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Institutions and Corporate
Governance
Peer C. Fiss
15
From its inception, the institutional
tradition of studying organizations has
been informed by themes of control and
coordination – themes that fall within the
domain of corporate governance, broadly
defined as being concerned with the implicit
and explicit relationships between the corpo-
ration and its constituents, as well as the rela-
tionships between these constituent groups
(Bradley, Schipani, Sundaram, and Walsh,
1999). With its insights into the nature of
authority and control structures, institutional
theory is uniquely positioned to provide
important contributions to scholarship on
corporate governance. However, the reverse
is also true: because of its concerns with the
control of the corporation, corporate gover-
nance presents a particularly attractive field
for institutional theory and an opportunity to
clarify and refine it.
While questions about corporate control go
back to the emergence of the publicly owned
corporations as a form of organization (Berle
and Means, 1932), the literature on corporate
governance presents a somewhat more recent
phenomenon, establishing itself as a distinct
field of research only in the late 1970s. Since
then, traditional scholarship on corporate gov-
ernance has been largely dominated by a legal-
economic view of the firm as a nexus of
contracts (e.g. Jensen and Meckling, 1976;
Fama and Jensen, 1983; Hart, 1995). This
approach has placed the principal-agency
problems at the center of most researchers’
concerns, and the result has been a rather
narrow conception of corporate governance as
concerning primarily the relationship between
shareholders and managers (e.g. Rubach and
Sebora, 1998; Shleifer and Vishny, 1997: 737).
The main thrust of this body of research has
accordingly been to investigate the optimal
contracts between shareholders and managers
(Fama and Jensen, 1983; Eisenhardt, 1989),
and has resulted in a large body of research that
addresses a variety of incentive mechanisms to
control the behavior of managers, focusing
mostly on compensation, the composition of
the board of directors, and the market for cor-
porate control as the three primary control
issues (see e.g. Blair, 1995; Shleifer and
Vishny 1997; Walsh and Seward, 1990;
Zingales, 1998 for reviews of this literature).
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Although the contractarian view clearly
emerged as the dominant paradigm of corpo-
rate governance research since the 1980s,
some recent research has begun to move away
from this focus on the effectiveness of individ-
ual mechanisms and has started to take a more
holistic view of the corporate governance
system as a configuration of interdependent
elements (e.g. Beatty and Zajac, 1994; Davis
and Useem, 2002). Such a view also empha-
sizes that corporate governance systems them-
selves are embedded in larger institutional and
legal frameworks, and that effective practices
are highly contingent on the institutional
environment in which corporations and their
stakeholders are embedded (e.g. Davis and
Useem, 2002). Emerging from the foundational
work of Coase (1937), the new institutional
economics of North (1990, 2005) and
Williamson (1981, 1988) have offered frame-
works regarding the role of institutions in cor-
porate governance that are rooted in a
boundedly rational actor model of the corpora-
tion. For example, North (1990) argues that a
national system of corporate governance may
be seen as an institutional matrix that provides
both the roles to the players and the goals to be
pursued by the corporation. Similarly,
Williamson (2000) acknowledges the embed-
dedness of corporate governance arrangements
in larger, society-wide systems of institutions.
Given several comprehensive and insightful
reviews of the contractarian approach to corpo-
rate governance (see e.g. Eggertsson, 1990;
Furubotn and Richter, 1997; Menard and
Shirley, 2005; but also Fligstein and Choo,
2005; Fligstein, 2001; Davis, 2005), in this
chapter I will focus relatively more on the con-
tributions of sociological institutionalism to
the study of corporate governance. In doing so,
I will examine corporate governance using a
socially informed view of actors and corpora-
tions as deeply enmeshed in systems of norms
and relations that are both culturally and socio-
politically constructed. My goal in this chapter
is thus to present an alternative account of how
corporate governance may be studied using the
tools of sociological institutionalism, to survey
how institutional theory has so far contributed
to the study of corporate governance, and to
examine a number of fruitful areas for further
inquiry, such as the study of contrasting
national governance systems, governance
in emerging economies, and the effect of
globalization.
AN INSTITUTIONAL APPROACH TO
CORPORATE GOVERNANCE
To accomplish the task of outlining an insti-
tutional approach to corporate governance,
a few clarifications are in order. The first
of these concerns the role of power in
institutional accounts. Earlier forms of insti-
tutional theory have been criticized for their
relative inattention to themes of power and
domination (e.g. Perrow, 1985; Clegg, 1989).
Since power relations lie at the heart of cor-
porate governance, such criticism is of
importance and needs to be addressed. In
response to it, I will follow prior work that
has viewed institutions as inherently about
the role of power (Stinchcombe, 1968: 107),
and institutionalization as a process that is
innately political, reflecting the relative
power and interests of coalitions of actors
(DiMaggio, 1988). Such an approach places
issues of power and control squarely at
the center of its attention, considering
governance systems as reflecting underlying
cultural narratives or moral orders that
define how social relations should be
constructed and whose interests have
priority (Wuthnow, 1987). These moral
orders thus form the foundation of gover-
nance systems and are expressed in the
ways in which power and influence work.
The view presented here furthermore
necessarily implies that we need to pay
attention to both sides of the power relation-
ship, including both obedience to power
and resistance to it (e.g. Clegg, 1989). It
thus points to the potential of institutional
theory to offer a critique of existing power
arrangements (Lawrence and Suddaby,
2005). In this sense, I will focus both on the
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INSTITUTIONS AND CORPORATE GOVERNANCE 391
enactment and acceptance of institutions as
well as on forms of resistance to institutions,
particularly in relation to the actual enact-
ment of institutional orders in governance
(cf. Davis, 2005).
Second, an institutional view of corporate
governance needs to start with a clear under-
standing of the nature of governance arrange-
ments. As noted earlier, the standard view of
corporate governance rooted in the economic
and legal traditions places the defense of the
shareholders’ interests at its center (Shleifer
and Vishny, 1997; Tirole, 2001). Its associated
scholarship considers governance arrange-
ments as emerging from the distribution of
property rights and based on two fundamental
assumptions. The first holds that shareholders –
as the ‘residual risk bearers’ of the corpora-
tion – are the only stakeholder group that is
not compensated by contract. Within financial
economics, this view of shareholders alone
bearing the risk of corporate failure is so
widely spread as to be taken as self-evident
(O’Sullivan, 2000). The second assumption is
that holding managers accountable only to
shareholders will result in the most efficient
aggregate social welfare outcome. It follows
from this assumption that the best governance
system for all stakeholders is to exclude all
constituents except shareholders from the
governance of the corporation (Hansmann and
Kraakman, 2001: 441).
