15

Institutions and Corporate

Governance
Peer C. Fiss

From its inception, the institutional field of research only in the late 1970s. Since
tradition of studying organizations has then, traditional scholarship on corporate gov-
been informed by themes of control and ernance has been largely dominated by a legal-
coordination – themes that fall within the economic view of the firm as a nexus of
domain of corporate governance, broadly contracts (e.g. Jensen and Meckling, 1976;
defined as being concerned with the implicit Fama and Jensen, 1983; Hart, 1995). This
and explicit relationships between the corpo- approach has placed the principal-agency
ration and its constituents, as well as the rela- problems at the center of most researchers’
tionships between these constituent groups concerns, and the result has been a rather
(Bradley, Schipani, Sundaram, and Walsh, narrow conception of corporate governance as
1999). With its insights into the nature of concerning primarily the relationship between
authority and control structures, institutional shareholders and managers (e.g. Rubach and
theory is uniquely positioned to provide Sebora, 1998; Shleifer and Vishny, 1997: 737).
important contributions to scholarship on The main thrust of this body of research has
corporate governance. However, the reverse accordingly been to investigate the optimal
is also true: because of its concerns with the contracts between shareholders and managers
control of the corporation, corporate gover- (Fama and Jensen, 1983; Eisenhardt, 1989),
nance presents a particularly attractive field and has resulted in a large body of research that
for institutional theory and an opportunity to addresses a variety of incentive mechanisms to
clarify and refine it. control the behavior of managers, focusing
While questions about corporate control go mostly on compensation, the composition of
back to the emergence of the publicly owned the board of directors, and the market for cor-
corporations as a form of organization (Berle porate control as the three primary control
and Means, 1932), the literature on corporate issues (see e.g. Blair, 1995; Shleifer and
governance presents a somewhat more recent Vishny 1997; Walsh and Seward, 1990;
phenomenon, establishing itself as a distinct Zingales, 1998 for reviews of this literature).
390 THE SAGE HANDBOOK OF ORGANIZATIONAL INSTITUTIONALISM

Although the contractarian view clearly to the study of corporate governance, and to
emerged as the dominant paradigm of corpo- examine a number of fruitful areas for further
rate governance research since the 1980s, inquiry, such as the study of contrasting
some recent research has begun to move away national governance systems, governance
from this focus on the effectiveness of individ- in emerging economies, and the effect of
ual mechanisms and has started to take a more globalization.
holistic view of the corporate governance
system as a configuration of interdependent
elements (e.g. Beatty and Zajac, 1994; Davis
and Useem, 2002). Such a view also empha- AN INSTITUTIONAL APPROACH TO
sizes that corporate governance systems them- CORPORATE GOVERNANCE
selves are embedded in larger institutional and
legal frameworks, and that effective practices To accomplish the task of outlining an insti-
are highly contingent on the institutional tutional approach to corporate governance,
environment in which corporations and their a few clarifications are in order. The first
stakeholders are embedded (e.g. Davis and of these concerns the role of power in
Useem, 2002). Emerging from the foundational institutional accounts. Earlier forms of insti-
work of Coase (1937), the new institutional tutional theory have been criticized for their
economics of North (1990, 2005) and relative inattention to themes of power and
Williamson (1981, 1988) have offered frame- domination (e.g. Perrow, 1985; Clegg, 1989).
works regarding the role of institutions in cor- Since power relations lie at the heart of cor-
porate governance that are rooted in a porate governance, such criticism is of
boundedly rational actor model of the corpora- importance and needs to be addressed. In
tion. For example, North (1990) argues that a response to it, I will follow prior work that
national system of corporate governance may has viewed institutions as inherently about
be seen as an institutional matrix that provides the role of power (Stinchcombe, 1968: 107),
both the roles to the players and the goals to be and institutionalization as a process that is
pursued by the corporation. Similarly, innately political, reflecting the relative
Williamson (2000) acknowledges the embed- power and interests of coalitions of actors
dedness of corporate governance arrangements (DiMaggio, 1988). Such an approach places
in larger, society-wide systems of institutions. issues of power and control squarely at
Given several comprehensive and insightful the center of its attention, considering
reviews of the contractarian approach to corpo- governance systems as reflecting underlying
rate governance (see e.g. Eggertsson, 1990; cultural narratives or moral orders that
Furubotn and Richter, 1997; Menard and define how social relations should be
Shirley, 2005; but also Fligstein and Choo, constructed and whose interests have
2005; Fligstein, 2001; Davis, 2005), in this priority (Wuthnow, 1987). These moral
chapter I will focus relatively more on the con- orders thus form the foundation of gover-
tributions of sociological institutionalism to nance systems and are expressed in the
the study of corporate governance. In doing so, ways in which power and influence work.
I will examine corporate governance using a The view presented here furthermore
socially informed view of actors and corpora- necessarily implies that we need to pay
tions as deeply enmeshed in systems of norms attention to both sides of the power relation-
and relations that are both culturally and socio- ship, including both obedience to power
politically constructed. My goal in this chapter and resistance to it (e.g. Clegg, 1989). It
is thus to present an alternative account of how thus points to the potential of institutional
corporate governance may be studied using the theory to offer a critique of existing power
tools of sociological institutionalism, to survey arrangements (Lawrence and Suddaby,
how institutional theory has so far contributed 2005). In this sense, I will focus both on the
 INSTITUTIONS AND CORPORATE GOVERNANCE 391

