An Institutional Configurational Approach to Cross‐National Diversity in Corporate Governance

• Author: Ruth V. Aguilera,Ilir Haxhi
• Date: 01 May 2017
• DOI: http://doi.org/10.1111/joms.12247
• Published date: 01 May 2017

An Institutional Configurational Approach to

Cross-National Diversity in Corporate Governance

Ilir Haxhi and Ruth V. Aguilera

Amsterdam Business School, University of Amsterdam; Northeastern University and ESADE Business

School, Universitat Ramon Llull

ABSTRACT Corporate governance (CG) research has typically been studied from rather

disparate disciplinary approaches, thereby offering myopic and often conflicting rationales. We

develop an institutional configurational approach to integrate this ‘siloed’ field and explain

CG patterns around the world. To do so, we draw on an inductive, theory-building

methodology based on fuzzy-set logic to uncover the configurations across institutional actor-

centred domains and their impact on CG patterns. Empirically, we explore the necessary and

sufficient causal conditions leading to different features of codes of good governance across 32

OECD countries. We generate propositions linking configurational institutional domains to

code features. Our results show that a single institutional domain by itself is not sufficient to

explain CG outcomes, and that these domains need to be considered in conjunction, leading,

in turn, to the identification of four distinct configurational governance prototypes. Our study

offers a comprehensive account of drivers of cross-national differences in CG and yields useful

insights for managing and regulating governance.

Keywords: codes, corporate governance, institutional configuration, qualitative comparative

analysis

INTRODUCTION

In recent years, much of the comparative management literature has striven to explain

how national varieties of capitalism impact firm behaviour and managerial practices

across advanced industrial countries. A core characteristic of these frameworks is their

focus on institutional diversity and how it shapes firms’ organizational and strategic

behaviour (Hall and Soskice, 2001; Whitley, 1992). For example, national financial insti-

tutions such as capital markets and banks account for the long versus short-term firm

orientation (Connelly et al., 2010). Managers also capitalize on institutional diversity –

Address for reprints: Ilir Haxhi, International Management & Strategy Section, Amsterdam Business School,

University of Amsterdam, P.O. Box 15953, 1001 NL Amsterdam, The Netherlands (i.haxhi@uva.nl).

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Journal of Management Studies 54:3 May 2017

doi: 10.1111/joms.12247

for instance when they become aware of how different national institutions and their

varieties of business organization contribute to multiple types of pay structures or

employment security (Filatotchev and Wright, 2011). As noted by both Scott (1995) and

North (1991), institutions are not only regulatory schemes but are also often adopted as

normative and cognitive collective norms of conduct. In turn, organizations are embed-

ded in these sets of institutions that jointly make up the Gestalt types of Capitalism in

which organizations and managers operate (Jackson and Deeg, 2006). Thus, under-

standing the composition of these varieties of Capitalism sheds critical light on how firms

and managers can more effectively develop and sustain competitive advantage.

Corporate Governance (CG) systems are the result of the combination of these insti-

tutions, forming different types of Capitalism. Because they are directly linked to firm

strategies and outcomes, scholars anchored in multiple disciplines have explored differ-

ences in cross-national CG systems, typically focusing on the influence of one institution

on CG patterns. Unfortunately, this combined research yields a field that is fragmented

along disciplinary lines (Aguilera and Jackson, 2010). For instance, to explain the sources

of cross-national CG variation, law and economics scholars point to differing protection

of capital rights (La Porta et al., 1998; Shleifer and Vishny, 1997), political economists

refer to the role of political coalitions within the State (Cioffi, 2010; Gourevitch and

Shinn, 2005), and industrial relations and managerial scholars focus on power relations

within firms (Davis, 2009; O’Sullivan, 2000).

This research fragmentation has impaired our full understanding of the complexity of

CG patterns in the way they emerge, evolve and diffuse around the world for two main

reasons. First, institutions do not work in isolation but rather are part of a broader

national institutional system (Amable, 2003). Thus, CG patterns are affected by multi-

ple, functionally interrelated sets of institutions resulting in configurations of institutions.

