corporate governance - decades of dialogue and data

® Academy of Management Review2003, Vol. 28, No. 3, 371-382.

INTRODUCTION TO SPECIAL TOPIC FORUM

CORPORATE GOVERNANCE: DECADES OFDIALOGUE AND DATA

CATHERINE M. DAILYDAN R. DALTON

Indiana University

ALBERT A. CANNELLA, Jr.Texas A&M University

The field oi corporate governance is at a crossroads. Our knowledge oi what we knowabout the eificacy oi corporate governance mechanisms is rivaled by what we do notknow. This special topic ionim is dedicated to continuing the rich tradition oi researchin this area, with the hope that the models and theories oiiered will propel corporategovernance research to the next level, enhancing our understanding oi those gover-nance structures and mechanisms that best serve organizational functioning.

We define governance as the determination ofthe broad uses to which organizational re-sources will be deployed and the resolution ofconflicts among the myriad participants in or-ganizations. This definition stands in some con-trast to the many decades of governance re-search, in which researchers have focusedprimarily on the control of executive self-interest and the protection of shareholder inter-ests in settings where organizational ownershipand control are separated. The overwhelmingemphasis in governance research has been onthe efficacy of the various mechanisms avail-able to protect shareholders from the self-interested whims of executives. These years ofresearch have been very productive, yieldingvaluable insights into many aspects of the man-ager-shareholder conflict. An intriguing elementof the extensive body of corporate governanceresearch is that we now know where not to lookfor relationships attendant with corporate gov-ernance structures and mechanisms, perhapseven more so than we know where to look forsuch relationships.

This current state of corporate governance re-search is what propels this special topic forum.We were intrigued by the opportunity to encour-age researchers (including ourselves) to assesswhere the field stands and set forth an agendafor future study. Predominant among our aimswas a hope that new theoretical perspectives

and new models of corporate governance wouldemerge to guide researchers toward productiveavenues of study. We hope the readers of thisspecial issue agree with us that the contributorshave helped accomplish this goal.

THEORY AND PRACTICE: THE BLIND LEADINGTHE BLIND?

In a 1997 review of corporate governance re-search, Shleifer and Vishny noted that "the sub-ject of corporate governance is of enormouspractical importance" (1997: 737). Their observa-tion highlights one of the attractions to conduct-ing research in this area: its direct relationshipwith corporate practice. Corporate governanceresearchers have a unique opportunity to di-rectly influence corporate governance practicesthrough the careful integration of theory andempirical study. It has not always been clear,however, whether practice follows theory, orvice versa. As important, it is not clear that thereis concordance between the guidance providedin the extant literature and the practices em-ployed by corporations.

THEORY

The overwhelmingly dominant theoreticalperspective applied in corporate governancestudies is agency theory (Dalton, Daily, Ell-

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Strand, & Johnson, 1998; Shleifer & Vishny, 1997).Jensen and Meckling (1976) proposed agencytheory as an explanation of how the public cor-poration could exist, given the assumption thatmanagers are self-interested, and a context inwhich those managers do not bear the fullwealth effects of their decisions. This was thefirst satisfactory explanation of the public cor-poration since Berle and Means (1932) pointedout some of the key problems inherent in theseparation of ownership and control.

The popularity of agency theory in gover-nance research is likely due to two factors. First,it is an extremely simple theory, in which largecorporations are reduced to two participants—managers and shareholders—and the interestsof each are assumed to be both clear and con-sistent. Second, the notion of humans as self-interested and generally unwilling to sacrificepersonal interests for the interests of others isboth age old and widespread. Adam Smith pre-dicted more than 200 years ago that the "jointstock company"—an analogue to the modernpublic corporation—could never survive the rig-ors of a competitive economy, because wasteand inefficiency would surely bring it down(Smith, 1776). Economists struggled with thisproblem for centuries, until Jensen and Meckling(1976) provided their convincing rationale forhow the public corporation could survive andprosper despite the self-interested proclivities ofmanagers. In nearly all modern governance re-search governance mechanisms are conceptual-ized as deterrents to managerial self-interest.

Corporate governance mechanisms provideshareholders some assurance that managerswill strive to achieve outcomes that are in theshareholders' interests (Shleifer & Vishny, 1997).Shareholders have available both internal andexternal governance mechanisms to help bringthe interests of managers in line with their own(Walsh & Seward, 1990). Internal mechanismsinclude an effectively structured board, compen-sation contracts that encourage a shareholderorientation, and concentrated ownership hold-ings that lead to active monitoring of executives.The market for corporate control serves as anexternal mechanism that is typically activatedwhen internal mechanisms for controlling man-agerial opportunism have failed.

