The Importance of Considering Context when Developing a Global Theory of Corporate Governance

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The mission of CGIR is to identify and/or create a rigorous and relevant theory of corporate governance that applies equally well throughout the global economy. The predominant theory for a long time in the field of corporate governance was agency theory, which postulates that the fundamental governance problem is moral hazard created by the separation of ownership from control. It assumes that the agents of the firm will pursue their own self-interests in the absence of external monitoring and incentive management systems, and that shareholder value is the pre-eminent economic objective. For an excellent overview of agency theory, I highly recommend an extensive review article published in the Academy of Management Annals (Dalton, Hitt, Certo, & Dalton, 2007).

In agency theory's original formulation, only Anglo-American firms were considered and examined. In recent years, however, scholars have ventured into other governance environments. In so doing, scholars tried to extend agency theory to recognize different institutional arrangements (e.g., principal-principal conflicts), or to search for entirely new theoretical perspectives (Durisin & Puzone, 2009). Since agency theory has been criticized for assuming an Anglo-American context, some scholars argue that it is not an appropriate theory for a global perspective (e.g., Lubatkin, Lane, Collin, & Very, 2005). As a crude test of this assertion that the agency perspective fails to adequately consider context, I review the articles in this issue and discuss the findings within the governance environment(s) in which the studies were conducted.

In our lead article, for example, Renders and Gaeremynck look at how principal-principal ownership conflicts and the national disclosure environment influence firm value across 14 European economies (i.e., Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain, Sweden and the UK). Using structural equation modeling, they find that agency predictions apply to some economies, apply partially to other economies, and not at all to the remaining economies. As a result, this study concludes that agency theory needs to consider the national institutional context to be effective.

Next, Chancharat, Krishnamurti, and Tian seek to understand how board structural mechanisms influence firm survival in “new economy” Australian firms. (New economy firms are defined as small firms in high-growth industries that rely on emerging technologies.) They find that CEO duality has no impact, and board size and board independence have impacts on firm survival that are not predicted by agency theory. As such, they point to the importance of considering the industry context when considering governance dynamics and outcomes, particularly in high technology industries.

In our third article, Ortiz-de-Mandojana, Aragón-Correa, Delgado-Ceballos, and Ferrón-Vílchez seek to understand how director interlocks influence the adoption of proactive environmental strategies in the electric utility industry in the United States. Using resource dependency theory, they find relatively strong support for its predictions. Specifically, directors also active on boards within knowledge-intensive industries were more likely to serve on a utility board that adopted proactive environmental strategies, but directors of finance-based or fuel supplier firms serve on boards that were less likely to adopt a proactive strategy. In sum, this study emphasizes the industry context in which director interlocks occur in order to understand strategic choices within the firm.

You and Du employ both agency and resource dependency theory to predict involuntary CEO dismissal and subsequent firm performance in Chinese firms. Specifically, they argue that the CEO's political ties will explain more of the dismissal outcomes than specific board monitoring mechanisms in China. They find that board monitoring mechanisms explain very little of the firm outcomes of interest in this particular governance environment, but political ties with government officials at the state, provincial, county, and city levels are highly predictive of CEO turnover and ultimately firm performance. In other words, they conclude that political ties overrule economic norms in China, lending stronger support for the resource dependency perspective and challenging the agency cost perspective within this transition economy context.

In our next article, Mande, Park, and Son employ agency theory to help explain how corporate governance structures and information asymmetry interact to influence financing decisions. A central tenet of agency theory is that the higher the information asymmetry, the more likely that debt will be chosen over equity financing due to the relative ease of monitoring debt over equity financing. Interestingly, the majority of the agency predictions are supported in this study. However, the results were limited to a single country with a unique governance environment (the United States), and there was no exploration as to whether there was any subsequent impact on firm performance. Consequently, the generalizability of these findings to other countries and the ultimate performance effects remain to be explored.

Finally, Henrekson and Jakobsson seek to explain why Sweden's blockholding approach to corporate governance has persisted despite the many changes that have occurred in the global as well as within the Swedish economy. Therefore, even though foreign ownership has increased to 40 per cent of all ownership, the Swedish stock market has increased 56 times from 1980 to 2000, and there is a severe decline in dual class shares and pyramid schemes, Sweden persists with blockholding ownership. They suggest that Sweden's unique legal system and egalitarian social norms prevent dispersed ownership and principal-agent relationships from emerging. As such, this article demonstrates that differences in national institutional context violate many of the agency assumptions and, hence, explanations.

What all the above studies suggest is that a global theory of corporate governance must above all consider how national, and perhaps also industry context influences governance behavior and outcomes. Agency theory was developed within a very specific and limited set of Anglo-American institutional arrangements for large, publicly-held firms with dispersed ownership. As such, it is not surprising that the study that provided the most support for agency predictions was conducted in the United States (i.e., Mande and associates). However, the study by Krishnamurti and colleagues illustrates that even agency predictions do not always hold up in Anglo-American governance environments, such as their study conducted in Australia. And the study by Ortiz and his colleagues abandons agency theory altogether by utilizing a competing theory to describe and explain the board's service role within the US electric industry. As Renders and Gaeremynck argue, agency theory predictions are often incomplete and sometimes irrelevant to the extent that they presume an Anglo-American institutional context. Consequently, we need to keep searching for a more context-sensitive theoretical perspective on governance dynamics. I commend this general issue to you, and hope to see a future submission to our journal that tackles this important issue – namely the role that context plays in guiding governance behavior and outcomes.

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