Internal culture and outside influence in corporate governance

• Published date: 01 January 2018
• Author: Alessandro Zattoni,Praveen Kumar
• DOI: http://doi.org/10.1111/corg.12230
• Date: 01 January 2018

EDITORIAL

Internal culture and outside influence in corporate governance

The corporate governance (CG) literature has long studied the role of

both internal and external factors in the corporate governance perfor-

mance of firms. In particular, this journal has been at the forefront of

developing our knowledge on the substitutability and complementarity

between inside and outside factors (e.g., Aslan & Kumar, 2014; Kumar

& Zattoni, 2013; Schiehll, Ahmadjian, & Filatotchev, 2014). Neverthe-

less, there is a lot we still need to learn about the types of inside and

outside factors that impact CG performance of firms. For example,

while there is a substantial literature on formal inside mechanisms such

as the board of directors (Kumar & Zattoni, 2014), the role of more

informal factors, such as corporate culture, still needs to be analyzed

further. In a related vein, while there is a growing literature on formal

national level factors, such as financial and CG‐related regulations

(Kumar & Zattoni, 2016), the role of more informal external factors,

such as external political influence on directors or adoption of interna-

tional CG norms/principles, needs further study.

The four papers in this issue enhance substantially our under-

standing of more informal—but nevertheless significant—internal and

external factors in CG performance. In each case, the papers present

a very careful and interesting analysis of the role of internal culture,

external political connections of directors, the organizational commit-

ment of firm founders, and adoption of high‐quality corporate gover-

nance norms. It is noteworthy that the papers on internal factors use

response to adverse events, such as the financial crisis of 2008–

2009 and declining firm performance, to facilitate identification, which

is often an effective approach to addressing endogeneity concerns.

The first paper in this issue is by Sheedy and Griffin who examine

the effectiveness of internal risk structures and risk culture in the gov-

ernance of financial institutions. As is well known, the financial crisis of

2008–2009 drew substantial attention to governance failures in banks

and other financial institutions. Subsequently, there has been a signif-

icant change or innovation in the governance of such institutions.

These new approaches emphasize not only internal risk structures or

risk management related policies, but also developing a suitable risk

culture, which is based in part on the “shared perceptions”among

employees regarding the importance of risk management practices.

While the new governance practices have had a major impact on the

banking industry, to date there has been little available analysis of their

effectiveness because outcome‐based data only become available over

a long duration. Indeed, if the risk management or governance is effec-

tive, then we will only rarely observe adverse or “crisis”type outcomes.

The authors therefore use survey methods on seven large Australian

and Canadian banks. They find that internal risk structures are gener-

ally deemed effective except in the important area of compensation.

However, there is significant heterogeneity in the assessment of effec-

tiveness of risk cultures within firms (between senior executives and

staff), between firms in a given country and across countries. In partic-

ular, executives tend to be more optimistic with respect to the risk cul-

ture compared with staff, but both risk structures and risk culture are

important to generate desirable outcomes. This is a pioneering study

and one that will likely have a significant impact in shaping the future

CG literature in an important area.

In the second paper, Shin et al. examine the impact of appointing

politically connected outside directors (PCODs) on firm performance.

There is increasing interest in the effects of political connections on

firm performance in general across many areas of business scholarship.

However, the existing literature typically focuses on the political con-

nections of executives and/or controlling shareholders. The authors

use a hand‐collected sample from Korean chaebol firms (where the

founding family controls subsidiaries in the business group through

pyramidal ownership structures) that takes a broader view of political

connections than the literature, namely, by defining political connec-

tions as allowing access to the “key constituents surrounding the firm.”

In particular, this definition allows the authors to classify people who

have held senior positions in government and judiciary, which is emi-

nently sensible. The analysis reveals that PCODs are associated with

superior profit performance and lower risk, but have weaker monitor-

ing capabilities due to lack of professional expertise and firm‐specific

knowledge. Indeed, there are selection effects because the number

of PCODs is negatively correlated with the pay‐for‐performance sensi-

tivity of compensation of inside executives. Overall, this study signifi-

cantly extends the growing literature on the role of political

connections in CG and firm performance.

The third paper, by Abebe and Tangpong, examines, in the context

of family firms, the role of organizational commitment and psycholog-

ical attachment of corporate leaders on firm performance, in particular

the turnaround of firms with declining performance. The importance of

senior leaders (especially CEOs) in the firm turnarounds is increasingly

recognized. Meanwhile, there is a literature that studies founder‐CEO

effects on firm financial performance, but that generally finds mixed

results. Abebe and Tangpong are among the first to focus on foun-

der‐CEO effects on turnarounds, which has considerable intuitive

appeal as one expects the special commitment of founder‐CEOs to

be especially important in leading turnarounds. Addressing identifica-

tion concerns, the authors do not find that founder‐CEOs increase,

ceteris paribus, the likelihood of turnarounds, but they are able to gen-

erate novel and interesting results on the strategies adopted to engi-

neer such turnarounds. In particular, founder‐CEOs tend to lead

DOI: 10.1111/corg.12230

2© 2018 John Wiley & Sons Ltd Corp Govern Int Rev. 2018;26:2–3.wileyonlinelibrary.com/journal/corg