Bundles of Firm Corporate Governance Practices: A Fuzzy Set Analysis

• Date: 01 July 2013
• Author: Miguel A. Ariño,Ruth V. Aguilera,Roberto García‐Castro
• Published date: 01 July 2013
• DOI: http://doi.org/10.1111/corg.12024

Bundles of Firm Corporate Governance

Practices: A Fuzzy Set Analysis

Roberto García-Castro*, Ruth V. Aguilera, and Miguel A. Ariño

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: We explore how the combinations of f‌irm-level corporate governance (CG) practices embedded

in different national governance systems lead to high f‌irm performance.

Research Findings/Insights: Using fuzzy set/qualitative comparative analysis, we uncover a variety of f‌indings. First, we

show that within each of the stylized national CG models, there are multiple bundles of f‌irm-level governance practices

leading to high f‌irm performance (i.e., equif‌inality). Second, we provide evidence of complementarity as well as functional

equivalence between CG practices. Finally, we demonstrate that there can be heterogeneity (“differences in kind”) in f‌irm

governance practices within each stylized model of CG.

Theoretical/Academic Implications: We build on the conf‌igurational and complementarity-based approaches to make the

following theoretical claims. First, governance practices within f‌irm bundles do not always relate to each other in a

monotonic and cumulative fashion as this entails higher costs and possibly over-governance. Second, practices in bundles

do not need to be aligned toward the insider or the outsider model (“similar in kind”). We argue that non-aligned practices

can also be complementary, creating hybrid governance forms. Third, we predict functional equivalence across bundles of

CG practices which grants f‌irms agency on which of the practices to implement in order to achieve high performance.

Practitioner/Policy Implications: We contribute to comparative CG research by demonstrating that there are multiple

governance paths leading to high f‌irm performance, and that these practices do not always belong to the same national

governance tradition. Therefore, our f‌indings alert of the perils of “one size f‌its all” governance solutions when designing

and implementing CG policies.

Keywords: Corporate Governance, Board of Director Mechanisms, Market Control Mechanisms, Legal Control Mecha-

nisms, Corporate Financial Performance

INTRODUCTION

There is a rich tradition in comparative corporate gover-

nance research highlighting the diversity of national

governance systems and the complementarities of gover-

nance practices within systems (Aguilera & Jackson, 2003;

Goyer, 2010; Hall & Soskice, 2001; Hancke, Rhodes, &

Thatcher, 2008; Kogut, 2009; Schmidt & Spindler, 2004). This

research aggregates f‌irm-level governance characteristics to

the national-level governance traits and suggests two stylized

national models of corporate governance: outsider (or

shareholder-oriented) vs. insider (or stakeholder-oriented)

models, where governance practices are aligned within each

system. For instance, Aguilera and Jackson (2003) argue that

there are different sets of coalitions of governance practices

among three main stakeholders (management, labor, and

capital) competing for f‌irm resources, and that these prac-

tices align into bundles within these two dichotomous

national models. A parallel body of research in the law and

economics tradition (La Porta, Lopez-de-Silanes, Shleifer, &

Vishny, 1998; Shleifer & Vishny, 1997) has identif‌ied similar

country-level models of corporate governance def‌ined by

the strength of minority shareholder protection, where f‌irm

governance traits are tied to the country-level regulatory

features.

A completely separate body of governanceresearch exam-

ines corporate governance practices at the f‌irm level, mostly

within countries, and questions whether there is a direct and

monotonic causal link between f‌irm-level governance prac-

tices and f‌irm f‌inancial performance. These empirical

studies have, for example, investigated the relationship

between governance practices such as board independence

and CEO duality (Dalton, Daily, Ellstrand, & Johnson, 1998),

*Address for correspondence: Roberto García-Castro, IESE Business School, Camino

del Cerro del Águila, 3, 28023 Madrid, Spain.E-mail: rgarcia@iese.edu

390

Corporate Governance: An International Review, 2013, 21(4): 390–407

© 2013 John Wiley & Sons Ltd

doi:10.1111/corg.12024

executive pay(Bebchuck & Fried, 2004), ownership structure

(Hoskisson, Hitt, Johnson, & Grossman, 2002), and f‌irm per-

formance. Interestingly, results from these empirical studies

are inconclusive in showing an either positive or negative

relationship between f‌irm governance and performance

(Aguilera, Filatotchev, Gospel, & Jackson, 2008; Daily,

Dalton, & Cannella, 2003; Dalton et al., 1998).

Our study seeks to link these two, for the most partuncon-

nected, bodies of governance research by drawing on con-

f‌igurational logic and empirically examining how f‌irm

governance practices, embedded within different national

systems of corporate governance, interact with each other

and in turn lead to different f‌irm level outcomes (e.g., f‌irm

performance). Although, there exists some comparative

empirical research, mostly within the f‌ield of f‌inance, which

has explored the interaction between country-level institu-

tions and f‌irm-level practices (Aggarwal, Erel, Stulz, &

Williamson, 2010; Durnev & Kim, 2005), these studies over-

look the interaction between governance practices within

f‌irms (i.e., f‌irm-level governance bundles).

