The cost of conformity to good governance: Board design and compensation

• Published date: 01 July 2022
• Author: Yuliya Ponomareva,Ryan Federo,Ruth V. Aguilera,Sven‐Olof Collin
• Date: 01 July 2022
• DOI: http://doi.org/10.1111/corg.12408

ORIGINAL ARTICLE

The cost of conformity to good governance: Board design and

compensation

Yuliya Ponomareva

1

| Ryan Federo

2

| Ruth V. Aguilera

3,4

| Sven-Olof Collin

5,6

1

Department of Business Administration,

Universitat Autonoma de Barcelona,

Barcelona, Spain

2

Department of Business Administration,

Universitat de les Illes Balears, Palma de

Mallorca, Spain

3

D'Amore-McKim School of Business,

Northeastern University, Boston,

Massachusetts, USA

4

Department of Strategy and General

Management, ESADE Business School,

Universitat Ramon Llull, Barcelona, Spain

5

Free University of Scania, Scania, Sweden

6

The Economics and Law Chair, Kharkiv

University of Humanities People's Ukraininan

Academy, Kharkiv, Ukraine

Correspondence

Yuliya Ponomareva, Department of Business

Administration, Universitat Autonoma de

Barcelona, Campus de la UAB, Plaça Cívica,

08193 Bellaterra, Barcelona.

Email: yulia.ponomareva@uab.cat

Funding information

Spanish Ministry of Science and Innovation,

Grant/Award Numbers: MCIN/AEI/

PID2020-115982RB, PID2020-115018RB-

C32

Abstract

Research question/issue: Albeit the fact that the “one-size-fits-all”corporate gover-

nance model has been mostly discarded, the debate on what constitutes a well-

governed firm has converged toward a set of practices that comprise what we refer

to as the global good governance norm. Whereas extant research has focused mainly

on the benefits of good governance, we build on neo-institutional theory to explore

how firm conformity or nonconformity to this global norm is associated with the cost

of board governance, captured as board compensation.

Research findings/insights: Using a fuzzy set qualitative comparative analysis

(fsQCA) of firms listed in the Stockholm Stock Exchange, we find that the configura-

tions of board practices conforming to the global good governance norm are associ-

ated with higher board compensation than those that score low on conformity.

Based on our findings, we deduce four archetypical board design strategies jointly

shaped by two central forces: the pressure toward conformity to the good gover-

nance norm and the extent of governance discretion, denoting firm agentic behavior.

Theoretical/academic implications: First, our study highlights that conformity to the

global good governance norm is accompanied with higher costs than nonconformity.

Second, while most of the extant research discusses conformity and agentic behavior

as two opposing forces, we uncover that they simultaneously co-exist in board gov-

ernance, stressing their interconnectedness.

Practitioner/policy implications: Conformity to the global good governance norm

influences the strategic choices of board designs and the costs associated with such

choices.

KEYWORDS

corporate governance, board of directors, director compensation, qualitative comparative

analysis, neo-institutional theory

1|INTRODUCTION

Ample research shows the heterogeneity of corporate governance

models around the world, suggesting that the “one-size-fits-all”tenet

is a utopia (Aguilera et al., 2019). At the same time, the debate about

what constitutes a well-governed firm appears to have converged

toward a set of global best-practice recommendations for board struc-

tures and behaviors, labeled good governance, that are considered as

Received: 10 March 2020 Revised: 23 August 2021 Accepted: 4 October 2021

DOI: 10.1111/corg.12408

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial License, which permits use, distribution and reproduction in any

medium, provided the original work is properly cited and is not used for commercial purposes.

© 2021 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

Corp Govern Int Rev. 2022;30:399–420. wileyonlinelibrary.com/journal/corg 399

both efficient and legitimate (Aguilera & Cuervo-Cazurra, 2004;

Cuervo, 2002; Van Essen et al., 2013). As a result, firms all over the

world face intensifying isomorphic pressure to reconfigure their

boards to conform with a set of governance practices that constitute

a globally accepted good governance norm (Bell et al., 2014; Xie

et al., 2021; Zattoni & Cuomo, 2008).

Despite a large number of studies examining the performance

benefits of good governance practices, the literature is vague about

the costs associated with conformity to the increasingly influential

global good governance norm, such as increasing independence and

diversity of the board of directors. These costs, broadly defined as the

“value of inputs to corporate governance,”comprise an essential ele-

ment of the governance system (Aguilera et al., 2008: 476), reflecting

the firms' strategic choices (Oliver, 1991). Thus, understanding the

costs associated with conformity to the global good governance norm,

be this conformity substantive or symbolic (Westphal & Park, 2020),

becomes paramount for explaining the firms' board design choices as

well as the effects of these choices on organizational outcomes. Previ-

ous studies examining the costs of conformity to the good governance

norm in various national settings have drawn attention to the poten-

tial decoupling between formal adoption and implementation of gov-

ernance practices (Cuervo, 2002; Zajac & Westphal, 2004) and the

costs of over-governance (Aguilera et al., 2008; Bell et al., 2014). An

important issue that is yet to receive attention concerns: How does

conformity to the globally accepted good governance norm influence firm

governance costs?

