governance policies may be aligned with the intended goal of addressing Type II agency problem but their effectiveness is contingent on the presence external governance
institutions (Aguilera & Jackson, 2003; Aguilera & Jackson, 2010; Goyer, 2010; Schmidt & Spindler, 2006). Institutional scholars suggest that there are differences among national governance systems, which in many instances may not be supportive of the shareholder-
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Figure 3.1: Universal View based hypotheses regarding the effectiveness of Internal CG and External CG in attenuating P-P problem; P-P problem is indicated by H1
oriented CG model (Hall & Soskice, 2001; La Porta et al., 1998). Many countries are ceremonially adopting common CG policies mainly to secure global legitimacy (Aguilera & Cuervo-Cazurra, 2004; Cuervo, 2002). Institutional scholars also analyze the condition of institutional voids in emerging economies (Khanna & Palepu, 2000; Khanna & Rivkin, 2000; Kogut & Spicer, 2002) and assert that in such contexts, external CG mechanisms are missing in enforcing firm level good governance. In short, the success of internal mechanisms in protecting the minority shareholders’ wealth depends on the availability of necessary CG institutions, which are not present universally across nations.
When the firm level CG mechanisms are not mandated by strong institutions, UCOs seldom comply with the formal recommendations (Kim, Kitsabunnarat- Chatjuthamard, & Nofsinger, 2007; Nowland, 2008; Schulze, Lubatkin, Dino, &
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Buchholtz, 2001; Shi, Magnan, & Kim, 2012). Even if they comply, most firms manage to engage in ceremonial policy adoption because of the weaknesses in the external institutions (Guillén & Capron, 2015; Peng, 2003, 2004). Ironically, in weak context, suggested internal mechanisms can be utilized as a means of further expropriation. For example, UCOs can exercise their excessive power to manipulate the board structure by appointing their own people as board members and Board Chair. Formally, on paper, these board members and Board Chair may be the outsiders in the focal firms; in reality, they serve the interest of UCOs (Singla et al., 2014; Veliyath & Ramaswamy, 2000; Yeh & Woidtke, 2005). There is also evidence of misappropriation of the incentive
mechanisms. In the concentrated firms, UCOs themselves belong to the top management team or they appoint top management and engage in collusions. At the expense of minority shareholders, UCOs reward top management with extravagant pay and equity ownership irrespective of their (top management’s) performance results (Amdouni & Boubaker, 2015; Gallego & Larrain, 2012; Jaiswall & Firth, 2009).
In sum, according to the idea of Policy-Practice Decoupling of CG, availability of developed external institutions is crucial for the success of Monitoring CG and Incentive CG. When legal and disclosure related CG institutions are strong enough to enforce firm level implementation of the internal policies and punish the act of ceremonial policy adoption (Espeland & Sauder, 2007), firms will conduct real policy adoption. Such policy implementation may be legitimacy motivated (Kostova & Roth, 2002); however, due to ‘positive externality’ there will be mitigation of P-P conflict. There is a difference between Complementarity of External CG and Policy-Practice Decoupling of CG that should be recognized with caution. Both emphasize the importance of external
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mechanisms. However, Complementarity of External CG explains the availability of legal and disclosure provisions as a ‘complementary’ factor. In their absence in weak context, organizations rely on the internal CG mechanisms to attain good governance; in strong context, its availability functions as an additional force to enhance the positive impact of firm level mechanisms. On the contrary, Policy-Practice Decoupling of CG emphasizes the availability of legal and disclosure provisions as a ‘necessary’ factor. In their absence in weak context, organizations conduct symbolic adoption of the internal CG that seldom attains good governance; in strong context, intended outcomes by the internal CG are often achieved as necessary institutions are available in enforcing the desired policies. Empirical findings by Hellman et al. (2018), Heugens et al. (2009), Klapper & Love (2004), and Leuz et al. (2003), have shown that availability of developed external institutions is a pre-requisite for the success of internal governance; otherwise there will be ceremonial policy adoption with no impact on the intended outcomes. Accordingly, I hypothesize (Embedded View based hypotheses are summarized in Figure 3.2):
Hypothesis 4(a): The negative effect of Excess Control on Minority Shareholder Wealth is attenuated (positively moderated) by Monitoring CG (Board
Independence; CEO-Separation) on the pre-condition that the internal
mechanisms are implemented by developed external institutions (legal institution; disclosure standard). That is, external mechanisms are the ‘necessary’ factor in moderating the positive impact of internal mechanisms.
Hypothesis 4(b): The negative effect of Excess Control on Minority Shareholder Wealth is attenuated (positively moderated) by Incentive CG (Managerial Ownership; Performance based Pay) on the pre-condition that the internal
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mechanisms are implemented by developed external institutions (legal institution; disclosure standard). That is, external mechanisms are the ‘necessary’ factor in moderating the positive impact of internal mechanisms.
Figure 3.2: Embedded View based hypotheses regarding the effectiveness of
Internal CG and External CG in attenuating P-P problem; P-P problem is indicated by H1
Rejection of significant positive impact by the internal and external CG policies in attenuating P-P problem will provide support for the analysis of Means-Ends Decoupling of CG, which raises serious concerns about the effectiveness of common CG policies in governing the UCOs (Attig et al., 2016; Bebchuk & Hamdani, 2009; Davis et al., 1997; Fiss, 2008; Heracleous & Lan, 2012; Morck et al., 2000; Young et al., 2008). Proponents of this view agree that agency problem occurs in both the dyads – dispersed owner- manager (P-A) and minority shareholder-UCO (P-P). However, in the P-A conflict, top
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management exploit their day to day decision making power to expropriate the dispersed shareholders; whereas in the P-P conflict, UCOs utilize their excessive control to
expropriate the minority shareholders. That is, agents’ identity and their means of power vary substantially. Universal CG policies are fundamentally designed to govern the top management; they are not equipped with curtailing the excessive power of UCOs (Bebchuk & Hamdani, 2009). According to Means-Ends Decoupling of CG, when internal CG mechanisms are misaligned to begin with, external CG institutions cannot support moderating any positive result at the organizational level (Bromley & Powell, 2012; Dick, 2015). The core problem in such instance is not lack in ‘policy
implementation’ (which can be addressed by developed external institutions) but rather lack in ‘policy-goal alignment’ (where developed external institutions may end up enforcing misaligned policies) (Wijen, 2014; 2015). In short, proponents of Policy- Practice Decoupling of CG question the universality of “good” CG principles from the perspective of country institutional heterogeneity/embeddedness; whereas proponents of Means-Ends Decoupling of CG question the universality of “good” CG principles from the perspective of firm structural heterogeneity/embeddedness. A large number of studies have shown that commonly recommended internal policies cannot improve the firm level governance even when the external institutions are relatively developed to sustain the shareholder-oriented CG model (Daily & Dalton, 1997; Dalton, Hitt, Certo, & Dalton, 2007; Mizruchi, 2004; Walsh & Seward, 1990).
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