We are motivated by the two main limitations when

exploring the relationships between f‌irm governance and

f‌irm performance as identif‌ied by Aguilera et al. (2008).

First, existing research tends to be under-socialized or

neglect corporate governance patterned variations contin-

gent on different institutional environments. Second, it is

rarely conceptually and empirically modeled that gover-

nance practices are not independent from each other but

rather they are highly interrelated (complementary) as well

as costly to adopt. In fact, these two theoretical voids might

be the reason why current research exploring governance

practices and f‌irm performance is inconclusive. Therefore,

we propose to adopt a conf‌igurational perspective, which

allows us to account for both the institutional environment

as well as f‌irm combinatory governance when exploring

f‌irm outcomes.

While cross-national governance research tends to aggre-

gate f‌irm-level practices, we want to contribute by analyzing

different combinations or bundles of f‌irm-level governance

practices and showing that there are important differences

in the bundles at the f‌irm level within countries and within

the stylized national governance models. We conceptualize

f‌irm governance practices as embedded within the stylized

insider–outsider national corporate governance models

and subject to costs and complementarities. We draw on

the conf‌igurational logic and the complementary-based

approach to argue that f‌irm governance practices combine

into different bundles leading to high f‌irm performance. In

particular, we f‌irst examine the notion of “internal f‌it”

among a positive combination of practices leading to high

f‌irm performance, and test whether more practices is better

– this is an underlying assumption within much corporate

governance research. Second, we explore the existing notion

of “internal f‌it” with the national models of corporate gov-

ernance, that is, the idea that the more aligned governance

practices are the better (Hall & Soskice, 2001). Our empirical

f‌indings uncover the existence of intra-corporate governance

models heterogeneity. That is to say, there are f‌irms in the

insider (outsider) governance model reaching high f‌irm per-

formance with a governance bundle which includes outsider

(insider) governance practices. We conclude that there is not

a “one path f‌its all combination” of governancepractices or a

single magic bullet governance bundle leading to high f‌irm

performance.

We use set-theoretic methods to study in detail the poten-

tial combinations between different CG practices. Given that

CG bundles remain to be systematically theorized and

investigated empirically (Aguilera et al., 2008), our study is

an empirical exploration of theory-informed propositions.

We f‌ind set-theoretic methods particularly appropriate to

explore and map the different existing conf‌igurations of CG

within f‌irms and in the insider–outsider governance models,

and to evaluate their relative eff‌iciency. In the rest of the

article, we proceed as follows. We f‌irst discuss conf‌igura-

tions and complementarities in CG at the f‌irm level and

identify its critical dimensions. Then, we use fuzzy set

methods (fs/QCA analysis) to uncover the causal conditions

and the CG f‌irm conf‌igurations leading to superior f‌irm

f‌inancial performance within the two stylized governance

models. Lastly, we offer a conclusion of our main f‌indings

and discuss their implications for comparative CG and cor-

porate strategy research.

CONFIGURATIONS AND

COMPLEMENTARITIES IN FIRM

GOVERNANCE

Our conceptual model draws on the conf‌igurational and

complementarity approach to understand the bundles of

f‌irm-level corporate governance practices leading to high

f‌irm performance. Organizational and economic theory

research has empirically demonstrated the importance of

conf‌igurational practices (Meyer, Tsui, & Hinnings, 1993)

and their complementarities (Milgrom & Roberts, 1995) to

explain f‌irm outcomes. Yet these two perspectives are not

always integrated. On the one hand, conf‌igurational refers to

the fact thatorganizational practices interact with each other,

and as a result there might be multiple combinations of

practices (grouped into bundles) generating a given f‌irm

outcome. It assumes that there is not a one best conf‌igura-

tion or a single “f‌it all” conf‌iguration (Grandori & Furnari,

2008:462). There exists empirical research in different f‌ields

of management demonstrating that alternative conf‌igura-

tions can lead through different paths (bundles of practices)

to the same organizational outcome – i.e., equif‌inality. For

example, research in human resource management has

shown that different bundles of high-performance work

practices are likely to cause high f‌inancial performance

(Delery & Doty, 1996; Macduff‌ie, 1995). Similar studies exist

in organization theory (Etzioni, 1961; Perrow, 1970) and cor-

porate strategy (Fiss, 2011; Miles & Snow, 1978). Cross-

national governance research has also incorporated the logic

of conf‌iguration or bundles of practices, yet mostly concep-

tually (Hall & Gingerich, 2009; Jackson, 2005).

On the other hand, the notion of complementarity is

generally theorized around the concept of internal f‌it in

the interaction among different organizational attributes.

Complementarity is def‌ined as a relation between elements,

whereby applying one practice raises the value of employing

another practice (Aoki, 2001; Milgrom & Roberts, 1990,

1995). Unlike conf‌igurational thinking, complementarities

BUNDLES OF CG MECHANISMS 391

Volume 21 Number 4 July 2013© 2013 John Wiley & Sons Ltd