Leveraging foreign institutional logic in the adoption of stock option pay among Japanese firms

Research summary : We investigate why Japanese firms have adopted executive stock option pay, which was developed with shareholder‐oriented institutional logic that was inconsistent with Japanese stakeholder‐oriented institutional logic. We argue that Japanese managers have self‐serving incentives to leverage stock ownership of foreign investors and their associated institutional logic to legitimize the adoption of stock option pay. Our empirical analyses with a large sample of Japanese firms between 1997 and 2007 show that when managers have elite education, high pay inequality with ordinary employees, and when firms experience poor sales growth, foreign ownership is more likely associated with the adoption of stock option pay. The study shows the active role of managers in facilitating the diffusion of a new governance practice embodying new institutional logic. Managerial summary : Why have Japanese firms adopted stock option pay for executives? Inconsistent with Japanese stakeholder‐oriented tradition in corporate governance, such pay has been believed to prioritize managerial attention to the interests of shareholders over those of other stakeholders. However, to the extent that shareholders' interests are legitimate in the Japanese context, executives who have self‐serving incentives to adopt such pay can leverage the need to look after shareholders' interest in their firms to legitimize their decisions. In a large sample of Japanese firms, we find that foreign ownership (representing shareholders' interests) is more likely to be associated with the adoption of stock option pay when managers are motivated to receive such pay, such as when they have elite education, high pay inequality with ordinary employees, or poor sales growth. Copyright © 2015 John Wiley & Sons, Ltd.     

Determinants of alliance partner choice: Network distance,managerial incentives,and board monitoring

Research Summary: We ask if managerial opportunism is a significant problem in alliance partner choice and examine the role of corporate governance mechanisms in explaining this choice. Using a sample of 313 alliances of U.S. firms from the pharmaceutical and biotechnology industries from 1992 to 2010, we find that managerial incentives lead to managerial preference for relationally risky distant partners over existing and new close partners. Further, board monitoring encourages managers to pursue existing and distant partners over new close ones, choices aligned with shareholder interests. In addition, we find that board monitoring substitutes for managerial incentives in alliance partner choice. We contribute to the literature on alliance partner choice to identify an important, and hitherto, unexplored perspective. Managerial Summary: This article examines whether managers and shareholders view alliance‐related risks differently, and how the divergent interests between managers and shareholders affect alliance partner choice. We argue that managers’ concern about their loss of employment and compensation from alliance failure impedes the choice of relationally risky alliance partners that may increase shareholder value. We also argue that managerial stock ownership and board monitoring mitigate this managerial propensity. Our findings suggest that stock ownership owned by managers and strong board monitoring are effective governance mechanisms to align managers’ interests with those of shareholders. Our study offers a novel perspective to understand alliance partner choice by viewing the firm as an entity comprised of fragmented interests.     

Corporate Governance and returns on information technology investment: evidence from an emerging market

Prior studies have reported mixed findings on the impact of corporate information technology (IT) investment on firm performance. This study investigates the effect of corporate governance, an important management control mechanism, on the relation between IT investment and firm performance in the Taiwanese electronics industry. Specifically, we explore board independence and foreign ownership, which have increasingly become salient factors concerning corporate governance in emerging markets. We address their roles across firms of different sizes and in industries where degrees of competitiveness run a wide gamut. Our results show a positive moderating effect of board independence on the IT investment‐firm performance relation, especially when competition intensifies. Furthermore, we find that the greater the foreign ownership in small firms, the more positive the IT investment‐firm performance relation, suggesting that foreign investors may bring IT expertise to help small firms reap the benefits of using IT. Copyright © 2010 John Wiley & Sons, Ltd.     

Shareholder Primacy and the Trajectory of UK Corporate Governance

Core institutions of UK corporate governance, in particular those relating to takeovers, board structure and directors’ duties, are strongly orientated towards a norm of shareholder primacy. Beyond the core, in particular at the inter‐section of insolvency and employment law, stakeholder interests are better represented, thanks largely to European Community influence. Moreover, institutional shareholders are redirecting their investment strategies away from a focus on short‐term returns, in such a way as to favour stakeholder‐inclusive practices. We therefore suggest that the UK system is currently in a state of flux and that the debate over shareholder primacy has not been concluded.     

Owners on both sides of the deal: mergers and acquisitions and overlapping institutional ownership

Using a corporate governance lens, this study considers owners with a stake in both the acquiring and the target firms in the context of mergers and acquisitions. A possible agency problem arises with regard to monitoring implications as managers may be able to take advantage of compromised monitoring because overlapping owners may focus on the aggregate value for both the acquiring and the target firms and nonoverlapping owners may be interested only in the acquirer's side of the deal. The results suggest that when more owners overlap in their ownership of both the acquiring and target firms, the acquiring firms are more likely to experience decreased shareholder value through merger and acquisition deals. This effect, however, can be constrained by stronger board control. Copyright © 2010 John Wiley & Sons, Ltd.     