In contrast, an institutional approach to cor-
porate governance suggests that corporate gov-
ernance arrangements always reflect political
processes (Cyert and March, 1963; Davis and
Thompson, 1994) and as such do not naturally
arise out of an order of property rights. Instead,
I believe that governance models are better
understood as containing implicit and explic-
itly normative theories or logics about the
distribution of power and the ‘natural’ order
of interests in the corporation. In other words,
governance models are articulated systems
of meaning that embody the moral order as
they explain and justify the proper allocation
of power and resources. This view of gover-
nance models goes back to the work of
Reinhard Bendix, who understood managerial
ideologies to be ‘all ideas which are espoused
by or for those who seek authority in economic
enterprises, and which seek to explain and jus-
tify that authority’ (1956: 2). By emphasizing
the symbolic nature and cultural embedded-
ness of corporate governance models, the view
advanced here likewise builds on recent work
on the role of institutional logics, defined as
‘the axial principles of organization and action
based on cultural discourses and material prac-
tices prevalent in different institutional or soci-
etal sectors’ (Thornton, 2004: 2). The logics
that underlie corporate governance models
thus refer to and emerge from the wider cul-
tural belief and rule systems that structure cog-
nition and guide decision-making (Wuthnow,
1987; Lounsbury, 2007). As such, governance
models are similar to conceptions of control
(Fligstein, 1990; 2001) in that they refer to
local orders that provide actors with cognitive
frames to interpret the actions of others as well
as their own.
The view of corporate governance models
presented here is much more dynamic and
culturally constructed than that employed in
the contractual tradition. It also differs from
the contractual approach by highlighting
issues of power and contestation, and partic-
ularly resistance to governance models.
Rather than being rigid structures, gover-
nance models are symbolic orders that
require constant tending to be maintained.
Such an approach thus also speaks to a
common theme in the institutional literature,
namely questions of why and how institu-
tional change comes about where existing
institutional arrangements become replaced
with alternative orders.
There are several reasons why governance
models and their underlying normative claims
are more fragile and vulnerable to alternative
theories than usually assumed. First, as is true
for all systems of institutional order, the mean-
ing embodied by governance models is inher-
ently unstable, as the very symbols that are
their building blocks tend to be open to differ-
ent interpretations that may empower different
actors. Sewell (1992) refers to one aspect
of this as the ‘transposability of schemas,’
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392 THE SAGE HANDBOOK OF ORGANIZATIONAL INSTITUTIONALISM
suggesting that culturally learned rules and
assumptions ‘can be applied to a wide and not
fully predictable range of cases outside the
context in which they are initially learned’
(1992: 17). This is particularly true when gov-
ernance models and practices are applied
across institutional contexts. Similarly, exist-
ing institutional settlements are built on the
remains of previously contending alternatives,
many of which remain available as differing
models of organizing. As a result, the hege-
mony of governance models is intrinsically
unstable and constantly threatened, either by
the memories of prior social orders
(Schneiberg, 2006), by alternative versions of
what could be (Comaroff and Comaroff,
1991), or by contradictions within the current
orders (Clemens, 1997).
Furthermore, existing models have to be
passed on, either through reproduction and
socialization or through conversion of new
members. However, transmission is problem-
atic, because many socialization processes
remain far from complete (Zucker, 1977). As
a result, social systems in general, and sys-
tems of normative claims in particular, tend to
suffer from ‘social entropy’ (Zucker, 1988),
with a gradual erosion of the accepted beliefs
and assumptions on which the models them-
selves are based, opening the door for chal-
lengers such as the shareholder-oriented
model that replaced the traditional managerial
model of governance (e.g. Fligstein, 1990;
Lazonick and O’Sullivan, 2001; Dore, 2000).
Finally, governance models are vulnerable to
technical and economic changes that result in
discrepancies between actual experience and
explanation offered by the normative narrative
embodied in them (e.g. Goodrick, Meindl, and
Flood, 1997). Such techno-economic changes
may open up performance gaps (Abrahamson,
1996), thereby creating opportunities for chal-
lengers to step in and offer alternative explana-
tions and ways of organizing. In this regard,
Barley and Kunda (1992) have shown that the
ebb and flow of managerial ideologies is
related to broad cycles of economic expansion
and contraction, leading to alternating waves
of rational and normative rhetorics of control.
Likewise, many of the current claims about the
superiority of the shareholder-oriented model
of the corporation point to the performance
gaps between the presumably superior model
and more traditional, stakeholder-oriented
models (e.g. Hansmann and Kraakman, 2001;
Bradley et al., 1999).
The view of governance models presented
here also speaks to another central concern in
institutional theory, namely the relationship
between taken-for-grantedness and purpo-
sive agency (Colyvas and Powell, 2006).
Building on the work of Comaroff and
Comaroff (1991), it suggests a continuum of
governance practices that ranges from the
salient and openly contested to the taken-for-
granted and therefore uncontested assump-
tions about the governance of corporations.
Taken-for-grantedness refers to those aspects
of the corporate governance world that ‘... go
without saying, because, being axiomatic,
they come without saying’ (Comaroff and
Comaroff, 1991: 23). However, due to the
mutability of meaning systems and inherent
contradictions, even highly legitimated gov-
ernance models may become subject to chal-
lenges, and it may thus be better to
conceptualize the cultural field in which they
operate as a ‘fluid, often contested, and only
partially integrated mosaic of narratives,
images, and signifying practices’ (Comaroff
& Comaroff, 1991: 29). In this field, actors
will frequently aim to stake a claim for
new and differing governance against
contenders, resulting in continuing contest
and struggle. Such a view of governance has
been advanced by some authors in the
accounting literature. For example, Covaleski,
Dirsmith, and Michelman (1993) argue that
control-systems such as case-mix accounting
present unfinished processes infused with
power and are open to manipulation by vari-
ous organizational actors, thus echoing the
idea expressed by Thompson (1990) that the
symbolic order is fragile and can never be
taken for granted; its maintenance is as
problematic as its change, making the ‘ideo-
logical work of repair and renovation’ a never-
ending project (Scott, 1985: 23).
