Social Norms, Social Cohesion, and Corporate Governance

• Author: Paul Matthyssens,Marc Deloof,Andriy Boytsun
• Date: 01 January 2011
• Published date: 01 January 2011
• DOI: http://doi.org/10.1111/j.1467-8683.2010.00829.x

Social Norms, Social Cohesion, and

Corporate Governancecorg_82941..60

Andriy Boytsun*, Marc Deloof, and Paul Matthyssens

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: We study the relationship between informal rules (represented by social norms and social

cohesion in a community) and corporate governance.A community is a large social unit characterized by a distinct set of

informal rules. Specif‌ically, three hypotheses are tested: (1) Communities with stronger social norms will have more open

f‌irm-level corporate governance; (2) More socially cohesive communities will have more open f‌irm-level corporate gover-

nance; and (3) The relationship between social norms and corporate governance will be mediated by social cohesion.

Research Findings/Insights: Unlike previous studies, we use data from a single, culturally diverse country, Ukraine, in

order to isolate the effect of informal rules. The country’s provinces are used as proxies for communities. We develop our

measures of social norms and social cohesion by performing a factor analysis on the measures commonly used in previous

research (social capital, religiosity, total fertility, ethnic homogeneity, linguistic homogeneity, and homicide rate).All three

hypotheses are supported, whether using composite or individual measures of social norms and cohesion. The mediation

is partial, suggesting that the hypothesized effect of social norms on corporate governance may (1) partly come through

cohesion; and (2) partly be direct. The results are highly signif‌icant and robust, and they hold very well when controlled for

economic development, f‌irm characteristics, and industry.

Theoretical/Academic Implications: We contribute to the large literature on institutional determinants of corporate gov-

ernance by proposing thatinformal rules may have a substantial impact on f‌irm-level corporate governance. Wealso identify

specif‌ic sources of informal rules: social norms and cohesion. Testing our insights in other countries and in cross-country

settings would help to further understand what rules matter for corporate governance and whether informal rules may

substitute for formal rules. Another research opportunity, perhaps best exploited through case-based research, is the deeper

enquiry into the very mechanism by which informal rules may affect f‌irm-level corporate governance.

Practitioner/Policy Implications: Manipulating informal rules, such as norms and cohesion, is an unlikely option for

corporate governancereform. If that is the case, the policy should consist in adjusting the governance system to f‌it them. As

this f‌it will differ across communities and countries, international convergence of corporate governance appears unlikely.

Keywords: Corporate Governance, Institutions, Informal Rules, Social Norms, Social Cohesion

INTRODUCTION

Research on institutional determinants of corporate gov-

ernance has been extensive (for overviews,see Bebchuk

& Weisbach, 2010; Boytsun, 2009). Following North (1990),

such determinants can be classif‌ied into three broad

categories: (1) informal constraints; (2) formal rules; and (3)

enforcement.1

Perhaps, due to better observability and easier measure-

ment, formal rules have received the most attention in the

literature. The legal approach led the way by studying the

impact of law on corporate governance. Legal families have

been shown to affect legal rules protecting investors, and

these, in turn, have been shown to have an impact on

ownership concentration, shareholding patterns, and the

development of debt and equity markets. In particular,

common-law countries appear to offer investors better pro-

tection, which arguably results in more dispersed owner-

ship, a greater number of widely held companies, and larger

and broader capital markets (see, e.g., La Porta, Lopez-de-

Silanes, & Shleifer, 1999a, 2006; La Porta, Lopez-de-Silanes,

Shleifer, & Vishny, 1997a, 1998, 2000a, 2000b; as well as Beck,

Demirgüç-Kunt, & Levine, 2003; Demirgüç-Kunt, Love, &

Maksimovic, 2006; Klapper & Love, 2004; and Klapper,

*Address for correspondence: Andriy Boytsun, University ofAntwerp, Prinsstraat 13,

2000 Antwerp, Belgium. Tel: +32-3-265-4231; Fax: +32-3-265-4064; E-mail:

andriy.boytsun@ua.ac.be

41

Corporate Governance: An International Review, 2011, 19(1): 41–60

© 2010 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00829.x

Laeven, & Love, 2006). In addition, Pagano and Volpin

(2005), Rajan and Zingales (2003), and Roe (2003) have

emphasized the role of the political system.

Another stream in the corporate governance research has

stressed the role of enforcement, especially in countries with

weak institutions, such as transition economies and emerg-

ing markets (Berglöf & Pajuste, 2003; Berglöf & von

Thadden, 1999; Pistor, 2000; Pistor, Raiser, & Gelfer, 2000).

Furthermore, Berkowitz, Pistor, and Richard (2003) have

shown that a simple transplantation of the legal rules may

not work because they need to be adapted to local societal

conditions. Scholars have conjectured that differences

between the impact of the legal systems on corporate gov-

ernance regimes may stem from the complementarities

between different institutions, such as enforcement institu-

tions and legal rules (Berglöf & von Thadden, 1999), legal

systems’ different balance between public and private law

(Berkowitz et al., 2003), or between the role of statutory and

case law (Berglöf & Claessens, 2004).