While agency theory dominates corporategovernance research (Dalton, Daily, Certo, &Roengpitya, 2003), parts of the governance liter-

ature stem from a wider range of theoreticalperspectives. Many of these theoretical perspec-tives are intended as complements to—not sub-stitutes for—agency theory. A multitheoretic ap-proach to corporate governance is essential forrecognizing the many mechanisms and struc-tures that might reasonably enhance organiza-tional functioning. For example, the board ofdirectors is perhaps the most central internalgovernance mechanism. Whereas agency the-ory is appropriate for conceptualizing the con-trol/monitoring role of directors, additional (andperhaps contrasting) theoretical perspectivesare needed to explain directors' resource, ser-vice, and strategy roles (e.g., Johnson, Daily, &Ellstrand, 1996; Zahra & Pearce, 1989).

Resource dependence theory provides a theo-retical foundation for directors' resource role.Proponents of this theory address board mem-bers' contributions as boundary spanners of theorganization and its environment (e.g., Dalton,Daily, Johnson, & Ellstrand, 1999; Hillman, Can-nella, & Paetzold, 2000; Johnson et al., 1996; Pfef-fer & Salancik, 1978). In this role, outside direc-tors provide access to resources needed by thefirm. For example, outside directors who arealso executives of financial institutions may as-sist in securing favorable lines of credit (e.g.,Stearns & Mizruchi, 1993); outside directors whoare partners in a law firm provide legal advice,either in board meetings or in private communi-cation with firm executives, that may otherwisebe more costly for the firm to secure. The provi-sion of these resources enhances organizationalfunctioning, firm performance, and survival.

Stewardship theory has also garnered re-searchers' attention, both as a complement anda contrast to agency theory (see, for example,Davis, Schoorman, & Donaldson, 1997, for an ex-cellent overview). Whereas agency theoristsview executives and directors as self-servingand opportunistic, stewardship theorists de-scribe them as frequently having interests thatare isomorphic with those of shareholders (e.g.,Davis et al., 1997). This is not to say that stew-ardship theorists adopt a view of executives anddirectors as altruistic; rather, they recognize thatthere are many situations in which executivesconclude that serving shareholders' interestsalso serves their own interests (Lane, Cannella,& Lubatkin, 1998).

Executives have reputations that are interwo-ven with the financial performance of their firms

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(e.g., Baysinger & Hoskisson, 1990). In order toprotect their reputations as expert decision mak-ers, executives and directors are inclined tooperate the firm in a manner that maximizesfinancial performance indicators, includingshareholder returns. For example, directors,whether insiders or outsiders, concern them-selves with the effectiveness of their firm's strat-egy, because they recognize that the firm's per-formance directly impacts perceptions of theirindividual performance. In being effective stew-ards of the organization, executives and direc-tors are also effectively managing their own ca-reers (Fama, 1980).

The power perspective, as applied to corpo-rate governance studies, addresses the poten-tial conflict of interests among executives, direc-tors, and shareholders (e.g., Jensen & Werner,1988). The power relationship between CEOsand boards of directors has been of particularinterest in corporate governance research (e.g..Daily & Johnson, 1997; Finkelstein & D'Aveni,1994; Mizruchi, 1983). In CEO succession studies,for example, researchers often incorporatepower theories to help explain the successionprocess (e.g., Shen & Cannella, 2002).

Although the board legally is the more pow-erful entity in the CEO/board relationship, thereare a number of factors that operate to reduceboard power vis-d-vis the CEO. For example,CEOs can exercise influence over the succes-sion process by dismissing viable successorcandidates (Cannella & Shen, 2001). The timingof a director's appointment to the board mightalso impact the power relationship betweenboard members and CEOs, because directorsappointed during the tenures of current CEOsmay feel beholden to them and may be lesslikely to challenge them (Monks & Minow, 1991;Wade, O'Reilly, & Chandratat, 1990).

Our intent is not to provide a comprehensivelist of the many theoretical perspectives appar-ent in the corporate governance literature. Thereare several additional perspectives that wehave elected not to develop, for the sake of par-simony. For example, Zahra and Pearce (1989)have noted the applicability of class hegemonytheory and the legalistic perspective in thetreatment of boards of directors. Other research-ers have applied signaling theory to governancein initial public offering (IPO) firms (e.g., Certo,Covin, Daily, & Dalton, 2001). Social comparisontheorists have examined the CEO compensation

process (O'Reilly, Main, & Crystal, 1988). Thetheoretical perspectives we have identified—and those we have not mentioned—suggest thatresearchers face a considerable challenge indetermining those settings that best fit the as-sumptions in a given theory.