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INSTITUTIONS AND CORPORATE GOVERNANCE 393
The view I have advanced here does not
imply that governance regimes cannot take on
a relatively stable nature. Clearly, the symbolic
orders that underlie corporate governance
regimes can become reinforced by formalized
arrangements such as legal regulations and
political sanctions. But while such legal under-
pinnings can have a stabilizing effect, what
emerges eventually is a continuum of gover-
nance regimes, ranging from settled periods of
relative stability to unsettled periods of chal-
lenge and change, with cultural narratives
about power and authority either sustaining
existing orders or providing the tools for con-
structing new ones (Swidler, 1986).
So far, I have argued for an institutional
approach to corporate governance that takes
into account the normative nature of culturally
constructed governance models and highlights
the role of conflict and resistance in corporate
governance. Yet, such governance models are
not merely higher-order systems of meaning.
Rather, much of the action of institutions lies
in their everyday enactment and the ways in
which abstract meaning systems become tan-
gible in everyday experience. As suggested by
Scott (1985) and Fine & Sandstrom (1993), to
understand the working of institutions it is
essential to tie them closely to action and
everyday practice, and specific governance
practices in particular.
A focus on practices is attractive to the study
of corporate governance because the normative
claims that inform governance models are not
always readily transformed into corresponding
practices. The overt exercise of power reflect-
ing self-interest is frequently avoided for fear
it would mobilize opposition. As a result, pow-
erful actors often move to replace overt power
with more formalized and structural control
practice (Covaleski et al., 1993). Accordingly,
the appropriate focus may frequently be not
only overt espousal and diffusion of gover-
nance ideologies, but also the practices
through which such ideologies are enacted.
Particularly formalized, highly institutional-
ized practices such as financial incentive plans
or monitoring arrangement present effective
tools for influencing social situations and are
‘an adroit substitute for the overt use of power,
the very deployment of which might actually
signal weakness’(Covaleski et al., 1993: 76;
also Pfeffer, 1981). At the same time, agents
that are the target of such monitoring and con-
trol attempts frequently try to influence the
implementation of practices such as incentive
plans or financial reporting. This highlights
issues of spread, implementation, and manipu-
lation of governance practices, i.e. changing
either the reach or meaning of the practice
within and for the organization (Davis, 2005).
In other words, practice diffusion and imple-
mentation frequently present the grounds on
which battles between various interest groups
are fought, and thus deserve special attention.
THE DIFFUSION OF GOVERNANCE
PRACTICES
The diffusion of corporate governance prac-
tices presents perhaps the most developed
field of applying institutional theory to cor-
porate governance. Much of this research has
focused on the antecedents of successful dif-
fusion, focusing specifically on the compati-
bility of the diffusing practice and the
adopting organization. An institutional view
of governance practices as implicit theories
raises the question of fit between practice
and those theories held by adopters, as prac-
tices do not diffuse into an institutional
vacuum, but rather into a pre-existing moral
universe or ‘cultural field’ (Comaroff and
Comaroff, 1991). One of the first works to
take this approach was Hirsch’s (1986) study
of the rhetoric of corporate takeovers, which
argued that an early misfit between the
understandings surrounding takeovers and
the dominant views held by the business
community inhibited the spread of this
practice. However, a normative framing of
the practice in line with the values of
American business culture eventually facili-
tated the diffusion and legitimation of
takeovers. Similarly, Davis and Greve (1997)
found that the spread of poison pills and
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394 THE SAGE HANDBOOK OF ORGANIZATIONAL INSTITUTIONALISM
golden parachutes – two anti-takeover
defenses that became popular during the
wave of hostile takeovers of the 1980s – fol-
lowed differing pathways that depended on
the normative claims embedded in these
practices. Poison pills diffused quickly and
widely through shared directorships as their
legitimacy was based on the defense of the
corporation against outside raiders; a claim
that could be readily rationalized by outside
directors. In contrast, the diffusion of golden
parachutes proceeded much more slowly
through regional elite networks, which is
commensurate with a practice that was sur-
rounded by greater controversy as it
appeared to clearly privilege executives over
other constituents. Examining the spread of a
shareholder value orientation among German
firms, Fiss and Zajac (2004) and Sanders and
Tuschke (2007) find evidence that gover-
nance practices compatible with the mental
models and educational background of top
executives are also more likely to be imple-
mented. Similarly, Palmer and Barber (2001)
show the importance of elite education for
determining diversifying acquisition activity,
while Espeland and Hirsch (1990) point to
the important role that accounting played in
providing the conceptual underpinnings that
facilitated and legitimated the U.S. conglom-
erate mergers of the 1960s. By offering a
framework for making sense of the firm as a
portfolio of income streams, the rhetoric
of accounting accelerated the spread of a
variety of practices, culminating in the emer-
gence of the hostile takeover and the market
for corporate control. These studies highlight
the role of theorization in the diffusion
process (Strang and Meyer, 1993), where
diffusing practices are framed such as to
make them more compatible with existing
cognitive and social requirements, an insight
that has also been applied to the diffusion
and institutionalization of corporate gover-
nance codes in the international arena
(Enrione, Mazza, and Zerboni, 2006).
Other authors have pointed to the role of
mimetic isomorphism in influencing choices
of governance mechanisms. For example,
Ahmadjian and Robinson (2001), in studying
the spread of downsizing among Japanese
firms, point to the importance of a ‘safety-in-
numbers’ effect, where growing prominence
of a practice facilitated its spread as individual
firms were less likely to be noticed or criti-
cized. Similarly, Venkatraman, Loh, and Koh
(1994) examine the spread of joint ventures
and the multidivisional form, finding that iso-
morphic pressures to adopt were more preva-
lent for joint ventures since this practice did
not require a drastic rearrangement of the
organizational structure. Palmer, Jennings,
and Zhou (1993) also point to the importance
of mimetic pressures in the spread of the mul-
tidivisional form, where prevalence of this
governance arrangement increased the likeli-
hood of its adoption by other corporations.