These institutional configurations are more complex than the traditional dichotomous

model of CG – the shareholder versus stakeholder model –, which has dominated the

comparative CG literature (Aguilera and Jackson, 2010). Second, the emphasis on the

structural attributes of institutions, such as the strength of labour union rights, overlooks

the interests that specific agents (for instance, investors or governments) play in reacting

to, and shaping, these institutions (Giddens, 1984; Greenwood et al., 2011). As stated by

Aoki, ‘in order to really understand why a particular institution emerges in a domain of

one economy but not in a similar domain of another economy, we need to make explicit

the mechanism of interdependencies among institutions across domains in each econ-

omy’ (2001, p. 18).

Most importantly, this single institutional focus might introduce a biased view of gov-

ernance in the comparative management literature. For instance, a one-dimensional

focus on capital rights (La Porta et al., 1998) neglects the salience of power relations

between labour and management, since managers are directly affected by capital own-

ers, whereas employees can influence managers through interest group coalitions (Gour-

evitch and Shinn, 2005). Similarly, although legal scholars tend to assume that hard law

is the most effective means to institutionalize norms (Coffee, 1999), institutional sociolo-

gists argue that soft law is the one that becomes truly internalized and subsequently insti-

tutionalized (Aguilera et al., 2015). As a last example, while Aguilera and Cuervo-

Cazurra (2004) claim that Civil Law typically triggers the diffusion of codes as a

262 I. Haxhi and R. V. Aguilera

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response to weak protection of investors, Haxhi and van Ees (2010) show that codes gen-

erally amply develop in Common Law countries with stronger capital rights protection.

To explore these complex institutional interactions, and help clarify biased and/or

conflicting CG findings, we steer away from the prevailing idea of stressing an individual

institution in the analysis of CG patterns. Instead, we draw on an all-inclusive configura-

tional approach that emphasizes the importance of systemic institutional interactions in

the broader CG system. Our goal is thus to answer: Why and how do key institutions influence

cross-national patterns of CG practices?

We employ an inductive, theory-building research design and build on three related

theoretical perspectives: Actor-Centered Institutionalism (Aguilera and Jackson, 2003),

Varieties of Capitalism (VoC) (Hall and Soskice, 2001) and National Business System

(NBS) (Whitley, 1992), to compare how institutional diversity impacts organizational

outcomes across advanced economies. While these perspectives are in themselves useful,

they do not explicitly account for the interactions across institutional domains, given

that their respective one-dimensional logic neglects the complexity and embeddedness

of institutions (Amable, 2003). These complementarities are also essential to uncover the

different properties of CG systems. We purposefully develop an institutional configura-

tional framework that highlights the interactions of institutional domains (i.e., Capital,

Management-Labour, and the State), and includes most of the institutional arrange-

ments defining economic organization and CG practices. We contend that institutional

domains vary across countries both in how they are individually composed and in how

their corresponding actors interact with one another, and the effect on decision-making

and control over the process of creating CG practices. In sum, we seek to move beyond

the current silo-based discussions and underscore systemic institutional interactions

within the broader CG system.

For the analysis of CG practices, we focus on a central and widespread practice: codes

of good governance (hereafter ‘codes’). In contrast to the somewhat abstract operation-

alization of CG, codes are the observable instrument through which national CG is

adopted. This makes codes a tangible outcome as well as an appropriate level of analysis

to disentangle broader debates around comparative CG. Codes are instruments of self-

regulation, delineating best practices with respect to boards, management, supervision,

disclosure, and auditing (Aguilera and Cuervo-Cazurra, 2004). They have key implica-

tions for a variety of actors in their respective institutional domains, including managers,

owners, regulators, and most firm stakeholders. Codes are the product of the diversity in

the institutions because their development is contingent on the configurational relation-

ships between country-level institutional domains. In other words, cross-national com-

parisons of CG systems can be best achieved through the empirical analysis of the CG

codes adopted in different countries. Moreover, codes matter for national and firm gov-

ernance competitiveness because they equip firms with the necessary governance prac-

tices to win investors trust – although for some firms, codes can also demand redundant

or costly practices at the risk of over-governance (Aguilera et al., 2008). Finally, our

arguments about codes are easily applicable to other management practices such as ISO

quality settings, HR standards, and sustainability practices.

We use a Qualitative Comparative Analysis (QCA) approach based on the logic of

the fuzzy sets (fs/QCA) technique (Crilly, 2011; Fiss, 2007; Ragin, 2000) to explore the

263An Institutional Configurational Approach in Corporate Governance

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