PRACTICE

As with scholarly research, agency theoreticprinciples also dominate corporate practice.Shareholder activism is instructive on thiscount. By considering the governance reformssought by shareholder activists, we can gaininsight into governance practices that are per-ceived as both legitimate and effective in pro-tecting shareholders' interests. Shareholder ac-tivism is designed to encourage executives anddirectors to adopt practices that insulate share-holders from managerial self-interest by provid-ing incentives for executives to manage firms inshareholders' long-term interests.

The more notable corporate governance re-forms have included configuring boards largely,if not exclusively, of independent, outside direc-tors; separating the positions of board chair andchief executive officer; imposing age and termlimits for directors; and providing executivecompensation packages that include contingentforms of pay (e.g., Business Roundtable, 1997;Dalton et al., 1999; National Association of Cor-porate Directors, 1996; Teachers Insurance andAnnuity Association-College Retirement Equi-ties Fund, 1997). Notably, these reforms are be-ing sought in multiple country contexts, includ-ing the United States, United Kingdom,Germany, and Australia (e.g.. Committee onCorporate Governance, 1998; The Financial As-pects of Corporate Governance, 1992; Flynn,Peterson, Miller, Echikson, & Edmondson, 1998).

Some of the more notable shareholder activ-ists are public pension funds, such as the Cali-fornia Public Employees' Retirement System(CalPERS). CalPERS has been active in seekinggreater director independence by requestingthat firms in which the fund invests (1) composetheir boards predominantly of independent di-rectors, (2) identify a lead director to assist theboard chair, and (3) impose age limits on direc-tors (Lublin, 1997; van Heeckeren, 1997). Simi-larly, the CREF arm of the Teachers Insuranceand Annuity Association-College RetirementEquities Fund (TIAA-CREF) has targeted firms


that maintain what the fund views as inappro-priate governance structures. In 1998, for exam-ple, CREF pressured Walt Disney Co. to recon-figure its board such that a majority of directorshad no ties to firm management (Orwall, 1998;Orwall & Lublin, 1998).

A variety of organizations have also issuedguidelines designed to create independentboards and ensure that boards are composed ofindividuals able to effectively discharge theirduties. An early exemplar of such efforts is TheFinancial Aspects of Corporate Governance re-port (aka the Cadbury Report). This report is theoutcome of a committee, chaired by Sir AdrianCadbury, in the United Kingdom. The committeewas formed "to address the financial aspects ofcorporate governance" (The Financial Aspects ofCorporate Governance, 1992: 15). Central to thisreport is The Code of Best Practice that outlinesguidelines for board and director independence.All U.K.-listed organizations are expected toconform to the report's guidelines.

Similarly, in 1996 the National Association ofCorporate Directors (NACD) constituted a Com-mission on Director Professionalism that in-cluded guidelines for enhanced director perfor-mance. Included among these guidelines arelimits on the number of boards on which direc-tors might serve and director term limits (e.g..National Association of Corporate Directors,1996; see also Byrne, 1996, and Lublin, 1996).These and related efforts are designed to en-hance shareholder wealth through more inde-pendent governance.

CONSIDERING THE EVIDENCE

As we described above, both researchers andpractitioners have focused largely on the con-flicts of interests between managers and share-holders and on the conclusion that more inde-pendent oversight of management is better thanless. Independent governance structures (e.g.,outsider-dominated boards, separation of theCEO and board chair positions) are both pre-scribed in agency theory and sought by share-holder activists. Were independent governancestructures clearly of superior benefit to share-holders, we would expect to see these resultsreflected in the results of scholarly research.Such results, however, are not evident (Shleifer& Vishny, 1997).

Two meta-analyses provide some context andillustrate the general state of corporate gover-nance research relying on agency theory (Daltonet al., 2003; Dalton et al., 1998). While agencytheorists clearly would prescribe boards com-posed of outside, independent directors and theseparation of CEO and board chair positions,neither of these board configurations is associ-ated with firm financial performance (Daltonet al., 1998). Importantly, this conclusion holdsacross the many ways in which financial perfor-mance has been measured in the literature. Sim-ilarly, in the second meta-analysis, Dalton et al.(2003) found no support for the agencytheory-prescribed relationship between equityownership and firm performance. Neither insidenor outside equity ownership is related to firmfinancial performance. As with the earlier Dal-ton et al. (1998) meta-analysis, this analysis in-cluded both accounting and market-based mea-sures of financial performance.

