Institutional Environment and Corporate Governance

• DOI: http://doi.org/10.1111/corg.12160
• Author: Praveen Kumar,Alessandro Zattoni
• Date: 01 March 2016
• Published date: 01 March 2016

Editorial

Institutional Environment and Corporate

Governance

Praveen Kumar and Alessandro Zattoni

Over the last two decades, the corporate governance (CG)

literature has highlighted the importance of the institu-

tional environment. Most commonly, the institutional environ-

ment for CG is viewed in terms of national-level factors,

such as the legal framework for property rights and contract

reinforcement (e.g., LaPorta, Lopez-de-Silanes, Shleifer, &

Vishny, 1997, 1998). More broadly, the CG literature shows

that each country, at the national level, has unique, informal

and formal institutions that have a strong impacton corporate

governance mechanisms. This institutional literaturehas been

advanced throughcomparative studies, oftengrounded in the

theoreticalframeworks of institutionaltheory, that explore the

antecedents and the consequences of corporate governance

mechanisms in different national contexts (Kumar and

Zattoni, 2013a; Zattoni & Judge, 2012). More recently, there

has been substantial interest in the view that even at the

national level there is complementarity and substitutability

between (or among) national governance factors (Aguilera,

Filatotchev, Gospel & Jackson, 2008; Kumar & Zattoni, 2015,

2015; Schiehll, Ahmadjian & Filatotchev, 2014). This research

has further enriched our understanding of the impact of

national-level institutional environment on corporate

governance.

Nevertheless, there is also an increasing recognition of the

importance of other aspects of the national-level institutional

environmentthat impact corporate governanceby inf‌luencing

managerial and board behavior. For example, it is clear from

introspection and a stream of research in a variety of f‌ields

that the credibility of a country’s judicial system in enforcing

laws against white-collar crime and/or corruption is impor-

tant for incentives against malfeasance by managers and

boards. Strong and bias-free implementation of these laws

can deter opportunistic behavior by self-interested entrenched

managers, dominant shareholders, and co-opted boards

(Kumar & Ramchand, 2008). Thus, these aspects of national

legal frameworks can inf‌luence signif‌icantly the intensity of

agency conf‌licts and the effectiveness of internal governance

mechanisms. Yet, we areonly beginning to see careful empir-

ical studies to address these topics.

However, the institutional environment for corporate gov-

ernance is also determined by formal mechanisms at the f‌irm

level. There is increasing awareness in the literature that the

formalizationof governance-relatedpractices and stakeholder

interactions can have independent effects. To illustrate, most

f‌irms regularly undertake analysis of business, f‌inancial, and

regulatory risks as part of effective management practices.

However, if the board sets up a formal risk committee (similar

to the usual presence of audit and compensation committees

of directors), then risk analysis is institutionalized as a gover-

nance-related mechanism at the level of the f‌irm. The open

question is whether setting up such formal mechanisms has

a meaningful effect on the effectiveness of corporate

governance.

The four papers in this issue contribute to the CG literature

by addressing these open issues, both in terms of national

legal frameworks and in terms of formal f‌irm-level mecha-

nisms. In the f‌irst paper, Choi et al. analyze judicial bias in

South Korea with respect to the sentencing and imprisonment

of individualsfor white-collar crime, such as embezzlementor

breach of f‌iduciary duty by executives in public companies.

Previous literature has shown that in emerging economies

there is a tendencyfor judicial bias in favor of theperpetrators

based on their status within the company; for example, even

when convicted, top-level managers receive more lenient

sentences and are less likely to suffer imprisonment thanper-

petratorsfrom the lower ranks. Choi et al. examine an interest-

ing hypothesis,namely, whetherthere is a similar judicial bias

at the level of companies.In particular,given the inf‌luential and

often exalted role of large, family-controlled business groups

(chaebols)in the Korean economy, is it the case that,controlling

for managerial rank and the severity of the crime, indicted

employees of chaebols benef‌itfromgreaterjudicialleniency

with respect to sentencing and probability of imprisonment

(conditional on sentencing)? Using a careful empirical test

design, the authors show that a judicial bias exists in the

implementation of criminal law across companie s. The study

is original, carefully thought out, and generates important

new f‌indings that have signif‌icant implications for corporate

© 2016 JohnWiley & Sons Ltd

doi:10.1111/corg.12160

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Corporate Governance: An International Review, 2 016, 24(2): 82–84