enactment and acceptance of institutions as ideologies to be ‘all ideas which are espoused
well as on forms of resistance to institutions, by or for those who seek authority in economic
particularly in relation to the actual enact- enterprises, and which seek to explain and jus-
ment of institutional orders in governance tify that authority’ (1956: 2). By emphasizing
(cf. Davis, 2005). the symbolic nature and cultural embedded-
Second, an institutional view of corporate ness of corporate governance models, the view
governance needs to start with a clear under- advanced here likewise builds on recent work
standing of the nature of governance arrange- on the role of institutional logics, defined as
ments. As noted earlier, the standard view of ‘the axial principles of organization and action
corporate governance rooted in the economic based on cultural discourses and material prac-
and legal traditions places the defense of the tices prevalent in different institutional or soci-
shareholders’ interests at its center (Shleifer etal sectors’ (Thornton, 2004: 2). The logics
and Vishny, 1997; Tirole, 2001). Its associated that underlie corporate governance models
scholarship considers governance arrange- thus refer to and emerge from the wider cul-
ments as emerging from the distribution of tural belief and rule systems that structure cog-
property rights and based on two fundamental nition and guide decision-making (Wuthnow,
assumptions. The first holds that shareholders – 1987; Lounsbury, 2007). As such, governance
as the ‘residual risk bearers’ of the corpora- models are similar to conceptions of control
tion – are the only stakeholder group that is (Fligstein, 1990; 2001) in that they refer to
not compensated by contract. Within financial local orders that provide actors with cognitive
economics, this view of shareholders alone frames to interpret the actions of others as well
bearing the risk of corporate failure is so as their own.
widely spread as to be taken as self-evident The view of corporate governance models
(O’Sullivan, 2000). The second assumption is presented here is much more dynamic and
that holding managers accountable only to culturally constructed than that employed in
shareholders will result in the most efficient the contractual tradition. It also differs from
aggregate social welfare outcome. It follows the contractual approach by highlighting
from this assumption that the best governance issues of power and contestation, and partic-
system for all stakeholders is to exclude all ularly resistance to governance models.
constituents except shareholders from the Rather than being rigid structures, gover-
governance of the corporation (Hansmann and nance models are symbolic orders that
Kraakman, 2001: 441). require constant tending to be maintained.
In contrast, an institutional approach to cor- Such an approach thus also speaks to a
porate governance suggests that corporate gov- common theme in the institutional literature,
ernance arrangements always reflect political namely questions of why and how institu-
processes (Cyert and March, 1963; Davis and tional change comes about where existing
Thompson, 1994) and as such do not naturally institutional arrangements become replaced
arise out of an order of property rights. Instead, with alternative orders.
I believe that governance models are better There are several reasons why governance
understood as containing implicit and explic- models and their underlying normative claims
itly normative theories or logics about the are more fragile and vulnerable to alternative
distribution of power and the ‘natural’ order theories than usually assumed. First, as is true
of interests in the corporation. In other words, for all systems of institutional order, the mean-
governance models are articulated systems ing embodied by governance models is inher-
of meaning that embody the moral order as ently unstable, as the very symbols that are
they explain and justify the proper allocation their building blocks tend to be open to differ-
of power and resources. This view of gover- ent interpretations that may empower different
nance models goes back to the work of actors. Sewell (1992) refers to one aspect
Reinhard Bendix, who understood managerial of this as the ‘transposability of schemas,’
392 THE SAGE HANDBOOK OF ORGANIZATIONAL INSTITUTIONALISM

suggesting that culturally learned rules and Likewise, many of the current claims about the
assumptions ‘can be applied to a wide and not superiority of the shareholder-oriented model
fully predictable range of cases outside the of the corporation point to the performance
context in which they are initially learned’ gaps between the presumably superior model
(1992: 17). This is particularly true when gov- and more traditional, stakeholder-oriented
ernance models and practices are applied models (e.g. Hansmann and Kraakman, 2001;
across institutional contexts. Similarly, exist- Bradley et al., 1999).
ing institutional settlements are built on the The view of governance models presented
remains of previously contending alternatives, here also speaks to another central concern in
many of which remain available as differing institutional theory, namely the relationship
models of organizing. As a result, the hege- between taken-for-grantedness and purpo-
mony of governance models is intrinsically sive agency (Colyvas and Powell, 2006).
unstable and constantly threatened, either by Building on the work of Comaroff and
the memories of prior social orders Comaroff (1991), it suggests a continuum of
(Schneiberg, 2006), by alternative versions of governance practices that ranges from the
what could be (Comaroff and Comaroff, salient and openly contested to the taken-for-
1991), or by contradictions within the current granted and therefore uncontested assump-
orders (Clemens, 1997). tions about the governance of corporations.
Furthermore, existing models have to be Taken-for-grantedness refers to those aspects
passed on, either through reproduction and of the corporate governance world that ‘... go
socialization or through conversion of new without saying, because, being axiomatic,
members. However, transmission is problem- they come without saying’ (Comaroff and
atic, because many socialization processes Comaroff, 1991: 23). However, due to the
remain far from complete (Zucker, 1977). As mutability of meaning systems and inherent
a result, social systems in general, and sys- contradictions, even highly legitimated gov-
tems of normative claims in particular, tend to ernance models may become subject to chal-
suffer from ‘social entropy’ (Zucker, 1988), lenges, and it may thus be better to
with a gradual erosion of the accepted beliefs conceptualize the cultural field in which they
and assumptions on which the models them- operate as a ‘fluid, often contested, and only
selves are based, opening the door for chal- partially integrated mosaic of narratives,
lengers such as the shareholder-oriented images, and signifying practices’ (Comaroff
model that replaced the traditional managerial & Comaroff, 1991: 29). In this field, actors
model of governance (e.g. Fligstein, 1990; will frequently aim to stake a claim for
Lazonick and O’Sullivan, 2001; Dore, 2000). new and differing governance against
Finally, governance models are vulnerable to contenders, resulting in continuing contest
technical and economic changes that result in and struggle. Such a view of governance has
discrepancies between actual experience and been advanced by some authors in the
explanation offered by the normative narrative accounting literature. For example, Covaleski,
embodied in them (e.g. Goodrick, Meindl, and Dirsmith, and Michelman (1993) argue that
Flood, 1997). Such techno-economic changes control-systems such as case-mix accounting
may open up performance gaps (Abrahamson, present unfinished processes infused with
1996), thereby creating opportunities for chal- power and are open to manipulation by vari-
lengers to step in and offer alternative explana- ous organizational actors, thus echoing the
tions and ways of organizing. In this regard, idea expressed by Thompson (1990) that the
Barley and Kunda (1992) have shown that the symbolic order is fragile and can never be
ebb and flow of managerial ideologies is taken for granted; its maintenance is as
related to broad cycles of economic expansion problematic as its change, making the ‘ideo-
and contraction, leading to alternating waves logical work of repair and renovation’ a never-
of rational and normative rhetorics of control. ending project (Scott, 1985: 23).
 INSTITUTIONS AND CORPORATE GOVERNANCE 393