Another instructive stream of research, alsodominated by agency theory, is that addressingexecutive compensation. Two important changesin the early 1990s altered the means by whichexecutive compensation packages are struc-tured. One change was in executive compensa-tion reporting guidelines, specified by the Secu-rities and Exchange Commission (SEC). In 1992the SEC adopted the Executive CompensationDisclosure Rules (Executive Compensation Dis-closure, 1992). These rules require that ex-change-listed firms report executive compensa-tion in a manner that clearly and conciselyidentifies the compensation packages for the fivemost highly paid officers, including the CEO.Moreover, these rules require that firms provide(1) comparative performance graphs relying onindustry benchmarks, (2) estimates of the valueof executive stock options granted, and (3) thecriteria by which executives are evaluated.

The second change in the regulatory land-scape involves a change in the way executivecompensation is taxed. The enactment of Inter-nal Revenue Code 162(m) limits deductions fornonperformance-based compensation to onemillion dollars annually for those executiveswhose compensation must be reported in SECproxy filings (i.e., the CEO and the four addi-tional most highly paid firm officers). Thesechanges, in concert with shareholder activismaimed at better aligning executive pay withshareholder performance, encouraged executive

2003 Daily, Dalton, and Cannella 375

compensation practice to move toward stock op-tions and other incentives.

The increased reliance on equity-based formsof executive compensation has resulted in astronger alignment between executives andshareholders, driven largely by stock options(e.g., Lowenstein, 2000; Perry & Zenner, 2000).That is, executives today hold greater percent-ages of firm equity than they did during theearly 1990s. Despite the increase in equity-based compensation during the past decade,extant research has not provided compellingevidence of a strong relationship between exec-utive compensation and shareholder wealth atthe firm level. A recent meta-analysis of paystudies, for example, showed that firm size ac-counted for eight times more variance in CEOpay than did firm performance (e.g., Tosi,Werner, Katz, & Gomez-Mejia, 2000; see alsoDalton et al., 2003).

In sum, while issues of control over executivesand independence of oversight have dominatedresearch and practice, there is scant evidencethat these approaches have been productivefrom a shareholder-oriented perspective. Theseresults suggest that alternative theories andmodels are needed to effectively uncover thepromise and potential of corporate governance.In the following section we identify threethemes within this stream of research that webelieve carry such promise.

PROMISING THEMES

A variety of themes are relevant to corporategovernance research. As we have noted, manyof these themes are also apparent in organiza-tional practice. Below we develop threethemes—board oversight, shareholder activism,and governing firms in crisis—that we envisionas central to moving corporate governance re-search forward.

Board Oversight

The role of monitoring (i.e., board oversight ofexecutives) is a central element of agency the-ory and fully consistent with the view that theseparation of ownership from control creates asituation conducive to managerial opportunism(e.g., Jensen & Meckling, 1976). Importantly, aswe have noted, this theme dominates both cor-porate governance research and practice. Inde-

pendent boards of directors are widely believedto result in improved firm financial perfor-mance, whether measured as accounting re-turns or market returns (see, for example, Daltonet al., 1998, for an overview). Extant empiricalresearch, however, provides virtually no supportfor this belief. As a result, the monitoring modelof corporate governance has been characterizedas largely deficient (Langevoort, 2001).

The current state of corporate governance re-search suggests a reconceptualization of theoversight role. Board monitoring has been cen-trally important in corporate governance re-search (Johnson et al., 1996), with boards of di-rectors described as "the apex of the internalcontrol system" (Jensen, 1993: 862). As a demon-stration of their centrality within corporate gov-ernance, directors are responsible for key over-sight functions that include hiring, firing, andcompensating CEOs. Directors are also ulti-mately responsible for effective organizationalfunctioning (Blair & Stout, 2001; Jensen, 1993;Johnson et al., 1996).

Given the importance of boards of directors incorporate governance research, it is intriguingthat extant studies have failed to reveal a sys-tematic significant relationship between boardindependence and firm financial performance(Dalton et al., 1998). While the reasons are un-doubtedly complex, we propose two potentialexplanations as a starting point for futurediscussion and research. First, too much empha-sis may be placed on directors' oversight role, tothe exclusion of alternative roles. Second, theremay be intervening processes that arise be-tween board independence and firm financialperformance.