However, the relationship between informal institutions

and corporate governance has remained largely underre-

searched and, more importantly, poorly situated in the f‌ield.

Recently, legal scholars have placed more emphasis on the

role of non-legal rules in governing human behavior (Rib-

stein, 2001). This thinking has resulted in a debate in the

legal literature on the interaction between corporate gover-

nance and informal rules, as Coffee (2001:2151) boldly pro-

claimed: “That corporate behavior may be more shaped and

determined by social norms than by legal rules seems to be

an idea whose time has come.”2

Despite the contributions of this norms-and-law literature

(e.g., Coffee, 2001; Milhaupt, 2001), it provides illustrations

rather than a convincing test. Although some other authors

have also touched upon the importance of informal rules,

their impact on f‌irm-level governance has been largely over-

looked. Thus,Licht, Goldschmidt, and Schwartz (2005) argue

that, in the long run, legal rules governing investor protec-

tion should ref‌lect informal rules, such as cultural orienta-

tions in the given society; however, their focus is on country-

level investor protections. Li and Filer (2007) argue that

different combinations of formal and informal rules lead

foreign investors to choose different investment modes

(portfolio vs. direct investment); however, the researchers

also do this at the country level and do not deal with f‌irm-

level governance. Judge, Douglas, and Kutan (2008) use a

large cross-section of countries to show that country-level

corporate governance is perceived to be more legitimate by

nations with a greater extent of law and order, cultures

placing more emphasis on global competitiveness, and

lower prevalenceof corruption. Finally,Guiso, Sapienza, and

Zingales (2008, 2009) discuss the effects of trust on country-

level trade and investment, as well as stock market partici-

pation by households, but do not enquire into the link

between trust and governance in f‌irms.

In this paper, we investigate whether various informal

constraints – as manifested in social norms and social cohe-

sion – are related to f‌irm-level corporate governance. Spe-

cif‌ically, we use the data from a single country in order to

examine the relationship between cross-province variation

in social norms and social cohesion and variation in corpo-

rate governance by means of regression analysis. We chose

Ukraine for our enquiry because this country is culturally

and historically diverse; therefore we may expect a large

enough variance in informal rules.

We f‌ind that corporate governance is likely to be more

open in communities with stronger social norms and higher

cohesion. Our evidence also suggests that social cohesion

may be a mechanism that mediates the hypothesized effect

of social norms on governance. Our results are highly sig-

nif‌icant and robust, and they hold very well when controlled

for economic development, f‌irm characteristics, and indus-

try. These f‌indings suggest that informal rules have a sub-

stantial direct impacton corporate governance, meaning that

a corporate governance reform focused solely on legal rules

is likely to be limited at best. If informal rules matter, then

the policy should take them into account and consist of

adapting the corporate governance system to them. More-

over, if informal rules differ internationally, so will the cor-

porate governance systems.

Our study is novel in a number of ways. For one, despite

the recent calls for research into this subject (Lubatkin, Lane,

Collin, & Very, 2005, 2007; Stafsudd, 2009), to the best of our

knowledge, we are the f‌irst to systematically relate macro-

level informal rules to f‌irm-level corporate governance and

to empirically demonstrate the link between them. Secondly,

in order to isolate the effect of formal institutions and to

achieve a more reliable measurement of informal institu-

tions, we adopt a single-country research design, which is

almost never used in studies in our f‌ield. Previous studies

have been guided by the theoretical emphases on formal

institutions and enforcement, which invariably required a

cross-country approach. Thirdly, our research question dic-

tates a multilevel analysis, a feature also quite uncommon in

previous studies. Specif‌ically, because researchers have

mostly sought to explain the determinants of corporate gov-

ernance in cross-country settings, their operationalization of

both institutions and corporate governance has typically

been at the (convenient) country level. Finally, since no exist-

ing data would allow us to pursue our enquiry, we have

constructed a unique dataset for this study.

The paper is organized as follows. In the next section, we

brief‌ly review the extant literature on the topic and formu-

late our hypotheses. The third section lays out the method

and the data we used, and the fourth presents the results.

In the last section, we discuss our f‌indings and reach a

conclusion.

THE RESEARCH PROBLEM

The costs and benef‌its of corporate governance mechanisms

are affected by the institutional environment. For example,

Doidge, Karolyi, and Stulz (2007) propose that countries’

formal rules matter for corporate governance because they

inf‌luence the costs and benef‌its of bonding. We posit that

such costs and benef‌its and the resulting governancechoices

also may be shaped by informal rules.

A distinction can be made between open and closed cor-

porate governance. Open corporate governance refers to

transparency, external monitoring, and more developed

bonding between management and shareholders (and is

generally consistent with dispersed ownership). Closed cor-

42 CORPORATE GOVERNANCE

Volume 19 Number 1 January 2011 © 2010 Blackwell Publishing Ltd