a new understanding and applicable framework for advanced students, academics and researchers in the area of corporate governance and the related disciplines.

1
Resituating Corporate Governance

Lars Engwall, Jaan Grünberg, Josef Pallas, Kerstin Sahlin, Linda Wedlin, Stefan Arora-Jonsson, Helena Buhr, Katarina Buhr, Magnus Frostenson, Ingemund Hägg, Laurence Romani, Lars Strannegård and Karolina Windell

Introduction

Corporate governance has become a widely discussed and researched area in the recent decades (cf., e.g., Shleifer and Vishny 1997; Fligstein and Choo 2005; Wright et al. 2013; McGahan 2014). Often these discussions and research have been, and still are, concentrated on a few well-established mechanisms (e.g., incentive systems), on regulation (e.g., financial markets frameworks) and on particular actors (e.g., investors)—i.e., a strong focus on the financial aspects. In an effort to add to the earlier discourse, the present volume aims to provide an understanding of the governance of business corporations that includes institutions and processes beyond those that are generally denoted as corporate governance. In this way we are responding to the call from Tihanyi, Graffin and George (2014: 1539)

to consider emergent, contextual trends that are reshaping … governance in organizations [by broadening] conceptions of governance [thereby raising] new research avenues on the effectiveness and efficiency of nongovernmental organizations, governmental bodies, proprietorships, and other forms in the creation of value through the deployment of organizational resources.

Our effort draws inspiration from the insights of the early management and organizational scholars who showed that understanding organizations entailed looking beyond the formal organization and pointed to how organizations functioned in action (Gouldner 1954; Dalton 1959; Thompson 1967). In this way, we offer an analysis of governance that includes considerable institutional complexity and ambiguity, as well as the actions and efforts to handle and contain such complexity and ambiguity.

In the following, we will first provide a brief overview of extant approaches. We will then discuss three significant changes that we consider to be important reasons for developing a broader framework for the analysis of corporate governance landscape. In a subsequent section, we will illustrate, by means of three empirical cases, how these changes have put new demands on the analysis of corporate governance. Against this backdrop, we then briefly summarize our proposed approach, which will be more extensively presented in Chapter 2. Finally, in this chapter, we will recapitulate the contents of the book.

Extant Approaches

Theoretical considerations concerning corporate governance were long the domain of legal theorists. Such models sprung from the formulations of corporate law in the nineteenth century. The twentieth century saw the arrival of economic theories of corporate governance. Although some of the early work was in the area of institutional economics (e.g., Veblen 1899 and 1904), in the latter part of the last century, the financial conception of corporate governance had become dominant. In such models and theories, the issue of corporate governance is often seen as a matter of the interplay between owners and managers (see, e.g., Alchian and Demsetz 1972; Fligstein 1990; Keasey, Thompson and Wright 1997; Barca and Becht 2001; Carlsson 2001). Some others have instead chosen to focus on the relations between corporations and their various stakeholders (see, e.g., Freeman 1984; Aoki, Gustafsson and Williamson 1990; Freeman et al. 2010). However, a problem with this approach is the definition of stakeholders. Freeman et al. 2010: 208) thus point out that the common definition of stakeholders is too inclusive:

Indeed, on this definition, one could imagine virtually anyone, or any organization … Given such a wide view of what the term might mean, the notion of stakeholder risks becoming a meaningless designation. If all are stakeholders, then there is no point in using the term.

More recently alternative approaches have started to appear, as demonstrated by the contributions in the handbook by Wright et al. (2013) and a textbook (Goergen 2012) that includes a chapter on gatekeepers—i.e., financial analysts, credit rating agencies, corporate governance rating agencies, etc. However, the focus is still on the financial aspects of corporate governance.

A stream of writings by organizational scholars interested in the diffusion, variation and adoption of governance practices across areas and settings has also opened avenues for more institutionally inspired models of corporate governance (cf., e.g., Fiss 2008; Tihanyi, Graffin and George 2014). Such studies have covered issues such as governance processes of boards of directors (McNulty and Pettigrew 1998; Cowen and Marcel 2011), the political dynamics surrounding CEOs (Ocasio 1999; Zhang and Wiersema 2009; Gomulya and Boeker 2014) and the decoupling associated with the spread of governance mechanisms (Zajac and Westphal 1995). Studies focusing on the diffusion of corporate governance practices have shown how these are significantly embedded in normative and cultural values and framings. For instance, Davis and Greve (1997), in a study of practices to counter hostile takeovers by firms, found that poison pills spread rapidly through shared directorships, while golden parachutes were slower to spread through local and regional élite groups and networks. Furthermore, studies by Fiss and Zajac (2004) demonstrate the international spread of the shareholder value principles. Westphal and Zajac (1994), for their part, show that incentive plans for management are adopted by corporations in different settings, sometimes decoupled from actual governance practices (see also Belogolovsky and Bamberger 2014). However, although decoupling may occur, corporate governance processes are also adapted to fit local circumstances and contexts, leading to variation in corporate governance practices (Fiss and Zajac 2004). Other studies have also noted processes of translation and adaptation of corporate governance principles and practices in the rapid worldwide diffusion of corporate governance codes (Aguilera and Cuervo-Cazurra 2004; Enrione, Mazza and Zerboni 2006). In addition, corporate governance research has also come to look at the legitimacy of governance processes and the impact of governance on corporate reputations (Bates and Hennessy 2010; Delgado-García, De Quevedo-Puente and De La Fuente-Sabaté 2010; McDonnell and King 2013) and the way that media plays a role in corporate governance (Bednar 2012; Jansson 2013). Finally, changes in the corporate governance landscape are starting to enter research through studies of the role of activism from shareholders as well as various interest organizations (King 2008; Crespi and Renneboog 2010; Judge, Gaur and Muller-Kahle 2010).