The current state of corporate governancesuggests that researchers and practitionersmust reconsider the relative weight placed ondirectors' oversight function. In addition to themonitoring role, directors fulfill resource, ser-vice, and strategy roles Qohnson et al., 1996;Zahra & Pearce, 1989). Rather than focusing pre-dominantly on directors' willingness or abilityto control executives, in future research scholarsmay yield more productive results by focusingon the assistance directors provide in bringingvalued resources to the firm and in serving as asource of advice and counsel for CEOs.

The contrast of oversight and support posesan important concern for directors and chal-lenges them to maintain what can become a


rather delicate balance. Many functional organ-izational attributes, like the commitment of andconsensus among organizational participants,can contribute greatly to organizational effec-tiveness and efficiency, but they also can be-come dysfunctional in the extreme (Buchholtz &Kidder, 2002; Hedberg, Nystrom, & Starbuck,1978; Shen, see this issue). The challenge fordirectors is to build and maintain trust in theirrelationships with executives, but also to main-tain some distance so that effective monitoringcan be achieved.

An important aspect of broadening the focusbeyond directors' monitoring role is consideringtheoretical foundations other than agency the-ory. In recent research scholars have discussedthe limitations of agency theory, particularly asapplied to corporate governance research (Dal-ton et al., 2003; Dalton et al., 1998; Lane et al.,1998). Moreover, agency theory is not informa-tive with regard to directors' resource, service,and strategy roles. Here, theoretical perspec-tives such as resource dependence theory (Pfef-fer & Salancik, 1978), the legalistic perspective(e.g.. Coffee, 1999), institutional theory (DiMag-gio & Powell, 1983), and stewardship theory (e.g.,Davis et al., 1997) may have greater currency.

An additional limitation of extant corporategovernance research is its near universal focuson a direct relationship between corporate gov-ernance mechanisms and firm financial perfor-mance. Approximately a decade ago Pettigrewobserved, "Great inferential leaps are madefrom input variables such as board compositionto output variables such as board performancewith no direct evidence on the processes andmechanisms which presumably link the inputsto the outputs" (1992: 171). This criticism is cer-tainly not unique to corporate governance stud-ies; however, the strong reliance on proxies forprocesses and dispositions has undoubtedly re-sulted in limitations in researchers' abilities touncover optimal governance mechanisms andconfigurations. In an excellent synthesis ofboards of directors research, Forbes and Mil-liken note:

The influence of board demography on firm per-formance may not be simple and direct, as manypast studies presume, but, rather, complex andindirect. To account for this possibility, research-ers must begin to explore more precise ways ofstudying board demography that account for therole of intervening processes (1999: 490).

Shareholder Activism

Shareholder activism has emerged as an im-portant factor in corporate governance. Share-holders with significant ownership positionshave both the incentive to monitor executivesand the influence to bring about changes theyfeel will be beneficial (Bethel & Liebeskind,1993). Recent legislative and regulatory changeshave facilitated shareholders' ability to engagein activist efforts. These changes are fundamen-tal to the effectiveness of the corporate gover-nance system, from the perspective of share-holders, since the effectiveness of concentratedownership is largely dependent on the effective-ness of the legal system that protects sharehold-ers' property rights (Shleifer & Vishny, 1997).

An early 1990s regulatory change by the SECmade it significantly easier for institutional in-vestors, in particular, to engage in activist ef-forts. Prior to the regulatory change, sharehold-ers were prohibited from discussing corporatematters with more than ten shareholders orshareholder groups without prior SEC approval(Jensen, 1993). This rule was relaxed, permittingshareholders holding less than 5 percent of out-standing shares—with no vested interest in theissue being discussed and not seeking proxyvoting authority—to freely communicate withother shareholders (Jensen, 1993).

As a result of this and similar changes, insti-tutional investors have emerged as an impor-tant force in corporate monitoring (e.g.. Black,1990; Davis & Thompson, 1994). Institutional in-vestors have some incentive to actively monitorexecutives. Unlike most board members whohold modest, if any, ownership positions in thefirms they serve, institutions tend to hold muchlarger stakes (Blair, 1995; Conference Board,2000). Moreover, institutions account for the vastmajority of U.S. stock exchange transactions(Zahra, Neubaum, & Huse, 2000). While the hold-ings of a given institutional investor fund mightseem modest at an average of between 1 and 2percent of a given firm's outstanding shares, thedollar value of these holdings can be substan-tial (Blair, 1995).