The view I have advanced here does not ‘an adroit substitute for the overt use of power,
imply that governance regimes cannot take on the very deployment of which might actually
a relatively stable nature. Clearly, the symbolic signal weakness’(Covaleski et al., 1993: 76;
orders that underlie corporate governance also Pfeffer, 1981). At the same time, agents
regimes can become reinforced by formalized that are the target of such monitoring and con-
arrangements such as legal regulations and trol attempts frequently try to influence the
political sanctions. But while such legal under- implementation of practices such as incentive
pinnings can have a stabilizing effect, what plans or financial reporting. This highlights
emerges eventually is a continuum of gover- issues of spread, implementation, and manipu-
nance regimes, ranging from settled periods of lation of governance practices, i.e. changing
relative stability to unsettled periods of chal- either the reach or meaning of the practice
lenge and change, with cultural narratives within and for the organization (Davis, 2005).
about power and authority either sustaining In other words, practice diffusion and imple-
existing orders or providing the tools for con- mentation frequently present the grounds on
structing new ones (Swidler, 1986). which battles between various interest groups
So far, I have argued for an institutional are fought, and thus deserve special attention.
approach to corporate governance that takes
into account the normative nature of culturally
constructed governance models and highlights
the role of conflict and resistance in corporate THE DIFFUSION OF GOVERNANCE
governance. Yet, such governance models are PRACTICES
not merely higher-order systems of meaning.
Rather, much of the action of institutions lies The diffusion of corporate governance prac-
in their everyday enactment and the ways in tices presents perhaps the most developed
which abstract meaning systems become tan- field of applying institutional theory to cor-
gible in everyday experience. As suggested by porate governance. Much of this research has
Scott (1985) and Fine & Sandstrom (1993), to focused on the antecedents of successful dif-
understand the working of institutions it is fusion, focusing specifically on the compati-
essential to tie them closely to action and bility of the diffusing practice and the
everyday practice, and specific governance adopting organization. An institutional view
practices in particular. of governance practices as implicit theories
A focus on practices is attractive to the study raises the question of fit between practice
of corporate governance because the normative and those theories held by adopters, as prac-
claims that inform governance models are not tices do not diffuse into an institutional
always readily transformed into corresponding vacuum, but rather into a pre-existing moral
practices. The overt exercise of power reflect- universe or ‘cultural field’ (Comaroff and
ing self-interest is frequently avoided for fear Comaroff, 1991). One of the first works to
it would mobilize opposition. As a result, pow- take this approach was Hirsch’s (1986) study
erful actors often move to replace overt power of the rhetoric of corporate takeovers, which
with more formalized and structural control argued that an early misfit between the
practice (Covaleski et al., 1993). Accordingly, understandings surrounding takeovers and
the appropriate focus may frequently be not the dominant views held by the business
only overt espousal and diffusion of gover- community inhibited the spread of this
nance ideologies, but also the practices practice. However, a normative framing of
through which such ideologies are enacted. the practice in line with the values of
Particularly formalized, highly institutional- American business culture eventually facili-
ized practices such as financial incentive plans tated the diffusion and legitimation of
or monitoring arrangement present effective takeovers. Similarly, Davis and Greve (1997)
tools for influencing social situations and are found that the spread of poison pills and
394 THE SAGE HANDBOOK OF ORGANIZATIONAL INSTITUTIONALISM

golden parachutes – two anti-takeover Ahmadjian and Robinson (2001), in studying

defenses that became popular during the the spread of downsizing among Japanese
wave of hostile takeovers of the 1980s – fol- firms, point to the importance of a ‘safety-in-
lowed differing pathways that depended on numbers’ effect, where growing prominence
the normative claims embedded in these of a practice facilitated its spread as individual
practices. Poison pills diffused quickly and firms were less likely to be noticed or criti-
widely through shared directorships as their cized. Similarly, Venkatraman, Loh, and Koh
legitimacy was based on the defense of the (1994) examine the spread of joint ventures
corporation against outside raiders; a claim and the multidivisional form, finding that iso-
that could be readily rationalized by outside morphic pressures to adopt were more preva-
directors. In contrast, the diffusion of golden lent for joint ventures since this practice did
parachutes proceeded much more slowly not require a drastic rearrangement of the
through regional elite networks, which is organizational structure. Palmer, Jennings,
commensurate with a practice that was sur- and Zhou (1993) also point to the importance
rounded by greater controversy as it of mimetic pressures in the spread of the mul-
appeared to clearly privilege executives over tidivisional form, where prevalence of this
other constituents. Examining the spread of a governance arrangement increased the likeli-
shareholder value orientation among German hood of its adoption by other corporations.
firms, Fiss and Zajac (2004) and Sanders and Suggesting a somewhat modified version
Tuschke (2007) find evidence that gover- of mimetic pressures, Davis’ (1991) study
nance practices compatible with the mental emphasizes the importance of ties to prior
models and educational background of top adopters in the spread of poison pills as an
executives are also more likely to be imple- anti-takeover defense among the largest U.S.
mented. Similarly, Palmer and Barber (2001) corporations during the 1980s, with mimicry
show the importance of elite education for operating mainly through direct ties rather
determining diversifying acquisition activity, than the observation of competitors.
while Espeland and Hirsch (1990) point to Other studies have argued that more atten-
the important role that accounting played in tion needs to be paid to the coercive power of
providing the conceptual underpinnings that other organizations and legislative bodies in
facilitated and legitimated the U.S. conglom- promoting diffusion (e.g. Barron, Dobbin, and
erate mergers of the 1960s. By offering a Jennings, 1986; Scott, 1987). In an important
framework for making sense of the firm as a contribution, Davis and Thompson (1994) sug-
portfolio of income streams, the rhetoric gest that efficiency-oriented governance
of accounting accelerated the spread of a approaches based on agency theory are fre-
variety of practices, culminating in the emer- quently inadequate for explaining the politics
gence of the hostile takeover and the market of corporate control, and particularly the emer-
for corporate control. These studies highlight gence of shareholder activism. Drawing on the
the role of theorization in the diffusion literature on resource mobilization, Davis and
process (Strang and Meyer, 1993), where Thompson develop a social movements per-
diffusing practices are framed such as to spective that highlights the importance of gov-
make them more compatible with existing ernance actors’ interests, social infrastructure,
cognitive and social requirements, an insight and mobilization in determining the likelihood
that has also been applied to the diffusion for successful collective action within a given
and institutionalization of corporate gover- political opportunity structure. Similarly draw-
nance codes in the international arena ing on a social movements perspective, Rao
(Enrione, Mazza, and Zerboni, 2006). and Sivakumar (1999) argue that powerful
Other authors have pointed to the role of investor rights activists compelled organiza-
mimetic isomorphism in influencing choices tions to adopt boundary-spanning structures
of governance mechanisms. For example, that signaled the primacy of shareholder rights.
 INSTITUTIONS AND CORPORATE GOVERNANCE 395