Suggesting a somewhat modified version
of mimetic pressures, Davis’ (1991) study
emphasizes the importance of ties to prior
adopters in the spread of poison pills as an
anti-takeover defense among the largest U.S.
corporations during the 1980s, with mimicry
operating mainly through direct ties rather
than the observation of competitors.
Other studies have argued that more atten-
tion needs to be paid to the coercive power of
other organizations and legislative bodies in
promoting diffusion (e.g. Barron, Dobbin, and
Jennings, 1986; Scott, 1987). In an important
contribution, Davis and Thompson (1994) sug-
gest that efficiency-oriented governance
approaches based on agency theory are fre-
quently inadequate for explaining the politics
of corporate control, and particularly the emer-
gence of shareholder activism. Drawing on the
literature on resource mobilization, Davis and
Thompson develop a social movements per-
spective that highlights the importance of gov-
ernance actors’ interests, social infrastructure,
and mobilization in determining the likelihood
for successful collective action within a given
political opportunity structure. Similarly draw-
ing on a social movements perspective, Rao
and Sivakumar (1999) argue that powerful
investor rights activists compelled organiza-
tions to adopt boundary-spanning structures
that signaled the primacy of shareholder rights.
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The insights of these studies support a ‘forced-
selection’ perspective (Abrahamson, 1991)
where powerful organizations impose adoption
of practices – be they technically efficient or
not – over the resistance of other actors. These
insights are also reflected in Oliver’s (1991)
argument that features of the organization’s
context, such as the multiplicity of its stake-
holders and the organization’s dependence on
them, are likely to predict adoption or non-
adoption of practices. For example, Palmer,
Friedland, Jennings, and Powers (1987) and
Palmer, Jennings, and Zhou (1993) point to the
importance of powerful owners in determining
organizational structures, while Palmer et al.
(1995) show that the spread of predatory
takeovers was consistent with an embedded-
ness approach that highlights the role of a
firm’s position in networks as well as the posi-
tions of its managers and directors in the firm’s
ownership structure and the social network of
the business elite. In a similar vein, Fiss and
Zajac (2004) argue that the spread of a share-
holder value orientation among German firms
importantly reflected the power and interests
of various ownership groups, thus also high-
lighting the role of coercive influence in the
diffusion of governance practices. The insights
of these studies thus point to a model of the
diffusion process that sees the probability and
speed of a diffusing practice as a function of
the number, interest, and relative power of
agents within a given environment (Marquette,
1981; Fligstein, 1985), thus including both
organizations and outside stakeholders into the
diffusion model where both the actors involved
and their interests tend to be institutionally
constructed (Aguilera and Jackson, 2003)
VARIATION IN GOVERNANCE
PRACTICES
While institutional theory has contributed
considerably to our understanding of how and
why governance practices diffuse, less atten-
tion has been paid to the diffusing
practices themselves. Much of the prior
research tends to treat diffusing practices
as homogeneous entities that do not vary
by context and remain stable over time.
However, such homogenizing assumptions
seem questionable. If diffusing practices come
with explicit and implicit theories attached,
then adoption should go along with a consid-
erable amount of interpretive work that aims
to integrate these theories into pre-existing
organizational frameworks and world views.
As Strang and Soule argue, such interpretive
work ‘selects and transforms the diffusing
practice,’ and while some practices may be
more appropriate for interpretive work than
others, ‘none come out of this process unmod-
ified’(Strang and Soule, 1998: 277).
Such considerations point our attention to
the study of variation in practices, an issue that
has emerged as a central concern of institu-
tional theory (e.g. Lounsbury, 2007; Lawrence
and Suddaby, 2005). A number of studies have
begun to examine how practices are modified,
translated, and reinvented to fit local needs
(e.g. Boxenbaum and Battilana, 2005;
Czarniawska and Joerges, 1996; Djelic, 1998;
Fiss and Zajac, 2006; Lounsbury, 2001; Morris
and Lancaster, 2005; Sahlin-Andersson and
Engwall, 2002). A common theme emerging
from these studies is that while there are fre-
quently unifying elements that inform diffus-
ing practices, their actual enactment tends to
take a variety of forms. An important reason
for such variation lies in the fact that the inter-
nal dynamics of organizations may frequently
result in differential responses to external insti-
tutional pressures (Greenwood and Hinings,
1996). For example, Zbaracki (1998) suggests
that implementation of Total Quality
Management (TQM) practices resulted in con-
siderable variation as managers appropriated
the rhetoric of quality management, with TQM
becoming increasingly ambiguous and open to
appropriation. Likewise, Lounsbury’s (2001)
study of staffing practices in college recycling
programs indicates that practice variation dif-
fered depending on both connections to exter-
nal social movement organizations and internal
features such as size, ownership nature,
and social comparison processes relating to
INSTITUTIONS AND CORPORATE GOVERNANCE 395
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similar organizations. What emerges is imple-
mentation as not only a technical but also a
political and cultural process where new prac-
tices become appropriated into ongoing
exchanges and conflicts. Such a view, where
practices are adapted to fit local needs, has also
been suggested by more macro-level studies of
the international diffusion of the arm’s length
contracting standard (Eden, Dacin, and Wan,
2001) and corporate governance codes
(Aguilera and Cuervo-Cazurra, 2004). As
these studies indicate, a focus on variation is
central for a fine-grained understanding of cor-
porate governance practices and moves
beyond the acceptance of surface conformity
to explore the various forms of meaning and
transformation associated with specific
practices (e.g. Lounsbury, 2001; Zilber, 2006).