Jensen (1993) has recently questioned thepromise of shareholder activism—specifically,institutional investor activism. Not all institu-tional investors, for example, have demon-strated an inclination toward actively challeng-ing firms' executives (Brickley, Lease, & Smith,


1988; David, Kochhar, & Levitas, 1998; Kochhar &David, 1998). Only those institutional investorsnot subject to actual or potential influence fromcorporate management are likely to engage inactivism (Brickley et al., 1988; Coffee, 1991; Davis& Thompson, 1994). Brickley et al. (1988) havetermed these piessuie-iesistant institutional in-vestors. An additional concern is that whilepressure-resistant institutional investors havebeen effective in persuading officers and direc-tors to institute governance changes, thesechanges have not necessarily led to improvedfirm performance (Wahal, 1998). This lack ofevidence again calls into question the share-holder-centered models of corporate governance.

Institutional investors' increasing reliance onindexing investment strategies is also a factorin funds' propensity to engage in activism. In-dexing is a passive investment strategy thatinvolves buying a specified number of sharesfrom a delineated set of firms, such as the S&P500 (Coffee, 1991; Cox, 1993; Rock, 1991). The di-rection of the anticipated impact on institutionalinvestor activism is uncertain, however. Index-ing may result in fund managers' adopting theposition that activism is largely unnecessary, ifnot also ineffective. Fund managers may be-lieve that, on average, their portfolio of firmswill yield returns comparable to those for themarket as a whole, regardless of the governancestructure of any given firm in the overall port-folio. Additionally, because fund managers re-lying on indexing strategies have a predefinedset of firms from which to select, they may per-ceive their ability to divest the shares of firmswith which they are dissatisfied as largely un-tenable over the long term.

Alternatively, fund managers, as a function ofthe boundaries around the set of firms in whichthey might invest, may elect to actively monitorofficers and directors, given the constraints inaltering the portfolio of firms in which the fundinvests. This is consistent with fund managers'having a choice between exit—divesting afirm's stock—and voice—shareholder activism(Black, 1992). This strategy is not costless, how-ever. Institutional investor activism can be ninetimes as costly as pure reliance on indexingstrategies (Makin, 1993).

Jensen (1993) has also commented on the lim-itations in shareholder activism. He has notedthat shareholders' influence is largely groundedin the legal system. In his opinion, the legal

system "is far too blunt an instrument to handlethe problems of wasteful managerial behavioreffectively" (Jensen, 1993: 850). This reasoning,however, may have less to do with the legalsystem than with the need to further refine re-search approaches with regard to shareholderactivism efficacy. As with board of director re-search, this stream of research likely would ben-efit from greater consideration of the processesby which shareholders seek to institute gover-nance changes, as well as consideration of theanticipated outcomes of their activist efforts. Ad-ditionally, these approaches will require ex-panded theoretical foundations on which tobuild future research.

Governing Firms in Crisis

The vast majority of organizational literatureaddresses the stable or growing firm—that is,the focus is on effectively managing the suc-cessful organization (e.g., Jensen, 1993; Summeret al., 1990; Whetten, 1980). Relatively little re-search has been devoted to the effective man-agement of the firm in crisis, financial or other-wise (Daily, 1994). The volatility to which firmsworldwide have been subjected in recent yearssuggests that the relative inattention to firms incrisis is unfortunate. As a result, this inattentionpresents an opportunity for governance re-searchers to augment our understanding of theeffectiveness of alternative forms of governance.

In a small but productive stream of research,scholars have investigated governance struc-tures in financially distressed firms. Their re-search has supported the importance of gover-nance structures in explaining the likelihoodthat a firm will file for bankruptcy. Specifically,in contrast to the general body of governanceresearch, a series of studies has shown thatboard independence is related to firm perfor-mance, as measured by the incidence of bank-ruptcy filing (Daily & Dalton, 1994a,b; Hambrick& D'Aveni, 1992). Daily (1995a) has noted mixedsupport for board independence, however.

A central task of effectively functioningboards is the removal of poorly performing ex-ecutives (Fama, 1980). Boards with greater struc-tural independence (i.e., outsider-dominated,separate board leadership structure) may bemore willing to remove ineffective executivesprior to a crisis reaching the point of corporatebankruptcy. This action may prove critical in


reversing a financial decline, since deficiencieswithin the top management team are related tofirm failure (e.g., Hambrick & D'Aveni, 1992).Moreover, key organizational stakeholders maylose confidence in the management team per-ceived to be responsible for the firm's crisis.Stockholders, for example, react positively to ex-ecutive changes following a bankruptcy filing(Bonnier & Bruner, 1989; Davidson, Worrell, &Dutia, 1993).