The insights of these studies support a ‘forced- research tends to treat diffusing practices
selection’ perspective (Abrahamson, 1991) as homogeneous entities that do not vary
where powerful organizations impose adoption by context and remain stable over time.
of practices – be they technically efficient or However, such homogenizing assumptions
not – over the resistance of other actors. These seem questionable. If diffusing practices come
insights are also reflected in Oliver’s (1991) with explicit and implicit theories attached,
argument that features of the organization’s then adoption should go along with a consid-
context, such as the multiplicity of its stake- erable amount of interpretive work that aims
holders and the organization’s dependence on to integrate these theories into pre-existing
them, are likely to predict adoption or non- organizational frameworks and world views.
adoption of practices. For example, Palmer, As Strang and Soule argue, such interpretive
Friedland, Jennings, and Powers (1987) and work ‘selects and transforms the diffusing
Palmer, Jennings, and Zhou (1993) point to the practice,’ and while some practices may be
importance of powerful owners in determining more appropriate for interpretive work than
organizational structures, while Palmer et al. others, ‘none come out of this process unmod-
(1995) show that the spread of predatory ified’ (Strang and Soule, 1998: 277).
takeovers was consistent with an embedded- Such considerations point our attention to
ness approach that highlights the role of a the study of variation in practices, an issue that
firm’s position in networks as well as the posi- has emerged as a central concern of institu-
tions of its managers and directors in the firm’s tional theory (e.g. Lounsbury, 2007; Lawrence
ownership structure and the social network of and Suddaby, 2005). A number of studies have
the business elite. In a similar vein, Fiss and begun to examine how practices are modified,
Zajac (2004) argue that the spread of a share- translated, and reinvented to fit local needs
holder value orientation among German firms (e.g. Boxenbaum and Battilana, 2005;
importantly reflected the power and interests Czarniawska and Joerges, 1996; Djelic, 1998;
of various ownership groups, thus also high- Fiss and Zajac, 2006; Lounsbury, 2001; Morris
lighting the role of coercive influence in the and Lancaster, 2005; Sahlin-Andersson and
diffusion of governance practices. The insights Engwall, 2002). A common theme emerging
of these studies thus point to a model of the from these studies is that while there are fre-
diffusion process that sees the probability and quently unifying elements that inform diffus-
speed of a diffusing practice as a function of ing practices, their actual enactment tends to
the number, interest, and relative power of take a variety of forms. An important reason
agents within a given environment (Marquette, for such variation lies in the fact that the inter-
1981; Fligstein, 1985), thus including both nal dynamics of organizations may frequently
organizations and outside stakeholders into the result in differential responses to external insti-
diffusion model where both the actors involved tutional pressures (Greenwood and Hinings,
and their interests tend to be institutionally 1996). For example, Zbaracki (1998) suggests
constructed (Aguilera and Jackson, 2003) that implementation of Total Quality
Management (TQM) practices resulted in con-
siderable variation as managers appropriated
the rhetoric of quality management, with TQM
VARIATION IN GOVERNANCE becoming increasingly ambiguous and open to
PRACTICES appropriation. Likewise, Lounsbury’s (2001)
study of staffing practices in college recycling
While institutional theory has contributed programs indicates that practice variation dif-
considerably to our understanding of how and fered depending on both connections to exter-
why governance practices diffuse, less atten- nal social movement organizations and internal
tion has been paid to the diffusing features such as size, ownership nature,
practices themselves. Much of the prior and social comparison processes relating to
396 THE SAGE HANDBOOK OF ORGANIZATIONAL INSTITUTIONALISM