Corporate governance antecedents to shareholder activism: A zero‐inflated process

Research summary: Shareholder activism has become more widespread, yet the role of corporate governance as antecedent to shareholder activism remains equivocal. We propose a new conceptual model that characterizes the stochastic of observable shareholder activism as a compound product of two latent components representing (1) shareholder activists' propensity to target a company and (2) executives' propensity to settle activists' demands privately. Our model explicitly decouples corporate governance expectations for the two latent components embedded in activism process, and thus allows us to relax assumptions of homogenous shareholder interests and constrained managerial discretion where corporate managers are expected to negotiate privately and settle only value‐creating activist demands. Bayesian analysis of zero‐inflated Poisson regression reveals that corporate governance relationships with activism vary across shareholder demands and private settlements. Managerial summary: Increasing shareholder activism has generated debates as to whether activism promotes managerial accountability and responsibility or instead encourages managerial short‐termism. Our research model allows for heterogeneous interests among a company's shareholders. We theorize and empirically investigate a broader role of corporate governance: governance mechanisms need to ensure that executives are not (1) ignoring activists' value‐increasing demands or (2) accommodating activists' value‐decreasing demands in a private, opaque manner that disenfranchises other shareholders. Our results indicate that corporate governance implications differ for visible shareholder demands in contrast with private activism. A plausible application of our model is that it provides estimates of the probability of the numbers of shareholder demands to be received by a firm and the probability of privately settling a demand. Copyright © 2015 John Wiley & Sons, Ltd.     

Shareholder influence over director nomination via proxy access: Implications for agency conflict and stakeholder value

Corporate governance research indicates that corporate boards of directors may be overly beholden to management, which can be detrimental to firm value creation. Drawing upon agency theory and the governance law literature, we examine the effects of a new SEC rule designed to lessen managerial power by increasing large, long-term shareholders' influence in the director nomination process. We predict and find support for a positive overall market reaction to the rule's announcement as well as a greater reaction for firms with characteristics that suggest compromised board independence or greater CEO control. Moreover, we examine the implications of greater shareholder voice for another key stakeholder group, firm bondholders, and find evidence that it is also value increasing. We conclude by discussing important implications for theory and practice. Copyright © 2012 John Wiley & Sons, Ltd.     

Meta-analyzing ownership concentration and firm performance in Asia: Towards a more fine-grained understanding

We present a meta-analysis of the relationship between concentrated ownership and firm financial performance in Asia. At the cross-national level of analysis, we find a small but significant positive association between both variables. This finding suggests that in regions with less than perfect legal protection of minority shareholders, ownership concentration is an efficient corporate governance strategy. Yet, a focus on this aggregate effect alone conceals the existence of true heterogeneity in the effect size distribution. We purposefully model this heterogeneity by exploring moderating effects at the levels of owner identity and national institutions. Regarding owner identity, we find that our focal relationship is stronger for foreign than for domestic owners, and that pure “market” investors outperform “stable” or “inside” owners whom are multiply tied to the firm. Regarding institutions, we find that a certain threshold level of institutional development is necessary to make concentrated ownership an effective corporate governance strategy. Yet we also find that strong legal protection of shareholders makes ownership concentration inconsequential and therefore redundant. Finally, in jurisdictions where owners can easily extract private benefits from the corporations they control, the focal relationship becomes weaker, presumably due to minority shareholder expropriation.

Being the CEO's boss: An examination of board chair orientations

Research summary: Scholars have traditionally conceptualized board leadership as a dichotomous construct. A combined CEO and board chair position is interpreted as reflecting a more collaborative approach to corporate governance, whereas separate positions are interpreted as ensuring greater board control. I challenge this conceptualization and posit that a separate board chair can be oriented toward collaboration as well as—or in place of—control. I analyze newly available data from corporate proxy statements to identify these two board chair orientations and test competing perspectives on how they impact profitability growth in a sample of S&P 500 firms. The results indicate that board leadership is a more nuanced phenomenon than the extant literature would suggest . Managerial summary: What is the role of the board chair when not the CEO ? Corporate governance experts assert the board chair's role is to monitor and control the CEO . Yet, board chairs often play another, more collaborative role. Board chairs frequently provide advice and guidance to CEOs and relieve CEOs of board leadership burdens, enabling the CEOs to focus on their primary responsibilities. In this study, I examine the effect of board chair orientations on financial performance and find that, as with separating or joining the CEO and board chair positions, the profitability implications of the selected orientation are far from universal. Board chairs must consider their firm's performance context in order to get the most out of a particular approach to being the CEO 's boss . Copyright © 2016 John Wiley & Sons, Ltd.     