Interestingly, among firms in crisis, the tightgovernance prescribed by agency theory mayactually be harmful to firm survival and share-holder interests. As described by Hambrick andD'Aveni (1988, 1992), corporate failures fre-quently unfold as downward spirals in whichexecutive teams are replaced so quickly andfrequently that they have no time to devise andimplement strategies that might, in fact, savethe organization. Further, agency theory's pre-scription to replace poorly performing managersassumes there are willing and able replace-ments ready to step in for those who are re-moved. If (as agency theory implies) the onlygood managers are those associated with high-performing firms, it is unclear why any of thosegood managers would willingly leave a high-performing firm to take over one threatened bybankruptcy.

Finally, when a firm spirals toward bank-ruptcy, another of its key constituencies maypreempt shareholders. That is, banks and otherlending agencies may displace shareholders asthe key stakeholders to be satisfied. While thefirm may fail in' shareholders' eyes, the resolu-tion of the bankruptcy may well resolve most orall of the lenders' problems (Gilson, 2001). This isa situation in which the legal rights of somecorporate participants (lenders) come to out-weigh those of shareholders.

Research investigating the presence of insti-tutional investors in the financially decliningfirm has yielded less consistent results than re-search addressing boards of directors in crisisfirms. Daily and Dalton (1994a), for example,found an inverse relationship between institu-tional investor equity holdings and the inci-dence of bankruptcy in the five years prior to theactual bankruptcy filing. In contrast. Daily (1996)did not corroborate these findings. She did, how-ever, find that institutional investor equity hold-ings, contrary to expectation, were positivelyand significantly associated with the length of

time spent in bankruptcy reorganization andnegatively associated with a prepackagedbankruptcy filing. These findings suggest theneed for a greater understanding of the role ofinstitutional investors as a governance mecha-nism in the firm in crisis.

In research addressing the governance/performance relationship in firms in crisis,scholars have primarily examined firms eitherimmediately prior to or at the point of crisis(Daily, 1994). There remains much to learn aboutgovernance mechanisms that enable firms toavoid a crisis such as financial decline. There isalso an opportunity to significantly augment re-searchers' understanding of the period follow-ing a crisis. For example, the postbankruptcyperiod is a largely underdeveloped area of re-search. Researchers know very little about gov-ernance structures that enable a firm to success-fully emerge from financial crisis (Daily, 1994;Daily & Dalton, 1994a). Given the low rates ofsuccess in emerging from a bankruptcy filing(Daily, 1995a; LoPucki & Whitford, 1993; Moulton& Thomas, 1993), focused attention on gover-nance mechanisms that might assist in this ef-fort holds much promise.

DISMANTLING FORTRESSES

Attention to the three themes we have out-lined provides the promise of enabling re-searchers to develop a more comprehensive ap-preciation for the role that corporate governanceplays in organizational effectiveness. There arealso a number of potential barriers to movingcorporate governance research forward that de-serve attention. While some barriers are largelyout of researchers' control, others are moredirectly under the discretion of the researchcommunity.

One of the more challenging barriers re-searchers face is gaining access to the types ofprocess-oriented data that, we have suggested,will enhance our understanding of the effective-ness of governance mechanisms. The potentialvalue of process data is considerable. As notedby Forbes and Milliken, process-oriented gover-nance research "will enable researchers to bet-ter explain inconsistencies in past research onboards, to disentangle the contributions thatmultiple theoretical perspectives have to offer inexplaining board dynamics, and to clarify thetradeoffs inherent in board design" (1999: 502).


Access to these data, however, has proven ex-traordinarily difficult, for it requires the cooper-ation of corporate boards of directors. To date,boards have been largely unwilling to providesuch access.

Directors' reticence to invite researchers intothe "black box" of boardroom deliberations isunderstandable. The increase in shareholderactivism has been accompanied by an increasein shareholder lawsuits in recent years (e.g.,Kesner & Johnson, 1990). Directors fear thatopening up boardroom activity to external scru-tiny may also increase their risk of being subjectto a shareholder lawsuit. These fears are notnecessarily misplaced. Recent efforts at gover-nance reform have included "increasing the li-ability exposure for directors who fall down onthe job and fail to prevent some form of misbe-havior by insiders" (Langevoort, 2001: 800). Theprospects of boardroom access for firms experi-encing crisis are even lower. Leaders inthese firms are especially unlikely to exposethemselves to unnecessary scrutiny (Weitzel &Jonsson, 1989).