similar organizations. What emerges is imple- controlled and monitored, most of agency
mentation as not only a technical but also a theory concerns itself with refining the incen-
political and cultural process where new prac- tive and monitoring mechanisms to achieve
tices become appropriated into ongoing optimum efficiency, focusing particularly on
exchanges and conflicts. Such a view, where individual performance outcomes. As was true
practices are adapted to fit local needs, has also for Taylor’s scientific management, agency
been suggested by more macro-level studies of theory thus likewise views the executive as
the international diffusion of the arm’s length inefficient and in need of being ‘enmeshed
contracting standard (Eden, Dacin, and Wan, within a routinely-applicable calculative appa-
2001) and corporate governance codes ratus’ (Miller and O’Leary, 1987: 253). The
(Aguilera and Cuervo-Cazurra, 2004). As implications of this process of constructing
these studies indicate, a focus on variation is the nature of the governable person are con-
central for a fine-grained understanding of cor- siderable, as indicated by arguments about the
porate governance practices and moves negative effect of agency theory on ethical
beyond the acceptance of surface conformity behavior (Ghoshal, 2005) as well as recent
to explore the various forms of meaning and work on the transformation of financial mar-
transformation associated with specific kets in accordance with theoretical models
practices (e.g. Lounsbury, 2001; Zilber, 2006). about their nature (MacKenzie, 2006;
MacKenzie and Millo, 2003).
While the institutional view of governance
GOVERNANCE AND RESISTANCE advanced here differs considerably from that
advanced by agency theory, these agentic
The issue of resistance to governance models models nevertheless highlight the fact that gov-
and practices has formed an important yet ernance has to be accomplished since it will
somewhat unrecognized undercurrent in the frequently be resisted by those whose compli-
literature on corporate governance. The con- ance is to be achieved. In line with
cept of corporate governance itself implies the Granovetter’s (1985) caution against overso-
existence of both governable entities and even cialized models of actors, these considerations
more importantly governable persons (Miller point our attention again to the ways in which
and O’Leary, 1987). An important part of cor- institutional processes are frequently far from
porate governance thus relates to the construc- complete, leaving room for contestation and
tion of managers and employees as not only manipulation, the necessary counterparts to
corporate constituents with rights and respon- the exercise of power (Clegg, 1989). The
sibilities but also entities to be managed with knowledgeable and experienced practitioners
efficiency. The roots of this development can that inhabit many organizations will frequently
be traced back to Taylor’s Principles of attempt to resist the introduction of formal
Scientific Management (1913), which cen- control practices by manipulating the applica-
tered around the efficiency of the individual tion of such new practices, transforming them
worker and insisted that ‘each worker be into means for advancing their respective inter-
singled out, to be rewarded or punished on the ests (Dirsmith, Heian, and Covaleski, 1997).
basis of his or her individual performance’ Acknowledging the impossibility of perfect
(Miller and O’Leary, 1987: 253). This theme control, one stream of literature has focused on
finds its counterpart in contemporary agency the role of decoupling as a response to institu-
theory, which likewise constructs the manager tional pressures. In its classic formulation, the
as primarily self-interested, with goals that concept of decoupling referred to a situation
conflict with those of the principal and greater where ‘structure is disconnected from technical
risk averseness (Jensen and Meckling, 1976; (work) activity, and activity is disconnected
Eisenhardt, 1989). Accordingly, after con- from its effects’ (Meyer and Rowan, 1978: 79).
structing the manager as an agent to be At the same time, it is this very decoupling that
 INSTITUTIONS AND CORPORATE GOVERNANCE 397

maintains the legitimacy of the organization. GAAP based financial statements and the
Meyer and Rowan suggest that close supervi- mobilization of cost-benefit rhetoric to defend
sion may frequently be counterproductive, non-implementation. Similarly, Fiss and Zajac
since it would reveal a lack of trust in the (2006) show that a lack of implementation is
supervised organizations and would expose the frequently accompanied by rhetoric aimed at
controlling agencies to uncertainties arising at assuring constituents of compliance with
the technical core of these organizations, external demands.
uncertainties that neither the organizations nor However, resistance to institutional
their supervising agencies have the capacity to demands need not only take the form of
control. In order to prevent these uncertainties incomplete implementation, surface compli-
from leaking into the larger governance system ance, and impression management. Rather
and making it ungovernable, controlling agen- than taking the governance environment as
cies thus frequently rely on formal structure as exogenous, corporations can frequently act
an indicator of legitimacy; surface compliance to actively influence this environment to
may suffice where deep control is impractical, make it more suitable to their needs. As sug-
or indeed impossible. gested by Carruthers, ‘organizations are not
Expanding the classic notion of decoupling, only granted legitimacy; sometimes they go
a number of recent studies have connected it to out and get it’ (1995: 324). An example of
work on impression management in develop- this active construction of the institutional
ing a symbolic management perspective that environment is given by Mezias (1990), who
emphasizes how organizations, by purposive shows how large corporations in the U.S.
action, may maintain or increase their legiti- acted to influence their financial reporting
macy. In contrast to the work of Meyer and requirements. Similarly, Bealing, Dirsmith,
Rowan, legitimacy here is not achieved and Fogarty (1996) point to second-order
through a logic of confidence and cooperation, effects of institutionalization in governance
but rather by calculating, manipulative, or affairs, where, particularly in a fragmented
even deceptive actions that aim to show com- socio-political environment, organizations do
pliance towards external observers while con- not simply adopt institutionalized structures.
cealing nonconformity (Elsbach and Sutton, Instead these organizations actively partici-
1992; Oliver, 1991). Such a perspective has pate in building up a framework for social
been successfully applied to study a lack of control relevant to their own constituents
implementation relating to corporate gover- (such as the accounting profession for the
nance practices. For example, Westphal and US Securities and Exchange Commission),
Zajac (1994) find that symbolic adoption of thereby establishing the legitimacy of the
long term incentive plans for management is interrelationship of the organization with its
frequently decoupled from actual implementa- constituents. A symbolic perspective on cor-
tion of such plans. This is particularly true in porate governance thus points our attention to
firms where powerful CEOs have the resources the various ways in which corporations aim to
to resist board efforts to change their incentive elude institutional demands by hiding non-
structure. Likewise, Carpenter and Feroz compliance or aiming to affect the very defini-
(1992; 2001) examine the adoption of gener- tion of what constitutes acceptable conduct.
ally accepted accounting principles among
U.S. state governments and find that imple-
mentation of such accounting standards was
primarily driven by the desire to exhibit insti- OWNERS, MANAGERS, EMPLOYEES,
tutionalized practices to the public and credit AND OTHERS
markets. At the same time, the authors point to
resistance to institutional pressures, such as the The world of corporate governance is inhab-
state of Delaware’s shallow implementation of ited by a variety of groups with varying
398 THE SAGE HANDBOOK OF ORGANIZATIONAL INSTITUTIONALISM