Corporate Social Responsibility and Governance: The Role of Executive Compensation

This article examines the relationship between corporate governance and corporate sustainability by focusing on an essential component of companies' governance structure: executive compensation programs. We propose an original empirical strategy based on a large set of the biggest capitalizations in Organization for Economic Cooperation and Development (OECD) countries over the period 2004–2018, with explicit measures of how companies integrate into executive managers' remuneration precise criteria of corporate social responsibility, an incentive scheme called corporate social responsibility (CSR) contracting. Our results show that proposing executive compensation programs including CSR criteria has a negative impact on financial performance, and a large positive impact on extra-financial performance based on the following dimensions: relationship with customers and suppliers, and community involvement. Second, we explore the moderating role of the corporate governance model by distinguishing the impact between firms with a shareholder or stakeholder corporate governance model and reveal significant differences in the impact of CSR contracting. For firms with a stakeholder corporate governance model, CSR contracting is no longer associated with a fall of financial performance and has a large positive impact on human resources, environmental, and human rights performance. On the other hand, CSR contracting has a negative impact on financial performance but no impact on extra-financial performance for firms with a shareholder corporate governance model.     

Testing a model of reasoned risk‐taking: governance,the experience of principals and agents,and global strategy in high‐technology IPO firms

Research on the governance of risky ventures, like the initial public offerings (IPOs) of high‐technology firms, has focused primarily on the relationship between governance mechanisms and firm performance. While such an emphasis is clearly important, it does little to shed light on potential relationships between governance and the strategies pursued by risky firms, nor does it take into account the complementary role of key stakeholders in affecting those strategies. To partially remedy this deficit we integrate agency and behavioral perspectives to develop a theory of ‘reasoned risk‐taking,’ whereby the nature of risks undertaken is a consequence of the interaction of governance mechanisms and stakeholder characteristics. We demonstrate our theory by predicting when corporate governance should be associated with strategic risk‐seeking beyond a firm's technical core—as seen in the degree to which it has expanded internationally. Surprisingly, even though venture capitalists (VC) are risk specialists, we find that technology‐based IPO firms are less likely (i.e., a negative relationship) to have extensive global sales when they are backed by a VC. In support of our reasoned risk‐taking theoretical framework, we find that VCs are indeed risk‐seeking when VC backing is complemented by the international experience of their board appointees, top management team (TMT) members, or both. IPO firms with significant insider ownership are similarly global risk‐seekers, and those effects are strongest with an internationally seasoned board and TMT at the helm. Copyright © 2003 John Wiley & Sons, Ltd.     

Reassessing board member allegiance: CEO replacement following financial misconduct

Research summary: We examine how board members' reactions following financial misconduct differ from those following other adverse organizational events, such as poor performance. We hypothesize that inside directors and directors appointed by the CEO may be particularly concerned about their reputation following deceptive financial practices. We demonstrate that directors more closely affiliated with the CEO are more likely to reduce their support for the CEO following financial misconduct, increasing the likelihood of CEO replacement. Enactment of the Sarbanes‐Oxley Act similarly alters governance dynamics by creating a greater expectation for sound corporate governance. We demonstrate our findings in U.S. public firms that restated their financial earnings during a 12‐year period before and after the passage of Sarbanes‐Oxley. Managerial summary: Given past concerns about lack of oversight by boards of directors leading to firm financial misconduct, we examine how the relationship between directors and CEOs may be altered in the face of such misconduct. We argue that directors most closely tied to the CEO (inside board members and board members appointed by the CEO), typically the most supportive of the CEO, may become most concerned about their own reputation following financial misconduct. We find that CEOs receive less support from these directors, a finding in contrast to past studies demonstrating that such board members tend to shield CEOs following poor performance. These findings are accentuated following the passage of the Sarbanes‐Oxley Act, which places greater responsibility on the CEO for the accuracy of financial reports. Copyright © 2015 John Wiley & Sons, Ltd.     

Antecedents and consequences of corporate governance reform: the case of Germany

The paper examines the antecedents and consequences of the voluntary adoption of corporate governance reform in firms embedded in a relationship‐based governance system with less protection of minority shareholders. In such locations, ownership structure should be a key determinant of governance reform. Firms with dispersed ownership are likely to face agency problems but may lack sufficient ownership power in the hand of external owners for adoption to occur. Extensive ownership by external parties facilitates adoption but decreases the need and motivation to adopt governance reform. We examined the adoption of stock‐based incentive plans and transparent accounting regulations (e.g., greater disclosure to shareholders) among large German firms (DAX 100) during the late 1990s. We found an inverse ‘U’‐shaped relationship between ownership concentration and governance reform. In addition, we found that firms adopting governance reform were more likely to engage in corporate divestitures and achieve higher levels of market performance than firms not adopting governance reform. Copyright © 2003 John Wiley & Sons, Ltd.     