One way to capture the governance costs of adopting board prac-

tices consistent with the global good governance norm is the cost of

the board of directors, that is, board compensation. The lack of

research on board compensation as a conformity/nonconformity cost

of good governance is surprising given the economic and symbolic

importance of boardroom remuneration practices as well as their dis-

cretionary nature. Board compensation refers to a direct systemic cost

of remunerating the firm's board directors (Aguilera et al., 2008)

which, in recent years, has been increasing across the globe

(e.g., Boivie et al., 2015; Dah & Frye, 2017; Haron &

Akhtaruddin, 2013; Li & Roberts, 2017). Given the team nature of the

board's work, the largest portion of board compensation includes the

fixed fees paid regardless of members' individual contributions, mak-

ing it especially difficult to determine and measure the directors' input

to firm performance. In the presence of uncertainty stemming from

the weak link between directors' inputs and firm performance, existing

institutional norms are expected to play an important role in deter-

mining board compensation (Boivie et al., 2015; Budsaratragoon

et al., 2020), making it a useful tool to examine the cost of confor-

mity/nonconformity to global good governance norm.

Most research exploring the relationship between board compen-

sation and good governance practices identifies the directors' moni-

toring capacity (Burns et al., 2021) and social and human capital

(Collin et al., 2017; Fedaseyeu et al., 2018) to play an important role in

setting directors' fees. However, these studies largely examine board

practices in isolation without considering their key interdependencies.

Given that the good governance norm mandates boards to create

value through both monitoring and resource provision (Hillman &

Dalziel, 2003), accounting for the interplay between the practices

associated with each of the two board functions is imperative. To this

end, recent work adopting a configurational perspective has drawn

attention to the interconnected nature of governance practices,

suggesting that monitoring and resource provision can be complemen-

tary (Bell et al., 2014; Schiehll et al., 2017) and/or substitute each

other (Misangyi & Acharya, 2014). For example, Federo and

Saz-Carranza (2018) find that boards may provide resources through

different combinations of board governance practices, while Rediker

and Seth (1995) highlight the substitution effects between the moni-

toring undertaken by the board and that of large shareholders.

We build on this configurational perspective (Fiss, 2007; Furnari

et al., 2021) to examine how good governance practices complement

and/or substitute each other to form complex and unique board con-

figurations (or bundles) associated with high and low levels of gover-

nance costs. We draw on neo-institutional theory (DiMaggio &

Powell, 1983; Meyer & Rowan, 1977; Scott, 1995; Tolbert &

Zucker, 1983) to analyze how publicly listed Swedish firms conform to

the global good governance norm. While our theoretical proposition is

not exclusive to the Swedish context, Sweden provides a fertile gro-

und to analyze the costs of conformity to good governance due to the

openness of its economy and its high level of integration in the global

market. Although the Swedish context differs from that of the

United States due to the presence of few highly empowered owners,

the Swedish corporate governance system has some traits of the

Anglo-American governance model such as the board's core role. In

addition, the Swedish context displays small-world characteristics that

denote a strong sense of community and contribute to the rapid diffu-

sion of governance norms (Sinani et al., 2008), which generates

within-country variations in board designs.

Our findings indicate that conforming to the global good gover-

nance norm has high costs in terms of board compensation. In particu-

lar, we uncover four bundles conforming to the good governance

norm and associated with high levels of board compensation and four

bundles nonconforming to the good governance norm and associated

with low levels of board compensation. Based on our analysis, we

deduce four archetypical board design strategies jointly shaped by

two central forces: the pressure to conform to the global institutional

norm and the firm governance discretion, denoting “the latitude of

accessible governance practices”(Aguilera et al., 2018: 87) which cap-

tures firm's agentic behavior.

We contribute to board governance research in three ways. First,

rather than focusing on the performance benefits of good

governance—a topic that has spurred a considerable amount of

research—we examine the costs associated with conformity to the

globally accepted good governance practices. Our results indicate that

conformity with the global good governance norm by adopting a set

of specific governance practices is associated with high direct firm

costs through board compensation, which could be problematic given

the considerable empirical ambiguity regarding the performance bene-

fits of such practices (Boivie et al., 2016; Dalton & Dalton, 2011;

Johnson et al., 2013).

400 PONOMAREVA ET AL.