identities and interests; yet much of the in the 1990s and show that the diffusion of this
literature has focused on two of these groups, normative model happened along ownership
namely managers and owners, and has lines where power to adopt a different gover-
furthermore tended to focus on them in the nance model could be exercised. Several other
context of the publicly traded corporation. authors have employed a social movements
The literature in finance tends to assume perspective to examine the origins and effects
that owners are fairly homogeneous in their of shareholder activism (Davis and
interests, focusing primarily on the maximiza- Thompson, 1994; Proffitt and Spicer, 2006).
tion of shareholder value (e.g. Bagwell, While these studies present important devel-
1991; for an overview of the literature on opments in building an institutional theory of
ownership, see Kang and Sørensen, 1999). ownership, much remains to be done to further
A more institutionally oriented approach our understanding here.
points to the idea that both actors and Another important line of inquiry has
their interests are not merely given but focused on understanding who the top
instead constructed through their embedded- managers are, particularly how they are
ness in larger social systems (Aguilera selected, what their educational and functional
and Jackson, 2003). In such a view, owners background is, and what social circles they
are characterized by various interests and inhabit. Such considerations are relevant as the
identities that translate into differences background and social embeddedness of top
in governance orientations and models executives is likely to be reflected in the views
(Fligstein, 1990; Fiss and Zajac, 2004). they hold regarding the nature of the corpora-
Accordingly, owners tend to be much less tion and in whose interest it should be gov-
homogeneous in their interests than com- erned (Hirsch, 1986; Espeland and Hirsch,
monly assumed within the contractual view of 1990; Fligstein, 1990, 2001). A considerable
the firm. Furthermore, owners may differ in amount of work has focused on the formation
their attitudes towards shareholder value max- and influence of the business elite in the
imization, not only across different ownership United States (e.g. Useem 1979, 1980;
groups such as banks, family owners, and Domhoff, 1967). This literature has examined
other corporations, but their interests may both differences and commonalities in values,
differ even within such groups (e.g. Fiss and interests, and identities between managers and
Zajac, 2004). Similarly, Aguilera and Jackson shareholders, with particular interest in
(2003) have advanced an actor-centered insti- whether there exists a ruling class with
tutional approach to corporate governance that common perceived interests. For example,
emphasizes how the interests of the main cor- Useem and Karabel’s (1986) study of the rela-
porate governance actors are both constructed tionship between educational and social back-
and represented. grounds and careers of U.S. managers found
In addition, research drawing on institu- that career mobility was enhanced by presti-
tional arguments has shown the role of owners gious educational degrees, pointing to the
in the spread of governance models. In this importance of social capital for reaching the
regard, Ahmadjian and Robbins (2005) point upper strata of management. Likewise, mem-
to the importance of ownership in studying the bership in the exclusive social clubs of the
spread of practices associated with U.S. share- elite forms an important source of social
holder value capitalism to Japan. Their find- cohesion (Useem, 1980) and affects the spread
ings indicate that foreign investors were of practices among corporations (e.g. Palmer
associated with an increased restructuring of et al., 1995).
Japanese firms that were less central in the Finally, an extensive stream of research
Japanese political economy. Similarly, Fiss has examined the importance of executives in
and Zajac (2004) study the spread of a share- their role of establishing connections bet-
holder value orientation among German firms ween firms through interlocking directorates.
 INSTITUTIONS AND CORPORATE GOVERNANCE 399

This literature has examined the effect of board works councils as well as union influence, a
interlocks regarding a variety of issues ranging number of authors have drawn on institutional
from the exercise of corporate control (e.g. arguments (e.g. Aguilera and Jackson, 2003;
Mariolis, 1975; Mintz and Schwartz, 1981) to Gospel and Pendelton, 2004; Streeck and
corporate political action (Mizruchi, 1989, Thelen, 2003). In addition, some authors
1992) to social cohesion (e.g. Useem, 1984; have employed institutional theory to examine
for an overview of these literatures, see e.g. how control of employees is exercised.
Mizruchi, 1996). For example, Barker (1993) shows how
Other researchers have employed institu- value-based normative rules embedded in self-
tional theory to examine the selection of top managing teams make for more effective
executives. Fligstein (1987, 1990) shows how control of workers than more traditional,
a financial conception of control emerging in bureaucratic authority structures, while Oakes,
the postwar United States and the large-scale Townley and Cooper (1998) examine the ped-
merger movement of the 1960s resulted in agogical role of business plans as language that
increasing numbers of CEOs with a back- redirects work and changes the identity of
ground in finance, and firms with such CEOs managers and employees. However, given the
were in turn more likely to be the targets of current dominance of the shareholder-centered
takeover attempts (Fligstein & Markowitz, system, the role of employees is likely to
1993; Davis & Stout, 1992). Finance CEOs remain peripheral at least in the Anglo-Saxon
were also more likely to adopt the new share- governance context, even though themes of
holder value conception of control emerging in hegemony versus resistance to the shareholder-
the 1980s (Fligstein, 2001; Fiss and Zajac, centered governance model the part of
2004). Ocasio (1999) has shown the role of employees would warrant more attention.
both cognitive and political factors in the Finally, some research in the institutional
formal and informal rules governing CEO suc- theory tradition has expanded the focus to
cession, particularly the choice of insider consider the role of outside constituencies
versus outsider successors. Similarly, in corporate governance. Several studies in
Thornton and Ocasio (1999) and Thornton this regard have focused on the role of finan-
(2004) demonstrate how the institutional cial analysts, who occupy a central role as
logics guiding executive succession in the boundary-spanning and evaluating audiences
higher education publishing industry shifted for corporations. For example, Fogarty and
from an editorial to a market logic. Regarding Rogers (2005) examine the creation of
board composition, Luoma and Goodstein analyst reports and find that this process
(1999) have pointed to the importance of insti- largely follows the logic of confidence
tutional influences on the selection of corpo- described by Meyer and Rowan (1977),
rate directors. These studies indicate that the where strong expectations but little control
selection of top management is importantly characterize the production of reports, a
shaped by institutional forces emerging out of process that is furthermore strongly depend-
organizational and societal processes. ent on information controlled by managers.
While owners and managers have received Furthermore, Zuckerman examined the role
greater attention, major constituent group – of analysts as product critics and has shown
employees – has been less often examined that a mismatch between the cognitive cate-
from an institutional perspective. In this gories used by securities analysts to affect
regard, an institutional approach is not differ- stock prices and de-diversification activity
ent from the corporate governance literature (Zuckerman, 1999, 2000). These considera-
more generally (cf. Blair and Roe, 1999) and tions also point to the role of other actors
the Anglo-Saxon corporate governance litera- affecting the governance of corporations,
ture in particular. Within the literatures on such as suppliers, debtors, professional
labor representation, mechanisms such as associations, the courts, and of course
400 THE SAGE HANDBOOK OF ORGANIZATIONAL INSTITUTIONALISM