It is true that the vast majority of corporategovernance research relies on archival data-gathering techniques. We would, however, beremiss in not recognizing that there exists asmall subset of corporate governance studiesthat rely, at least in part, on primary data (e.g..Daily, 1995b; Pearce & Zahra, 1991; Westphal,1999; Zahra, 1996; Zahra et al., 2000). Also, manycorporate governance researchers will, at somepoint, have attempted to access primary gover-nance data. Many studies incorporating primarydata provide a limited view of corporate gover-nance processes and outcomes. It is typical, forexample, for these studies to be based on asingle organizational respondent, typically theCEO (e.g.. Daily, 1995b; Pearce & Zahra, 1991;Zahra, 1996; Zahra et al., 2000).

Another limitation to advancing the field ofcorporate governance is the near exclusive reli-ance on agency theory in extant research. While.we certainly do not mean to beat the proverbialdead horse, we feel compelled to reiterate theimportance of considering alternative theoreti-cal perspectives. Blair and Stout (2001) recentlyprovided an interesting analysis of why agencytheory may be largely ineffective at demonstrat-ing significant relationships between boards ofdirectors and firm performance. They suggest areconceptualization of the traditional treatment

of boards of directors within the agency theoryframework.

Agency theorists present the board of direc-tors as a mechanism to protect shareholdersfrom managerial self-interest. In previous re-search scholars have even conceptualizedboards of directors as a second level of agency(see, for example. Black, 1992). Within thisframework, directors' primary role is maximiz-ing shareholder value. Blair and Stout summa-rize this view as follows: "Provided the firm doesnot violate the law, directors ought to serve andbe accountable only to the shareholders" (2001:407). In contrast to this conceptualization, Blairand Stout note that directors' responsibility isnot exclusively to shareholder value maximiza-tion; rather, they serve as "'mediating hierarchs'charged with balancing the sometimes compet-ing interests of a variety of groups that partici-pate in public corporations" (2001: 409).

Blair and Stout's (2001) analysis suggests thatdirectors need a high degree of discretion inallocating corporate resources. This is as anal-ogous to resource dependence theory as it is tothe principal-agent model. This reconceptual-ization of directors' responsibilities and rolesfurther highlights the importance of incorporat-ing alternative theoretical perspectives in futurecorporate governance research.

One of the greatest barriers to advancing thefield of corporate governance will perhaps beone of the more controversial and difficult toaddress. It is, however, one that is directly inresearchers' control. We refer to this barrier asempirical dogmatism. That is, researchers toooften embrace a research paradigm that fits arather narrow conceptualization of the entiretyof corporate governance to the exclusion of al-ternative paradigms. Researchers are, on occa-sion, disinclined to embrace research that con-traindicates dominant governance models andtheories (i.e., a preference for independent gov-ernance structures) or research that is critical ofpast research methodologies or findings. Thiswill not help move the field of governanceforward.

To advance the study of corporate gover-nance, researchers will need to advance beyondestablishing—and protecting—our own for-tresses of research. The battle to advance re-search and practice must be a collective one. Toborrow from a military cliche, individual re-search efforts that do not genuinely embrace the


full scope of tools available to us as researcherswill result in continued won battles, with littleprogress toward ending the war.

CONCLUSION

We recognize that our introduction to this spe-cial topic forum has likely raised many moreissues than it has addressed. This is, however,consistent with our primary goal. Our intent wasto provide a forum for raising issues that mightmove corporate governance research forward,while at the same time providing a venue toshowcase cutting-edge research models andtheories. We hope the readers of this specialtopic forum find that we have accomplishedboth goals, at least in part.

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Catherine M. Daily is the David H. Jacobs Chair of Strategic Management in the KelleySchool of Business, Indiana University. She received her Ph.D. in strategic manage-ment from Indiana University. Her research interests include corporate governance,strategic leadership, the dynamics of business failure, ownership structures, andmanagerial ethics.

Dan R. Dalton is the dean and Harold A. Poling Chair of Strategic Management in theKelley School of Business, Indiana University. He received his Ph.D. from the Univer-sity of California, Irvine. His work focuses on corporate governance, particularlyoption repricing, equity holdings, stock-based compensation, and IPOs.

Albert A. Cannella, Jr., is professor of strategic management. Mays Faculty Fellow,and director of the Center for New Ventures and Entrepreneurship at Texas A&MUniversity. He received his Ph.D. from Columbia University. He currently serves aspast president of the Business Policy and Strategy Division of the Academy of Man-agement and teaches entrepreneurship, strategic management, research methods,and project management.

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