National Governance System, Corporate Ownership, and Roles of Outside Directors: A Corporate Governance Bundle Perspective

• Author: Hongjin Zhu,Toru Yoshikawa,Pengji Wang
• Date: 01 May 2014
• Published date: 01 May 2014
• DOI: http://doi.org/10.1111/corg.12050

National Governance System, Corporate

Ownership, and Roles of Outside Directors:

A Corporate Governance Bundle Perspective

Toru Yoshikawa,* Hongjin Zhu, and Pengji Wang

Manuscript Type: Conceptual

Research Questions/Issues: We explore why and how the different combinations of governance practices at national level,

such as the legal system, conduct codes, and capital markets, and at f‌irm level, such as various types of controlling

shareholders, enable or constrain outside directors to engage in their monitoring and resource provision roles. Building

upon such analysis, we develop a new taxonomy of corporate governance systems according to the different conf‌igurations

of a set of interdependent governance characteristics, including national governance mechanisms, identity of block share-

holders, and functions of outside directors.

Research Insights: This study enriches the growing body of research on governance complementarity and substitution by

highlighting the role of bundles of governance practices in inf‌luencing directors’ engagement in governance behavior, and

consequently advancing our understanding of variation in corporate governance systems across and within countries.

Theoretical/Academic Implications: This paper demonstrates that the roles of outside directors depend on the interaction

between a bundle of governance mechanisms rather than any individual mechanisms. The paper also goes beyond the

traditional governancemodels based on the national context and highlights that interdependencies of corporate governance

practices play an importantrole in explaining the diversity and variation of corporate governance arrangements across f‌irms

in both industrialized economies and emerging markets.

Practitioner/Policy Implications: This paper provides insights to policymakers by suggesting that not all the governance

bundles are conducive to managerial monitoring and resource provision by outside directors.

Keywords: Corporate Governance, Board of Directors, Ownership Mechanisms, Agency Theory, Resource Dependence

Theory

INTRODUCTION

Given the many corporate scandals in recent years (e.g.,

Enron, WorldCom, etc.), increased debate on and inter-

est in the roles and effectiveness of outside directors has

emerged in academia, industry, and regulatory institutions

in both developed and emerging economies (e.g., Carter &

Lorsch, 2004; CSRC, 2001). The vast bulk of research on the

antecedents of directors’ behavior conceptualizes outside

directors as an independent governance mechanism whose

eff‌icacy is determined by directors’ incentives and ability to

engage in two primary functions: monitoring the manage-

ment and providing resources/counseling to the manage-

ment (Adams & Ferreira, 2007; Hillman & Dalziel, 2003;

Sundaramurthy & Lewis, 2003). Agency theorists contend

that independence of outside directors brings greater trans-

parency, eff‌iciency, and accountability to managerial

monitoring (Fama & Jensen, 1983). Resource dependence

theorists view outside directors as critical resource provid-

ers who use their human and social capital to provideadvice

and counseling, connections to other organizations, access

to external resources, and legitimacy to the f‌irm (Pfeffer &

Salancik, 1978). Theoretically, the presence of outside direc-

tors should lead to better f‌irm performance, but the empiri-

cal f‌indings about the performance implication of such

directors are mixed (e.g., Dalton,Daily,Ellstrand, & Johnson,

1998; Finkelstein & D’Aveni, 1994; Peng, 2004; Westphal,

1999).

One explanation for the divergent f‌indings is that those

studies focus on outside directors per se, without consider-

ing their relationships with other governance mechanisms.

To the extent that various corporate governance practices

*Address for correspondence: Toru Yoshikawa, Lee Kong Chian School of Business,

Singapore ManagementUniversity, 50 Stamford Road,Singapore 178899. Tel: +65 6828

0756; Fax: +65 6828 0777; E-mail: toru@smu.edu.sg

252

Corporate Governance: An International Review, 2014, 22(3): 252–265

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12050