government regulators (Fligstein and notion that the economic systems of

Choo, 2005). Some of these have been advanced nations are marked by a variable
examined using a comparative perspective degree of cohesion and complemen-
on corporate governance, to which I now tarity among their respective subsystems.
turn. Beginning with a focus on the diversity of
modern economies, these authors argue that
variation emerges because corporations and
other social actors ‘develop distinctive strate-
THE COMPARATIVE STUDY OF gies and structures to capitalize on the insti-
GOVERNANCE SYSTEMS tutions available for market or non-market
coordination in the economy’ (Hall and
The institutional approach to corporate gov- Soskice, 2001: 48). For example, compara-
ernance suggests that national corporate tive research on Japanese business models
governance systems are importantly affected has suggested that the keiretsu structure
by cultural differences (Tricker, 1984, 1990). of corporate governance presents a
This points to the need to comparatively competitive advantage for large Japanese
evaluate the diversity of governance arrange- firms, since this structure leads to higher
ments. Such research on comparative rates of innovation, resulting in a competitive
corporate governance has for a long time advantage (Gerlach, 1992). While these
been primarily the domain of taxonomists, arguments are similar to those advanced
leading to a large body of mostly descriptive by a competitive logic of differentiation,
research on differences in national corporate they differ in their emphasis of a systemic
governance systems (see e.g. Boyd, Carroll, perspective that points to institutional com-
and Howard, 1996; Bradley et al., 1999; plementarities. Building on the work of
Guillén, 2000 for reviews; see Roe 2003 Aoki (1994), the VoC approach thus views
for a political perspective). The main national governance systems as part of a
assumption of this field of research has been system of interconnected institutions that
that each country’s system of corporate reinforce each other, creating stability but
governance developed in response to its par- also resistance to change. In this respect,
ticular historical, cultural, and technological the VoC approach identifies two ideal types
influences. However, recently a number of of economies: liberal market economies
scholars have aimed to develop these (such as the United States, Canada, the UK,
arguments into more coherent frameworks and Australia) that primarily rely on
that allow for a better understanding of the markets to coordinate their financial and
mechanisms that underlie national gover- industrial relations systems, and coordinated
nance systems, as well as a systematic com- market economies (such as Germany, Japan,
parison of national differences in governance the Netherlands, or the Scandinavian
arrangements. Two frameworks that have countries) that employ a variety of non-
particularly garnered attention in recent years market institutions to coordinate these
are the Varieties of Capitalism (VoC) spheres (Hall and Soskice, 2001). Empirical
approach (e.g. Hall and Soskice, 2001; support for these arguments comes from a
Thelen, 2004), and the business systems per- variety of case studies on European
spective (e.g. Whitley, 1999; Morgan, economies as well as comparative works
Whitley, and Moen, 2005). Their arguments (e.g. Thelen 2001, 2004; Wood, 2001).
are relevant to the embeddedness approach Several recent works have applied the VoC
suggested by institutional theory and deserve framework to the study of corporate gover-
special attention here. nance systems (e.g. Casper, 2001; Vitols
Building on a configurational approach, a 2001; Vitols, Casper, Soskice, and Woolcock,
central theme in the VoC approach is the 1997; Ziegler, 2000), suggesting that this
 INSTITUTIONS AND CORPORATE GOVERNANCE 401

approach can offer a framework for under- notion of an institutional logic to examine
standing the connections between corporate changes in the German model of corporate
governance systems and the larger political governance. Similarly combining a business
economy. systems approach with other institutional
A related approach to the study of arguments, Djelic and Quack (2003) and
economies and governance is advanced by Djelic and Sahlin-Andersson (2006) show
Whitley (1992a, 1992b, 1999) and others, how national institutional systems are
who aim to explain the institutional structur- increasingly nested within transnational,
ing of business systems. By business sys- higher-order institutional frames. Such
tems, these authors generally refer to the insights are highly relevant for the study of
‘distinctive patterns of economic organiza- corporate governance, and particularly
tion that vary in their degree and mode of regarding the potential for convergence
authoritative coordination of economic activ- in governance systems (Tempel and
ities, and in the organization of, and inter- Walgenbach, 2007). Both the VoC perspec-
connections between, owners, managers, tive and the business systems approach
experts, and other employees’(Whitley, tend to be focused around ideas of comple-
1999: 33). Accordingly, the nature of the mentarity and consistency. However, rather
relationships between these actors is of cen- than exploring how such systems provide
tral importance when contrasting business coherence to corporate governance, an
systems. For example, business systems may institutional approach also emphasizes the
be characterized by inter-firm relations based importance of conflict and inconsistency.
on arms-length contracting or repeated, Such considerations shift the focus to
cooperative connections (e.g. Dore, 1986). the importation of practices from one
Likewise, the providers of capital may institutional context into another, highlight-
view their investments as resources to be ing issues of enactment and integration, and
supervised directly or they may delegate thus questioning the coherence view of
this task to trusted agents (e.g. Whitley, national systems of corporate governance.
1999). From the combination of these forms Consistent with a focus on practices, it would
of relationships emerges a variety of possible also be useful to shift the level of analysis
types of economic organization and gover- further down to the firm level to examine
nance. However, interactions between vari- diversity even within ‘national’ systems.
ous forms of relationships limit the Such systems are frequently less than coher-
feasibility of business systems, and Whitley ent but instead are marked by considerable
(1999) identifies six that range from the frag- tensions between different governance
mented via the state-organized to the highly models and institutional logics, a process that
coordinated. will likely lead to considerable change
Work building on a business systems per- (O’Sullivan, 2000). However, this change
spective offers an intriguing framework for does not necessarily mean greater conver-
those who aim to study corporate governance gence in governance system, but rather
through an institutional lens, particularly increasing variety.
because its theoretical apparatus is not lim-
ited to the study of advanced economies.
The business systems approach provides a
systematic foundation for examining corpo- EMERGING DIRECTIONS FOR
rate governance practices, particularly when FUTURE RESEARCH
merged with insights from other theoretical
traditions (Tempel and Walgenbach, 2007). As a field for applying institutional theory,
For example, Lane (2005) draws on a busi- corporate governance is likely to continue
ness systems approach informed by the expanding, and the institutional approach is
402 THE SAGE HANDBOOK OF ORGANIZATIONAL INSTITUTIONALISM