GOVERNANCE AND RESISTANCE
The issue of resistance to governance models
and practices has formed an important yet
somewhat unrecognized undercurrent in the
literature on corporate governance. The con-
cept of corporate governance itself implies the
existence of both governable entities and even
more importantly governable persons (Miller
and O’Leary, 1987). An important part of cor-
porate governance thus relates to the construc-
tion of managers and employees as not only
corporate constituents with rights and respon-
sibilities but also entities to be managed with
efficiency. The roots of this development can
be traced back to Taylor’s Principles of
Scientific Management (1913), which cen-
tered around the efficiency of the individual
worker and insisted that ‘each worker be
singled out, to be rewarded or punished on the
basis of his or her individual performance’
(Miller and O’Leary, 1987: 253). This theme
finds its counterpart in contemporary agency
theory, which likewise constructs the manager
as primarily self-interested, with goals that
conflict with those of the principal and greater
risk averseness (Jensen and Meckling, 1976;
Eisenhardt, 1989). Accordingly, after con-
structing the manager as an agent to be
controlled and monitored, most of agency
theory concerns itself with refining the incen-
tive and monitoring mechanisms to achieve
optimum efficiency, focusing particularly on
individual performance outcomes. As was true
for Taylor’s scientific management, agency
theory thus likewise views the executive as
inefficient and in need of being ‘enmeshed
within a routinely-applicable calculative appa-
ratus’ (Miller and O’Leary, 1987: 253). The
implications of this process of constructing
the nature of the governable person are con-
siderable, as indicated by arguments about the
negative effect of agency theory on ethical
behavior (Ghoshal, 2005) as well as recent
work on the transformation of financial mar-
kets in accordance with theoretical models
about their nature (MacKenzie, 2006;
MacKenzie and Millo, 2003).
While the institutional view of governance
advanced here differs considerably from that
advanced by agency theory, these agentic
models nevertheless highlight the fact that gov-
ernance has to be accomplished since it will
frequently be resisted by those whose compli-
ance is to be achieved. In line with
Granovetter’s (1985) caution against overso-
cialized models of actors, these considerations
point our attention again to the ways in which
institutional processes are frequently far from
complete, leaving room for contestation and
manipulation, the necessary counterparts to
the exercise of power (Clegg, 1989). The
knowledgeable and experienced practitioners
that inhabit many organizations will frequently
attempt to resist the introduction of formal
control practices by manipulating the applica-
tion of such new practices, transforming them
into means for advancing their respective inter-
ests (Dirsmith, Heian, and Covaleski, 1997).
Acknowledging the impossibility of perfect
control, one stream of literature has focused on
the role of decoupling as a response to institu-
tional pressures. In its classic formulation, the
concept of decoupling referred to a situation
where ‘structure is disconnected from technical
(work) activity, and activity is disconnected
from its effects’ (Meyer and Rowan, 1978: 79).
At the same time, it is this very decoupling that
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INSTITUTIONS AND CORPORATE GOVERNANCE 397
maintains the legitimacy of the organization.
Meyer and Rowan suggest that close supervi-
sion may frequently be counterproductive,
since it would reveal a lack of trust in the
supervised organizations and would expose the
controlling agencies to uncertainties arising at
the technical core of these organizations,
uncertainties that neither the organizations nor
their supervising agencies have the capacity to
control. In order to prevent these uncertainties
from leaking into the larger governance system
and making it ungovernable, controlling agen-
cies thus frequently rely on formal structure as
an indicator of legitimacy; surface compliance
may suffice where deep control is impractical,
or indeed impossible.
Expanding the classic notion of decoupling,
a number of recent studies have connected it to
work on impression management in develop-
ing a symbolic management perspective that
emphasizes how organizations, by purposive
action, may maintain or increase their legiti-
macy. In contrast to the work of Meyer and
Rowan, legitimacy here is not achieved
through a logic of confidence and cooperation,
but rather by calculating, manipulative, or
even deceptive actions that aim to show com-
pliance towards external observers while con-
cealing nonconformity (Elsbach and Sutton,
1992; Oliver, 1991). Such a perspective has
been successfully applied to study a lack of
implementation relating to corporate gover-
nance practices. For example, Westphal and
Zajac (1994) find that symbolic adoption of
long term incentive plans for management is
frequently decoupled from actual implementa-
tion of such plans. This is particularly true in
firms where powerful CEOs have the resources
to resist board efforts to change their incentive
structure. Likewise, Carpenter and Feroz
(1992; 2001) examine the adoption of gener-
ally accepted accounting principles among
U.S. state governments and find that imple-
mentation of such accounting standards was
primarily driven by the desire to exhibit insti-
tutionalized practices to the public and credit
markets. At the same time, the authors point to
resistance to institutional pressures, such as the
state of Delaware’s shallow implementation of
GAAP based financial statements and the
mobilization of cost-benefit rhetoric to defend
non-implementation. Similarly, Fiss and Zajac
(2006) show that a lack of implementation is
frequently accompanied by rhetoric aimed at
assuring constituents of compliance with
external demands.
However, resistance to institutional
demands need not only take the form of
incomplete implementation, surface compli-
ance, and impression management. Rather
than taking the governance environment as
exogenous, corporations can frequently act
to actively influence this environment to
make it more suitable to their needs. As sug-
gested by Carruthers, ‘organizations are not
only granted legitimacy; sometimes they go
out and get it’ (1995: 324). An example of
this active construction of the institutional
environment is given by Mezias (1990), who
shows how large corporations in the U.S.
acted to influence their financial reporting
requirements. Similarly, Bealing, Dirsmith,
and Fogarty (1996) point to second-order
effects of institutionalization in governance
affairs, where, particularly in a fragmented
socio-political environment, organizations do
not simply adopt institutionalized structures.
Instead these organizations actively partici-
pate in building up a framework for social
control relevant to their own constituents
(such as the accounting profession for the
US Securities and Exchange Commission),
thereby establishing the legitimacy of the
interrelationship of the organization with its
constituents. A symbolic perspective on cor-
porate governance thus points our attention to
the various ways in which corporations aim to
elude institutional demands by hiding non-
compliance or aiming to affect the very defini-
tion of what constitutes acceptable conduct.
OWNERS, MANAGERS, EMPLOYEES,
AND OTHERS
The world of corporate governance is inhab-
ited by a variety of groups with varying
9781412931236-Ch15 5/19/08 4:14 PM Page 397
identities and interests; yet much of the
literature has focused on two of these groups,
namely managers and owners, and has
furthermore tended to focus on them in the
context of the publicly traded corporation.
The literature in finance tends to assume
that owners are fairly homogeneous in their
interests, focusing primarily on the maximiza-
tion of shareholder value (e.g. Bagwell,
1991; for an overview of the literature on
ownership, see Kang and Sørensen, 1999).
A more institutionally oriented approach
points to the idea that both actors and
their interests are not merely given but
instead constructed through their embedded-
ness in larger social systems (Aguilera
and Jackson, 2003). In such a view, owners
are characterized by various interests and
identities that translate into differences
in governance orientations and models
(Fligstein, 1990; Fiss and Zajac, 2004).