Despite the fact that the aforementioned research, and other work in these traditions, largely focuses on relatively traditional actors involved in corporate governance—such as boards of directors, CEOs and managers and investors—and the relations between them, they nevertheless point to an increasing awareness of the need to include new mechanisms and processes for understanding corporate governance. Such studies include political, social and cultural processes linked to corporate governance practices. These studies show how corporate governance mechanisms and principles are neither stable nor uniform systems that can be understood without reference to their social and institutional contexts and settings, and without recognition of the multitude of interorganizational and interpersonal relationships that make up the structure of such governance systems.

Together these later studies point to the need for a broader approach to the governance of corporations, recognizing both a broader set of actors, interests and forces that shape corporate behavior and the processes that construct both meaning and practices of corporate governance. In so doing, it is very important to recognize that the corporate governance landscape has undergone considerable changes in the past few decades. In the following section, we will discuss three such changes that we consider particularly significant.

Three Significant Changes in the Corporate Governance Landscape

In developing extant approaches to analyze the governance of modern corporations, we need to acknowledge that the corporate governance landscape has changed. Our analysis has pointed to three such broad developments in modern society that have been particularly significant:

• First, transnationalization, i.e., increasing relationships and interactions between various national actors across country borders as well as the development of transnational regulation (cf., e.g., Bruszt and Holz-hacker 2009; Iriye 2014).
• Second, regulatory changes, i.e., waves of deregulation—since the 1980s facilitating movements of capital and goods and increasing marketization, but also occurrences of re-regulation (cf., e.g., Morgan and Knights 1997; Balleisen and Moss 2010; MacAvoy and Schmalensee 2014).
• Third, the rise of scrutinization, the increasing tendency of examining and inspecting modern organizations, corporations as well as public organizations, through formal arrangements (auditors), critical reporting (media) or various kinds of protests (voluntary organizations) (cf., e.g., Power 1997; Doh and Teegen 2003; Hjarvard 2013).

Transnationalization

Although transnational corporations were important in the world economy even before World War II, the period after 1945 has been a boom time for transnational corporations (Casson 1990; Tolentino 2000). They have increased both in number and in size. Following the deregulation of financial markets in the 1980s, with a subsequent increase in rapid capital flows around the world, the global corporations could grow not only organically but also, largely, through mergers and acquisitions. As a consequence, corporations, as well as the settings in which they operate, have grown and developed transnationally (cf., e.g., Hubbard 2013).

The observation that corporations as well as their environments are increasingly transnationalized is supported by the development of less nationally bounded corporate boards. In a data set of almost 150 of the world’s largest companies for the period 1995–2005, Staples (2008) thus found that boards of directors in these companies grew more heterogeneous in terms of nationality during the period. The main driver for the increase in heterogeneity pointed out by Staples is transnational acquisitions, with already heterogeneous boards having a greater propensity for such deals, thus creating a mutually reinforcing process. Staples also points out that these globalized boards are much more common in corporations based within the European Union in comparison to the United States and Japan. Similar evidence is provided by Carroll (2002), who focused on Canadian boards of directors in which the tight nationally oriented networks of directors became more international and the traditional relations to banks became more “episodically enacted” (p. 339). Carroll points to changes in governance and regulation, changing norms in the business community and the transnationalization of capital as driving forces.

The aforementioned development of transnationalization has been reinforced by the evolution of modern information and communication technology. It has facilitated global financial markets with a concentration in a few significant stock exchanges such as those on Wall Street in New York and the City of London, but also the transnational NASDAQ. The business world has also experienced an altered mix of ownership, where both private equity and institutional ownership are becoming increasingly important. In addition, there has been the rise of a number of new, sophisticated financial instruments, which, like the other changes, have been of great importance to both companies and governments. Their significance, complexity and, in particular, their risks became dramatically evident during the financial crisis in the wake of the bankruptcy of Lehman Brothers in 2008, which made markets shudder all over the world (Williams 2010).

However, modern information technology has been important not only for the development of financial markets. It has also contributed significantly to the emergence of a highly concentrated transnational media industry with some very powerful actors controlling different kinds of media channels (see Engwall, Kipping and Üsdiken 2016, particularly Chapter 15). These in turn have become significant for corporations both as scrutinizers and as partners.

Because of the aforementioned factors, the analysis of corporate governance must reach beyond national borders and acknowledge how modern corporations are subject to transnational demands. Corporate governance is no longer simply a national phenomenon.

Regulatory Changes

As corporations have grown larger and increasingly global, the limits of national regulation of such entities have become evident. National legislations are thus sometimes played out against each other in the competition for international investors. In addition, an increasing share of regulation takes place between and among nations. Such transnational regulations do not rely on the coercive power of the nation-state, but rather evolve in processes of negotiation (Djelic and Sahlin-Andersson 2006) and take the form of standards (Brunsson, Jacobsson and Associates 2000) and other legally non-binding soft rules (Mörth 2004). Therefore, there have been attempts to move beyond a state-centered perspective on regulation. As an alternative to focusing on the state alone...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• List of Abbreviations
• Preface
• About the Contributors
• 1 Resituating Corporate Governance
• 2 A Field Approach to Corporate Governance
• 3 Regulators
• 4 Market Actors
• 5 Scrutinizers: NGOs
• 6 Scrutinizers: Media
• 7 Governance Relations
• 8 Conclusions
• Index