The role of the board and external stakeholders in corporate governance

• Published date: 01 May 2018
• Author: Alessandro Zattoni,Praveen Kumar
• Date: 01 May 2018
• DOI: http://doi.org/10.1111/corg.12242

EDITORIAL

The role of the board and external stakeholders in corporate

governance

The role and impact of internal bodies, principally the board, and

external stakeholders (such as shareholders) in corporate governance

(CG) and firm performance are one of the central topics of CG

research (Kumar & Zattoni, 2013, 2014a; Zattoni, 2011). Conceptu-

ally, the board has multi‐dimensional responsibilities or roles. Specif-

ically, from an agency perspective, monitoring the top management

team (TMT) to safeguard shareholders' interest is the primary respon-

sibility of board members (Kumar & Zattoni, 2017). Consistent with

this perspective, directors have fiduciary duties of loyalty and care,

and their malfeasance is subject to legal action by shareholders.

However, the CG literature also emphasizes the potential value of

expertise and specialized industry knowledge of directors in improv-

ing managerial effectiveness (Kumar & Sivaramakrishnan, 2008). In

addition, the outside directors may also contribute to firm economic

performance through their network of industry and government con-

tacts (Zona & Zattoni, 2007).

Meanwhile, the role of external stakeholders, such as large

shareholders (Shleifer & Vishny, 1986) and institutional investors

(OECD, 2011) on monitoring TMT and providing incentives for

improving corporate governance and firm performance is also widely

considered in the CG literature (Kumar & Ramchand, 2008; Kumar &

Zattoni, 2014b, 2015). In particular, the literature points to the

potential substitutability and complementarities between internal

governance through the board of directors and external scrutiny by

stakeholders (Aslan & Kumar, 2014; Cyert, Kang, & Kumar, 2002;

Zattoni & Judge, 2012).

Nevertheless, there remain many significant unresolved empirical

issues regarding the impact of board characteristics and external

stakeholders on the quality of the firm's corporate governance and

its performance. For example, despite the theoretical importance of

independent directors, the empirical CG literature generally finds an

ambiguous relationship between the board's independence and the

firm's performance (Black & Bhagat, 2002; Brickley, Coles, & Terry,

1994; Zattoni et al., 2017). We therefore need greater analysis of

the impact of different characteristics of non‐affiliated directors and

their role in governance and firm performance. From an internal per-

spective, what is the role of various board processes and their effec-

tiveness? While some recent studies support the positive influence

of certain board processes on board effectiveness (Zona & Zattoni,

2007), the analysis needs to extend to a larger class of processes

and to various companies (Zattoni, Gnan, & Huse, 2015). And while

the CG literature has widely analyzed executive compensation (Kumar

& Zattoni, 2016), we need better empirical understanding of factors

that affect the compensation for monitoring versus advisory functions

at the level of the board. In a related vein, the empirical CG literature is

still developing knowledge on the effects of different types of external

stakeholders on CG and firm performance.

The four papers in this issue contribute to the CG literature by

addressing these open issues. In the first paper, Kuzman et al. use

hand‐collected data for SOEs in six Central European countries to

examine the causes and performance consequences of board turnover.

Distinct from the received understanding of board turnover in private

enterprises, board turnover in SOEs is politically motivated rather than

based on firm performance issues (Gilson, 1990; Denis and Sarin,

1999). More generally, the CG literature finds board turnover related

to changes in ownership structure and top management (Hermalin

and Weisbach, 1988). Thus, and perhaps not surprisingly, it appears

that board turnover in SOEs is driven by external political changes as

distinct from the factors identified for private firms. Moreover, board

turnover is negatively related to firm profitability performance and

productivity. In contrast, the relation of board turnover and firm perfor-

mance is more complex for private firms. For example, board turnover

can lead to improved performance if the cause of departure of directors

was related to bankruptcy or poor economic performance. Thus, we

need to add external political interference as a factor in board perfor-

mance for SOEs. Interestingly, large SOEs and those governed by inde-

pendent government bodies are relatively insulated against the

negative performance impact of board turnover. In sum, Kuzman et al.

significantly add to our knowledge of the causes and performance

consequences of board turnover for an economically important class

of business organizations and enterprises.

In the second paper, Thomsen et al. analyze the effectiveness of

industrial foundations (which are independent non‐profit institutions)

as long‐term owners in improving the CG and business behavior of

(foundation‐owned) firms. Ownership by industrial foundations is

common in Northern Europe, but its CG implications have not

received much attention from researchers. Using a unique Danish

dataset, the authors show that foundation ownership is more stable

compared with other ownership structures and is associated with

lower managerial turnover and leverage, and scores more highly on

an index of long‐termism on finance, earnings, and employment. Ana-

lyzing the long‐run impact of ownership by such industrial foundations

DOI: 10.1111/corg.12242

158 © 2018 John Wiley & Sons Ltd Corp Govern Int Rev. 2018;26:158–159.wileyonlinelibrary.com/journal/corg