Accordingly, owners tend to be much less
homogeneous in their interests than com-
monly assumed within the contractual view of
the firm. Furthermore, owners may differ in
their attitudes towards shareholder value max-
imization, not only across different ownership
groups such as banks, family owners, and
other corporations, but their interests may
differ even within such groups (e.g. Fiss and
Zajac, 2004). Similarly, Aguilera and Jackson
(2003) have advanced an actor-centered insti-
tutional approach to corporate governance that
emphasizes how the interests of the main cor-
porate governance actors are both constructed
and represented.
In addition, research drawing on institu-
tional arguments has shown the role of owners
in the spread of governance models. In this
regard, Ahmadjian and Robbins (2005) point
to the importance of ownership in studying the
spread of practices associated with U.S. share-
holder value capitalism to Japan. Their find-
ings indicate that foreign investors were
associated with an increased restructuring of
Japanese firms that were less central in the
Japanese political economy. Similarly, Fiss
and Zajac (2004) study the spread of a share-
holder value orientation among German firms
in the 1990s and show that the diffusion of this
normative model happened along ownership
lines where power to adopt a different gover-
nance model could be exercised. Several other
authors have employed a social movements
perspective to examine the origins and effects
of shareholder activism (Davis and
Thompson, 1994; Proffitt and Spicer, 2006).
While these studies present important devel-
opments in building an institutional theory of
ownership, much remains to be done to further
our understanding here.
Another important line of inquiry has
focused on understanding who the top
managers are, particularly how they are
selected, what their educational and functional
background is, and what social circles they
inhabit. Such considerations are relevant as the
background and social embeddedness of top
executives is likely to be reflected in the views
they hold regarding the nature of the corpora-
tion and in whose interest it should be gov-
erned (Hirsch, 1986; Espeland and Hirsch,
1990; Fligstein, 1990, 2001). A considerable
amount of work has focused on the formation
and influence of the business elite in the
United States (e.g. Useem 1979, 1980;
Domhoff, 1967). This literature has examined
both differences and commonalities in values,
interests, and identities between managers and
shareholders, with particular interest in
whether there exists a ruling class with
common perceived interests. For example,
Useem and Karabel’s (1986) study of the rela-
tionship between educational and social back-
grounds and careers of U.S. managers found
that career mobility was enhanced by presti-
gious educational degrees, pointing to the
importance of social capital for reaching the
upper strata of management. Likewise, mem-
bership in the exclusive social clubs of the
elite forms an important source of social
cohesion (Useem, 1980) and affects the spread
of practices among corporations (e.g. Palmer
et al., 1995).
Finally, an extensive stream of research
has examined the importance of executives in
their role of establishing connections bet-
ween firms through interlocking directorates.
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INSTITUTIONS AND CORPORATE GOVERNANCE 399
This literature has examined the effect of board
interlocks regarding a variety of issues ranging
from the exercise of corporate control (e.g.
Mariolis, 1975; Mintz and Schwartz, 1981) to
corporate political action (Mizruchi, 1989,
1992) to social cohesion (e.g. Useem, 1984;
for an overview of these literatures, see e.g.
Mizruchi, 1996).
Other researchers have employed institu-
tional theory to examine the selection of top
executives. Fligstein (1987, 1990) shows how
a financial conception of control emerging in
the postwar United States and the large-scale
merger movement of the 1960s resulted in
increasing numbers of CEOs with a back-
ground in finance, and firms with such CEOs
were in turn more likely to be the targets of
takeover attempts (Fligstein & Markowitz,
1993; Davis & Stout, 1992). Finance CEOs
were also more likely to adopt the new share-
holder value conception of control emerging in
the 1980s (Fligstein, 2001; Fiss and Zajac,
2004). Ocasio (1999) has shown the role of
both cognitive and political factors in the
formal and informal rules governing CEO suc-
cession, particularly the choice of insider
versus outsider successors. Similarly,
Thornton and Ocasio (1999) and Thornton
(2004) demonstrate how the institutional
logics guiding executive succession in the
higher education publishing industry shifted
from an editorial to a market logic. Regarding
board composition, Luoma and Goodstein
(1999) have pointed to the importance of insti-
tutional influences on the selection of corpo-
rate directors. These studies indicate that the
selection of top management is importantly
shaped by institutional forces emerging out of
organizational and societal processes.
While owners and managers have received
greater attention, major constituent group –
employees – has been less often examined
from an institutional perspective. In this
regard, an institutional approach is not differ-
ent from the corporate governance literature
more generally (cf. Blair and Roe, 1999) and
the Anglo-Saxon corporate governance litera-
ture in particular. Within the literatures on
labor representation, mechanisms such as
works councils as well as union influence, a
number of authors have drawn on institutional
arguments (e.g. Aguilera and Jackson, 2003;
Gospel and Pendelton, 2004; Streeck and
Thelen, 2003). In addition, some authors
have employed institutional theory to examine
how control of employees is exercised.
For example, Barker (1993) shows how
value-based normative rules embedded in self-
managing teams make for more effective
control of workers than more traditional,
bureaucratic authority structures, while Oakes,
Townley and Cooper (1998) examine the ped-
agogical role of business plans as language that
redirects work and changes the identity of
managers and employees. However, given the
current dominance of the shareholder-centered
system, the role of employees is likely to
remain peripheral at least in the Anglo-Saxon
governance context, even though themes of
hegemony versus resistance to the shareholder-
centered governance model the part of
employees would warrant more attention.
Finally, some research in the institutional
theory tradition has expanded the focus to
consider the role of outside constituencies
in corporate governance. Several studies in
this regard have focused on the role of finan-
cial analysts, who occupy a central role as
boundary-spanning and evaluating audiences
for corporations. For example, Fogarty and
Rogers (2005) examine the creation of
analyst reports and find that this process
largely follows the logic of confidence
described by Meyer and Rowan (1977),
where strong expectations but little control
characterize the production of reports, a
process that is furthermore strongly depend-
ent on information controlled by managers.