Effects of corporate governance on risk taking in Taiwanese family firms during institutional reform

Can internal corporate governance mechanisms (such as boards of directors) and external corporate governance mechanisms (such as institutional reform) promote risk-taking behavior in family firms? This paper argues that conflicts between majority and minority owners, known as principal–principal conflicts, and cronyism in the board of directors affect firm risk taking. Moreover, institutional corporate governance reform to appoint outside directors may not have an immediate effect on reducing these problems. Based on a sample of family firms in Taiwan, we find that outside directors reduce the negative relationship between family ownership/involvement and risk taking. However, when their influence is examined further, it is found that in those sample firms that went public after institutional reform, outside directors did not improve the relationship between family ownership/involvement and risk taking.     

When does ownership matter? Board characteristics and behavior

We develop a contingency approach to explain how firm ownership influences the monitoring function of the board—measured as the magnitude of external audit fees contracted by the board—by extending agency theory to incorporate the resource dependence notion that boards have distinct incentives and abilities to monitor management. Analyses of data on Continental European companies reveal that while board independence and audit services are complementary when ownership is dispersed, this is not the case when ownership is concentrated—suggesting that ownership concentration and board composition become substitutes in terms of monitoring management. Additional analysis shows that the relationship between board composition and external audit fees is also contingent upon the type of the controlling shareholder. Copyright © 2013 John Wiley & Sons, Ltd.     

Ownership structure and economic performance in the largest european companies

The paper examines the impact of ownership structure on company economic performance in 435 of the largest European companies. Controlling for industry, capital structure and nation effects we find a positive effect of ownership concentration on shareholder value (market‐to‐book value of equity) and profitability (asset returns), but the effect levels off for high ownership shares. Furthermore we propose and support the hypothesis that the identity of large owners—family, bank, institutional investor, government, and other companies—has important implications for corporate strategy and performance. For example, compared to other owner identities, financial investor ownership is found to be associated with higher shareholder value and profitability, but lower sales growth. The effect of ownership concentration is also found to depend on owner identity. Copyright © 2000 John Wiley & Sons, Ltd.     

Does good governance prevent bad strategy? A study of corporate governance,financial diversification,and value creation by French corporations, 2000–2006

Building on and extending prior research, we propose a comprehensive framework which posits that free cash flow moderates the impact of corporate governance on financial diversification. We argue that because it increases CEO perceived risk, alignment devices increase rather than decrease financial diversification. In a sample of 59 publicly traded French corporations during 2000–2006, we show that financial diversification negatively impacts shareholder return and firm value. We obtain support for several of our hypotheses: at high levels of free cash flow, CEO variable compensation increases financial diversification, whereas chairman/CEO non‐duality reduces it. In contrast, independent directors increase financial diversification at low values of free cash flow (although weakly). We also find that ownership concentration only reduces financial diversification when free cash flow is low.Copyright © 2012 John Wiley & Sons, Ltd.     

The Effect of Corporate Governance on Investment: Evidence from Real Estate Investment Trusts

This study investigates the relation between firms' investment choices and various governance mechanisms, using a sample of real estate investment trusts (REITs). We find evidence that the responsiveness of REITs' investment expenditures to their opportunities depends on their corporate governance structures. Within the set of governance mechanisms that we examine, we find particularly strong links between investment behavior and ownership. Specifically, we find that the investment choices of REITs are more closely tied to Tobin's q if they have greater institutional ownership or if they have lower director and officer stock ownership. These results are consistent with institutional owners monitoring the firm's investment policies as well as with high insider ownership allowing managers to follow their own investment agendas.     

Corporate boards and outside stakeholders as determinants of environmental litigation

Each year, hundreds of firms are prosecuted for violating environmental laws and hundreds of millions of dollars in penalties are assessed. At the same time, a much larger number of firms escape the various costs associated with litigation by adhering to the provisions of the same laws and regulations. It is not a priori apparent why this dichotomy exists. In this paper we draw on corporate governance and stakeholder theories to empirically investigate environmental lawsuits. Specifically, we compare the pre‐lawsuit profile of 209 violators to a sample of matched control firms between 1994 and 1998. We find that the likelihood of becoming a lawsuit defendant increases with board size, with the fraction of directors in industrial firms, and with the fraction of inside ownership, and decreases with the number of directorships held by outside directors. These findings are robust to alternative dependent variable specifications. Together, our results suggest that managers, researchers, and policy‐makers need to direct their attention to the corporate board as the core decision‐making unit forming corporate environmental policies. Copyright © 2002 John Wiley & Sons, Ltd.