Corporate Governance and the Business Life Cycle

Corporate Governance and the Business Life Cycle (Corporate Governance in the New Global Economy), Igor Filatotchev (Editor)

Most of the empirical literature on corporate governance is rooted in agency theory. While the principle-agent relationship and monitoring play a central role, governance is also concerned with entrepreneurship and contextual issues. The editor has chosen a good cross section of articles to help develop a framework to understand organizational governance and its life-cycle evolution. Part 1 addresses general interrelationships; part 2 moves us to IPOs; part 3 more mature firms; and part 4 declining firms and buy-outs.

One of the more interesting chapters is by Matthew D. Lynall, Brian R. Golden and Amy J. Hillman, which points to the importance of dominate power at the time of board formation. Path dependence suggests a board composition that meets environmental needs at one stage may be inappropriately locked-in at another and that, in general, boards have a hard time addressing the changing needs of their environment over time. The authors set up an interesting typology of stages and propositions based on who has power at critical stages.

Lucian Arye Bebchuk and Mark J. Roe also address the idea of path dependency in chapter 5. One source of dependence is the country where the firm is established, resulting in what they label “structure-driven.” The other is the “rule-driven” path by which they appear to mean both those developed by the corporations themselves and those applied to them from outside.  The structural driven path is grounded on fixed adaptive costs and existing ownership structures, while the rule driven path is influenced by the power various interests groups have. Like much of Roe’s previous work, this essay continues to explain why key differences persist across boundries, despite globalization and market efficiencies.

In part 2, Eric Gedajlovic, Michael H. Lubatkin and William S. Schulze’s discussion of the transition of founder managed firms to professionally managed firms employs a governance perspective to demonstrate that more than techno-economic considerations are at stake. Deeply rooted legacies of founders often require “fundamental changes to an organizations’s resources, processes, values and culture.” Human agency, power-dependence, and normative claims are not so easily addressed by knowledge-based theory. Management scholars have borrowed too heavily from economics and finance, not enough from governance, which can provide a richer conceptualization of power relationships.

Also in part 2, Shaker A. Zahra, Donald O. Neubaum and Morten Huse test a number of hypotheses. Not surprisingly, they find CEO and board ownership positively associated with corporate entrepreneurship (CE). They also find a negative association between CE and stock ownership by “pressure-sensitive” institutions, such as banks, that fail to support long-term CE initiatives whereas “pressure-resistant” institutions, such as pension funds, do. Other findings provide support to limiting the size of boards, which generally start too small but grow too big.

In part 3, one of the more interesting chapters by Michael A. Hitt, Robert E. Hoskisson, Richard A. Johnson and Douglas D. Moesel found strong support for the idea that firms actively buying or selling businesses, or both, are likely to produce less internal innovation. Given the increasingly global nature of such transactions, this finding seems one well worth more attention.

The suggestion is that management places so much energy into mergers, they have little time to manage internal projects. Further, target companies become risk averse, impacting both sides of any possible equation. While strategic controls have a positive effect on innovation, financial controls become increasingly focused on the short-term. This also seems to apply to companies like General Electric that have developed a strategy of integrating innovative firms. It just takes longer for them to become moribund.  (my word, not theirs)

A few of the chapters, such as one by Kenneth J. Rediker and Anju Seth appear to be somewhat dated. While that is almost always true of books in the field of corporate governance, its is especially true of research applied to a study of ownership concentration in bank holding companies using data from the early 1980s. I would love to see these same authors or their protege update the work.

In part 4 Catherine M. Daily and Dan R. Dalton compare major firms that went bankrupt with a matched group of survivor firms. Bankrupt firms were more likely to have CEOs serving simultaneously as board chairpersons. They also had a higher proportion of directors affiliated with the CEO.

The book addresses a subject that has received far too little attention, since most studies either focus on mature firms or start-ups. The collected papers provide an excellent start in critiquing traditional agency theory by beginning to place our understanding of organizations in the context of both their internal and external environments. Perhaps it can help corporate governance, as an academic field, break out of its own relative path dependency.