Furthermore, Zuckerman examined the role
of analysts as product critics and has shown
that a mismatch between the cognitive cate-
gories used by securities analysts to affect
stock prices and de-diversification activity
(Zuckerman, 1999, 2000). These considera-
tions also point to the role of other actors
affecting the governance of corporations,
such as suppliers, debtors, professional
associations, the courts, and of course
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400 THE SAGE HANDBOOK OF ORGANIZATIONAL INSTITUTIONALISM
government regulators (Fligstein and
Choo, 2005). Some of these have been
examined using a comparative perspective
on corporate governance, to which I now
turn.
THE COMPARATIVE STUDY OF
GOVERNANCE SYSTEMS
The institutional approach to corporate gov-
ernance suggests that national corporate
governance systems are importantly affected
by cultural differences (Tricker, 1984, 1990).
This points to the need to comparatively
evaluate the diversity of governance arrange-
ments. Such research on comparative
corporate governance has for a long time
been primarily the domain of taxonomists,
leading to a large body of mostly descriptive
research on differences in national corporate
governance systems (see e.g. Boyd, Carroll,
and Howard, 1996; Bradley et al., 1999;
Guillén, 2000 for reviews; see Roe 2003
for a political perspective). The main
assumption of this field of research has been
that each country’s system of corporate
governance developed in response to its par-
ticular historical, cultural, and technological
influences. However, recently a number of
scholars have aimed to develop these
arguments into more coherent frameworks
that allow for a better understanding of the
mechanisms that underlie national gover-
nance systems, as well as a systematic com-
parison of national differences in governance
arrangements. Two frameworks that have
particularly garnered attention in recent years
are the Varieties of Capitalism (VoC)
approach (e.g. Hall and Soskice, 2001;
Thelen, 2004), and the business systems per-
spective (e.g. Whitley, 1999; Morgan,
Whitley, and Moen, 2005). Their arguments
are relevant to the embeddedness approach
suggested by institutional theory and deserve
special attention here.
Building on a configurational approach, a
central theme in the VoC approach is the
notion that the economic systems of
advanced nations are marked by a variable
degree of cohesion and complemen-
tarity among their respective subsystems.
Beginning with a focus on the diversity of
modern economies, these authors argue that
variation emerges because corporations and
other social actors ‘develop distinctive strate-
gies and structures to capitalize on the insti-
tutions available for market or non-market
coordination in the economy’ (Hall and
Soskice, 2001: 48). For example, compara-
tive research on Japanese business models
has suggested that the keiretsu structure
of corporate governance presents a
competitive advantage for large Japanese
firms, since this structure leads to higher
rates of innovation, resulting in a competitive
advantage (Gerlach, 1992). While these
arguments are similar to those advanced
by a competitive logic of differentiation,
they differ in their emphasis of a systemic
perspective that points to institutional com-
plementarities. Building on the work of
Aoki (1994), the VoC approach thus views
national governance systems as part of a
system of interconnected institutions that
reinforce each other, creating stability but
also resistance to change. In this respect,
the VoC approach identifies two ideal types
of economies: liberal market economies
(such as the United States, Canada, the UK,
and Australia) that primarily rely on
markets to coordinate their financial and
industrial relations systems, and coordinated
market economies (such as Germany, Japan,
the Netherlands, or the Scandinavian
countries) that employ a variety of non-
market institutions to coordinate these
spheres (Hall and Soskice, 2001). Empirical
support for these arguments comes from a
variety of case studies on European
economies as well as comparative works
(e.g. Thelen 2001, 2004; Wood, 2001).
Several recent works have applied the VoC
framework to the study of corporate gover-
nance systems (e.g. Casper, 2001; Vitols
2001; Vitols, Casper, Soskice, and Woolcock,
1997; Ziegler, 2000), suggesting that this
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INSTITUTIONS AND CORPORATE GOVERNANCE 401
approach can offer a framework for under-
standing the connections between corporate
governance systems and the larger political
economy.
A related approach to the study of
economies and governance is advanced by
Whitley (1992a, 1992b, 1999) and others,
who aim to explain the institutional structur-
ing of business systems. By business sys-
tems, these authors generally refer to the
‘distinctive patterns of economic organiza-
tion that vary in their degree and mode of
authoritative coordination of economic activ-
ities, and in the organization of, and inter-
connections between, owners, managers,
experts, and other employees’(Whitley,
1999: 33). Accordingly, the nature of the
relationships between these actors is of cen-
tral importance when contrasting business
systems. For example, business systems may
be characterized by inter-firm relations based
on arms-length contracting or repeated,
cooperative connections (e.g. Dore, 1986).
Likewise, the providers of capital may
view their investments as resources to be
supervised directly or they may delegate
this task to trusted agents (e.g. Whitley,
1999). From the combination of these forms
of relationships emerges a variety of possible
types of economic organization and gover-
nance. However, interactions between vari-
ous forms of relationships limit the
feasibility of business systems, and Whitley
(1999) identifies six that range from the frag-
mented via the state-organized to the highly
coordinated.
Work building on a business systems per-
spective offers an intriguing framework for
those who aim to study corporate governance
through an institutional lens, particularly
because its theoretical apparatus is not lim-
ited to the study of advanced economies.
The business systems approach provides a
systematic foundation for examining corpo-
rate governance practices, particularly when
merged with insights from other theoretical
traditions (Tempel and Walgenbach, 2007).
For example, Lane (2005) draws on a busi-
ness systems approach informed by the
notion of an institutional logic to examine
changes in the German model of corporate
governance. Similarly combining a business
systems approach with other institutional
arguments, Djelic and Quack (2003) and
Djelic and Sahlin-Andersson (2006) show
how national institutional systems are
increasingly nested within transnational,
higher-order institutional frames. Such
insights are highly relevant for the study of
corporate governance, and particularly
regarding the potential for convergence
in governance systems (Tempel and
Walgenbach, 2007). Both the VoC perspec-
tive and the business systems approach
tend to be focused around ideas of comple-
mentarity and consistency. However, rather
than exploring how such systems provide
coherence to corporate governance, an
institutional approach also emphasizes the
importance of conflict and inconsistency.
Such considerations shift the focus to
the importation of practices from one
institutional context into another, highlight-
ing issues of enactment and integration, and
thus questioning the coherence view of
national systems of corporate governance.
Consistent with a focus on practices, it would
also be useful to shift the level of analysis
further down to the firm level to examine
diversity even within ‘national’ systems.
