Business Groups and Corporate Governance: Review, Synthesis, and Extension

• Author: Asli M. Colpan,Andrea Colli
• DOI: http://doi.org/10.1111/corg.12144
• Published date: 01 May 2016
• Date: 01 May 2016

Business Groups and Corporate Governance:

Review, Synthesis, and Extension

Andrea Colli and Asli M. Colpan*

ABSTRACT

Manuscript Type: Review

Research Question/Issue: This article addresses the diverse and fragmented literature about the corporate governance of

business groups.We collected scholarly work on the subject, proposed a conceptualization of the main research questions they

addressed, classified them according to their research themes, and identified future research directions.

Research Findings/Insights: Academic research on corporate governance in business groups has been increasing but is still a

developing field.Available analyses make use of themain theoretical frameworks ingeneral in corporate governance research.

However, there are severalareas of analysis that stillneed stronger conceptualization and empiricalwork, leaving many oppor-

tunities for future studies and a pressing need to substantiate and extend the findings of previous studies.

Theoretical/Academic Implications: Our study identifies fouravenues for future researchon corporate governancein business

groups.This includes the examinationof the complex relationshipsand co-evolutionary processesamong corporate governance

attributes, andorganizational and performanceoutcomes of business groups; the effects of ownership goalson groups’perfor-

mance outcomes; the role and the actual functioning of boards inside business groups; and the analyses of cross-national

comparison and long-term development of the governance of business groups.

Practitioner/Pol icy Implications: This research allows practitioners and policymakers to get a better understanding of the crucial

areas regarding business groups and their governance, and offers pathways to examine inside the “black-box”of business groups.

Keywords: Corporate Governance, Business Groups, Family Ownership, Ownership Mechanisms, Board Composition

INTRODUCTION

Business groups are broadly defined as the amalgamation

of legally-independent companies through various for-

mal and informal ties (Granovetter, 1995, 2005; Khanna &

Yafeh, 2007). They have been the dominant form of large

enterprise in many emerging markets (Colpan, Hikino, &

Lincoln, 2010; Khanna & Palepu, 2010), but they are also

important players in a number of developed markets as well

(Colpan & Hikino, 2016; Shiba & Shimotani, 1997). While

there has been an increasing number of studies on business

groups, especially in the last two decades, from various

perspectives including management, sociology, and business

history, generally focusing on specific areas/countries

(Barbero & Jacob, 2008; Feenstra & Hamilton, 2006; Jones,

2000; Kock & Guillén,2001; Tripathi, 2004), there has not been

much work done to organize the governance attributes of

business groups into a systematized conceptual framework

through the synthesis of the available literature. This paper

aims to fill this research gap through an extensive review of

the management literature, and proposes a future research

agenda that will contribute to our understanding of the issue.

Research on business groups considers governance to be a

relevant topic, and a greater part of management research

emphasizes an instrumental perspective of business groups

(i.e., “what do they exist for?”)ratherthananoperational one

(“how do they really work?”). Business groups have basically

been examined in their nature as concrete alternatives to the

multidivisional enterprise (Colpan & Hikino, 2010). A rele-

vant emphasis has been put on the country-specific attributes

that determine the existence and survival of this organiza-

tional form, with inconclusive results (Whittington & Mayer,

2000). In particular, given the alleged superiority of the M

(multidivisional)-form as an efficient organizational artifact,

the persistence of business groups –otherwise sometimes la-

beled as H (holding)-form –in developed economieshas been

ascribed to residual imperfections. These imperfections could

be in the capital markets (resulting in disproportionate incen-

tives to leverage) and/or in the persistence of concentrated

ownership structures (incentivizing leverage as well; Faccio

& Lang, 2002). The ultimate perversity of business groups –

in this perspective –was additionally that they basically

coincided with an extractive attitude by dominant share-

holders toward minority shareholders (Johnson, La Porta,

Lopez-de-Silanes, & Shleifer, 2000). The (negative) view of

*Address forcorrespondence: Asli M. Colpan, GraduateSchool of Management, Kyoto

University, Yoshida-Honmachi, Kyoto,Japan 606-8501. Tel/fax:+81 75 7533517; E-mail:

colpan@gsm.kyoto-u.ac.jp

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12144

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Corporate Governance: An International Review, 2016, 24(3): 274–302

business groups as a bundle of control-enhancing mechanisms

contrasts with the more positive one, which, as mentioned above,

considersthemasefficient solutions in the case of market imper-

fections (especially in the context of developing economies).