well poised to provide a coherent framework national level of corporate governance

for the study of governance systems (Hollingsworth, Schmitter, and Streeck,
and practices across various levels of analy- 1994; Casper, 2000).
sis. As I have argued here, a culturally and Future research should also draw further
politically informed institutional approach attention to the ways in which governance
offers a counter weight to the currently dom- models hide power relations as they become
inating contractarian framework for under- increasingly taken for granted and take on the
standing governance arrangements. This is mantle of neutrality and inevitability. An
not to say that both approaches cannot important role in this regard lies with events
inform each other – in fact, some of the most that lift this mantle and provide a glance into
intriguing insights into governance arrange- the political nature of resource distributions,
ments are likely to come from approaches such as the current wave of corporate scandals
drawing on several theories and disciplines that has swept the United States. Governance
(Fiss, 2006). In the remaining, I want to scandals in particular provide opportunities
sketch out some of the more promising when the seams come apart, allowing for
avenues for further research, applying an regimes to be criticized and changed. As such,
institutional approach to the corporate the study of such scandals, the ways in
governance arena. which they are managed by corporations and
In line with my above arguments regarding regulators, as well as how they are framed and
the role of power and the normative nature of used for mobilization by various interest
governance models, we need to expand our groups, such as activist investors, are of partic-
understanding of how governance models as ular interest to institutional theory and provide
shared cognitive understandings are propa- fertile ground for future research. Such an
gated, find support, and become rooted approach might eventually offer a more sys-
across differing institutional contexts. This tematic framework of the conditions that lead
research project would need to pay attention to relatively strongly institutionalized versus
both to the ways in which governance models less strongly institutionalized models of cor-
spread across national and international porate governance.
arenas and to the processes by which indige- The study of emerging and transition
nous governance models become uprooted economies presents another promising
and contested. Prior research in the contrac- area for understanding both change and per-
tarian literature has pointed towards conver- sistence of corporate governance systems
gence in international governance systems and practices (e.g. Allen, 2005; Millar,
due to the effects of globalization and the Eldomiaty, Choi, and Hilton, 2005). How are
power of financial markets (e.g. Coffee, corporate governance models and practices
1999; Bradley et al., 1999; Hansmann and propagated in such environments and do they
Kraakman, 2001). In contrast, emerging take hold or do they remain externally
institutional work has questioned the likeli- imposed orders that meet with resistance
hood of convergence, pointing instead to from established interest groups? What is the
persistence in national systems alongside role of symbolic and surface compliance in
convergence processes (e.g. Aguilera and this regard? Who are the actors that lead
Jackson, 2003; Fiss and Zajac, 2004; reform efforts and what strategies do they
Guillén, 2001; Jackson and Moerke, 2005). pursue? These are but some of the questions
As argued by Tempel and Walgenbach that require answers once we expand the
(2006), further research should look to move focus of inquiry beyond the currently domi-
beyond the convergence–divergence debate nating Anglo-Saxon governance environ-
and should begin to disaggregate the ment, in combination with Germany, Japan,
processes occurring at various levels of aggre- and France, as the economies that have
gation, such as company, sector/industry, and received the most attention from researchers.
 INSTITUTIONS AND CORPORATE GOVERNANCE 403

Understanding the variety of governance underlying dimensions along which institu-

arrangements and the role of employees, tional contexts vary. Furthermore, there is an
banks, family owners, company networks opportunity for institutional theory to bring
and the state in Asian, South American, or all the corporate constituents back into the
Eastern European countries requires a holis- focus of governance research. Rather than
tic approach to corporate governance, and the focusing merely on executives and directors,
institutional perspective is well positioned to such work could take seriously how gover-
contribute such an approach nance is constructed at the intersection of
Regarding the emerging themes of transla- various influence spheres, including those of
tion and adaptation in institutional theory, inside and outside constituents and the
we still know rather little about the process attempts of corporate actors to actively
by which the re-organization of a model is manage such constituent groups. Such an
accomplished, pointing to the need for a emphasis on the active construction and
deeper understanding of how governance propagation of governance accounts would
practices combine and recombine. For enable institutional approaches to bring both
example, in what ways are governance sys- relevant and critically-reflective insight to
tems holistic and interconnected or modular in the current and future corporate governance
nature, and which features of these systems debates.
may be safely removed or added without
disturbing overall operation of the governance
system? Do hybridization and loose coupling
present viable trajectories (e.g. Deeg, 2005; ACKNOWLEDGMENT
Lane, 2005)? To analyze such issues, it may
be useful to examine other fields that have The author acknowledges the helpful com-
studied processes of syncretism and recombi- ments of Norman Macintosh, Sigrid Quack,
nation, such as anthropology (e.g. Stewart, Paul Adler, Christina Ahmadjian, Roy
1999). By drawing on insights developed Suddaby and the other editors of the
there, we may be able to gain a much deeper Handbook of Organizational Institutionalism,
understanding of the cultural embeddedness and seminar participants at the University of
of corporate governance practices. Southern California and the Center for
Finally, while researchers working within Advanced Study in the Behavioral Sciences.
the institutional tradition have made some
forays into the role of constituents and their
identities, these still present fruitful fields for
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