Such systems are frequently less than coher-
ent but instead are marked by considerable
tensions between different governance
models and institutional logics, a process that
will likely lead to considerable change
(O’Sullivan, 2000). However, this change
does not necessarily mean greater conver-
gence in governance system, but rather
increasing variety.
EMERGING DIRECTIONS FOR
FUTURE RESEARCH
As a field for applying institutional theory,
corporate governance is likely to continue
expanding, and the institutional approach is
9781412931236-Ch15 5/19/08 4:14 PM Page 401
well poised to provide a coherent framework
for the study of governance systems
and practices across various levels of analy-
sis. As I have argued here, a culturally and
politically informed institutional approach
offers a counter weight to the currently dom-
inating contractarian framework for under-
standing governance arrangements. This is
not to say that both approaches cannot
inform each other – in fact, some of the most
intriguing insights into governance arrange-
ments are likely to come from approaches
drawing on several theories and disciplines
(Fiss, 2006). In the remaining, I want to
sketch out some of the more promising
avenues for further research, applying an
institutional approach to the corporate
governance arena.
In line with my above arguments regarding
the role of power and the normative nature of
governance models, we need to expand our
understanding of how governance models as
shared cognitive understandings are propa-
gated, find support, and become rooted
across differing institutional contexts. This
research project would need to pay attention
both to the ways in which governance models
spread across national and international
arenas and to the processes by which indige-
nous governance models become uprooted
and contested. Prior research in the contrac-
tarian literature has pointed towards conver-
gence in international governance systems
due to the effects of globalization and the
power of financial markets (e.g. Coffee,
1999; Bradley et al., 1999; Hansmann and
Kraakman, 2001). In contrast, emerging
institutional work has questioned the likeli-
hood of convergence, pointing instead to
persistence in national systems alongside
convergence processes (e.g. Aguilera and
Jackson, 2003; Fiss and Zajac, 2004;
Guillén, 2001; Jackson and Moerke, 2005).
As argued by Tempel and Walgenbach
(2006), further research should look to move
beyond the convergence–divergence debate
and should begin to disaggregate the
processes occurring at various levels of aggre-
gation, such as company, sector/industry, and
national level of corporate governance
(Hollingsworth, Schmitter, and Streeck,
1994; Casper, 2000).
Future research should also draw further
attention to the ways in which governance
models hide power relations as they become
increasingly taken for granted and take on the
mantle of neutrality and inevitability. An
important role in this regard lies with events
that lift this mantle and provide a glance into
the political nature of resource distributions,
such as the current wave of corporate scandals
that has swept the United States. Governance
scandals in particular provide opportunities
when the seams come apart, allowing for
regimes to be criticized and changed. As such,
the study of such scandals, the ways in
which they are managed by corporations and
regulators, as well as how they are framed and
used for mobilization by various interest
groups, such as activist investors, are of partic-
ular interest to institutional theory and provide
fertile ground for future research. Such an
approach might eventually offer a more sys-
tematic framework of the conditions that lead
to relatively strongly institutionalized versus
less strongly institutionalized models of cor-
porate governance.
The study of emerging and transition
economies presents another promising
area for understanding both change and per-
sistence of corporate governance systems
and practices (e.g. Allen, 2005; Millar,
Eldomiaty, Choi, and Hilton, 2005). How are
corporate governance models and practices
propagated in such environments and do they
take hold or do they remain externally
imposed orders that meet with resistance
from established interest groups? What is the
role of symbolic and surface compliance in
this regard? Who are the actors that lead
reform efforts and what strategies do they
pursue? These are but some of the questions
that require answers once we expand the
focus of inquiry beyond the currently domi-
nating Anglo-Saxon governance environ-
ment, in combination with Germany, Japan,
and France, as the economies that have
received the most attention from researchers.
402 THE SAGE HANDBOOK OF ORGANIZATIONAL INSTITUTIONALISM
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Understanding the variety of governance
arrangements and the role of employees,
banks, family owners, company networks
and the state in Asian, South American, or
Eastern European countries requires a holis-
tic approach to corporate governance, and the
institutional perspective is well positioned to
contribute such an approach
Regarding the emerging themes of transla-
tion and adaptation in institutional theory,
we still know rather little about the process
by which the re-organization of a model is
accomplished, pointing to the need for a
deeper understanding of how governance
practices combine and recombine. For
example, in what ways are governance sys-
tems holistic and interconnected or modular in
nature, and which features of these systems
may be safely removed or added without
disturbing overall operation of the governance
system? Do hybridization and loose coupling
present viable trajectories (e.g. Deeg, 2005;
Lane, 2005)? To analyze such issues, it may
be useful to examine other fields that have
studied processes of syncretism and recombi-
nation, such as anthropology (e.g. Stewart,
1999). By drawing on insights developed
there, we may be able to gain a much deeper
understanding of the cultural embeddedness
of corporate governance practices.
Finally, while researchers working within
the institutional tradition have made some
forays into the role of constituents and their
identities, these still present fruitful fields for
further inquiry. For the most part, institu-
tional theory has not focused directly on the
role of ownership and control (cf. Fligstein
and Freeland, 1995). In this regard, family
owners present a particularly interesting
case, as such owners are a group where con-
flicts over economic versus social logics of
investment are particularly likely to be
prevalent. Likewise, while some research
has focused on the relationship between
ownership and national institutional context,
there is still a need for more cross-national
studies of strategy and corporate governance,
and particularly studies that would go
beyond national differences to examine the
underlying dimensions along which institu-
tional contexts vary. Furthermore, there is an
opportunity for institutional theory to bring
all the corporate constituents back into the
focus of governance research. Rather than
focusing merely on executives and directors,
such work could take seriously how gover-
nance is constructed at the intersection of
various influence spheres, including those of
inside and outside constituents and the
attempts of corporate actors to actively
manage such constituent groups. Such an
emphasis on the active construction and
propagation of governance accounts would
enable institutional approaches to bring both
relevant and critically-reflective insight to
the current and future corporate governance
debates.
ACKNOWLEDGMENT
The author acknowledges the helpful com-
ments of Norman Macintosh, Sigrid Quack,
Paul Adler, Christina Ahmadjian, Roy
Suddaby and the other editors of the
Handbook of Organizational Institutionalism,
and seminar participants at the University of
Southern California and the Center for
Advanced Study in the Behavioral Sciences.
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