Notwithstanding the available evidence at the “micro-

organizational”level derived from in-depth case studies,

business historians were also not attentive in providing a

governance-oriented theory of business groups. National

cases in which they constituted (and still are) a persisting fea-

ture of the corporate landscape have been examined mainly

from an instrumental perspective.Research about Italy, where

business groups are a permanent feature of the corporate

landscape in almost every sector (Colli, Rinaldi, & Vasta,

2015) has in fact emphasized how business groups brilliantly

solve the problems linked to the need by founders and fami-

lies to keep firm control over expanding businesses (Aganin

& Volpin, 2005; Amatori, 1997). Other scholars have shown

in detail how, particularly in the case of state-owned compa-

nies, the business group served as an effective way to flexibly

expand the boundariesof the concern in order to achievegoals

of political-economic nature (Amatori, 1997; Colli & Vasta,

2015). Japanese business historians have emphasized the

continuity between pre- and post-war corporate structures of

large firms showing how groups allowed balancing family

interests with managerial control, at the same time avoiding

the threat of hostile takeovers (Morikawa, 1992). Similar

considerations have been put forward for other European

(Barca & Becht, 2001) and Asian countries (Amsden, 2001),

characterized by an overwhelming diffusion of business

groups. The instrumental perspective has, in any case, been

prevalent over the operational one.

A research perspective emphasizingthe governance-related

aspects internal to the organization can better highlight the

operational nature of business groups. Further, the topic of

group governance is important and deserves a systematic

review for two reasons. First, governance of business groups

is different from, and more complex than, the governance of

stand-alone firms due to various multiplex ties among group

firms (Holmes, Hoskisson, Wam, & Holcomb, 2015;

Manikandan & Ramachandran, 2015; Yiu et al., 2013). The

characteristic control and coordination mechanisms in busi-

ness groups therefore necessitate a closer examination to un-

derstand their functioning and organizational/performance

consequences. Second, and relatedly, it has been shown that

these distinctive control mechanisms, especially the pyrami-

dal structures, are used extensively by wealthy families who

have been entrusted a critical degree of the large enterprises’

corporate governance in many countries (outside the US and

UK). As such, the characteristic governance of these groups

that control large proportions of their countries’economies

may have importa nt consequences, such as economic entrench-

ment retarding economic growth (Morck, Wolfenzon, &

Yeung, 2005). This potential influence of business groups

in their economies makes the examination of their gover-

nance even more pressing. In particular, as we will further

discuss below, a large bulk of the literature in the field of

corporate finance has emphasized a peculiar set of potential

threats to minority shareholders, which derive from the

extractive attitudes of controlling owners in “tunneling

out”of the companies belonging to the group in excess of

their cash-flow rights.

In light of this background, the aim of this study is twofold:

to review and integrate the previous research on corporate

governance of business groups, and propose future research

directionsto study the governance of businessgroups through

identifyingweaknesses and limitationsin the extant literature.

We adopt a broad definition of corporate governance for the

purpose of this paper as ‘the way in which corporations are

owned, controlled, and coordinated and set theirgoals.’In this

perspective, as our focus of analysis is business groups, we

concentrate on and disentangle the characteristic governance

attributes of business groups based on group ownership and

the intra-group control and coordination devices in a group;

namely the equity ties, director interlocks, and other ties.

Our perspective focuses on the relationship between corpo-

rate governanceattributes (as defined above, andin their turn

largely determined by the institutional and historical features

of the environment),and on their impact on the strategic and

structural behavior of companies and subsequently on their

performance.

This paper differentiates itself from previous studies on the

subject in three dimensions. First, we aim to synthesize the

business group governance literature around an organizing

framework. In doing so, we especially focus on the relation-

ships between group-related aspectsof governance,including

group ownership and intra-group control and coordination

devices, as well as organizational and performance outcomes

of such governance mechanisms. Second, we conduct an

extensive literature review by identifying all the published

literature in 30 leading journals on the subject. This kind of

extensive review is beneficial to build an exhaustive picture

of the literature. It is also helpful to find the gaps in the

existing research to direct us to future analysis. Finally, this

paper incorporates the business history research on business

groups, which examines their evolution over a long period

of time to have a cross-national and longitudinal coverage.

This research orientation affects the reference material we

analyze for this paper, which has rangedfrom journal articles

in different fields of governance, management, strategy, orga-

nization, and finance as well as business history, to volumes

and handbooks published on the topic, with specificreference

to governance issues as defined above.

We begin by examining the evolution of the businessgroup

research and the different perspectives in it, in order to

identify the state of the literature. In the next section, we aim

to identify the research themes in the governance literature

that relate to business groups. An important purpose here is

to provide a comprehensive framework of the governance of

business group research. In this section, the literature is

assessed and the empirical outcomes of the past research are

laid out. This section incorporates the theoretical and empi-

rical research related to the governance of business groups.

Finally, we propose an agenda for future studies.

EVOLUTION OF THE BUSINESS GROUP

RESEARCH AND CORPORATE

GOVERNANCE

The roots of the theoretical and systematic examination of busi-

ness groups go back to Nathaniel Leff (1976, 1978). Since then,

the business group literature has evolved in emphasizing four

275BUSINESS GROUPSAND CORPORATE GOVERNANCE

© 2015 JohnWiley & Sons Ltd Volume 24 Number 3 May 2016