® Academy of Management Review

2003, Vol. 28, No. 3, 371-382.

INTRODUCTION TO SPECIAL TOPIC FORUM

CORPORATE GOVERNANCE: DECADES OF

DIALOGUE AND DATA
CATHERINE M. DAILY
DAN 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 know

about the eificacy oi corporate governance mechanisms is rivaled by what we do not
know. This special topic ionim is dedicated to continuing the rich tradition oi research
in this area, with the hope that the models and theories oiiered will propel corporate
governance 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 of
the broad uses to which organizational re-
sources will be deployed and the resolution of
conflicts 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 focused
primarily on the control of executive self-
interest and the protection of shareholder inter-
ests in settings where organizational ownership
and control are separated. The overwhelming
emphasis in governance research has been on
the efficacy of the various mechanisms avail-
able to protect shareholders from the self-
interested whims of executives. These years of
research have been very productive, yielding
valuable insights into many aspects of the man-
ager-shareholder conflict. An intriguing element
of the extensive body of corporate governance
research is that we now know where not to look
for relationships attendant with corporate gov-
ernance structures and mechanisms, perhaps
even more so than we know where to look for
such 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 assess
where the field stands and set forth an agenda
for future study. Predominant among our aims
was a hope that new theoretical perspectives
371
and new models of corporate governance would
emerge to guide researchers toward productive
avenues of study. We hope the readers of this
special issue agree with us that the contributors
have helped accomplish this goal.
THEORY AND PRACTICE: THE BLIND LEADING
THE BLIND?
In a 1997 review of corporate governance re-
search, Shleifer and Vishny noted that "the sub-
ject of corporate governance is of enormous
practical importance" (1997: 737). Their observa-
tion highlights one of the attractions to conduct-
ing research in this area: its direct relationship
with corporate practice. Corporate governance
researchers have a unique opportunity to di-
rectly influence corporate governance practices
through the careful integration of theory and
empirical study. It has not always been clear,
however, whether practice follows theory, or
vice versa. As important, it is not clear that there
is concordance between the guidance provided
in the extant literature and the practices em-
ployed by corporations.
THEORY
The overwhelmingly dominant theoretical
perspective applied in corporate governance
studies is agency theory (Dalton, Daily, Ell-
372 Academy of Management Review
Strand, & Johnson, 1998; Shleifer & Vishny, 1997).
Jensen and Meckling (1976) proposed agency
theory as an explanation of how the public cor-
poration could exist, given the assumption that
managers are self-interested, and a context in
which those managers do not bear the full
wealth effects of their decisions. This was the
first satisfactory explanation of the public cor-
poration since Berle and Means (1932) pointed
out some of the key problems inherent in the
separation 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 large
corporations are reduced to two participants—
managers and shareholders—and the interests
of each are assumed to be both clear and con-
sistent. Second, the notion of humans as self-
interested and generally unwilling to sacrifice
personal interests for the interests of others is
both age old and widespread. Adam Smith pre-
dicted more than 200 years ago that the "joint
stock company"—an analogue to the modern
public corporation—could never survive the rig-
ors of a competitive economy, because waste
and inefficiency would surely bring it down
(Smith, 1776). Economists struggled with this
problem for centuries, until Jensen and Meckling
(1976) provided their convincing rationale for
how the public corporation could survive and
prosper despite the self-interested proclivities of
managers. In nearly all modern governance re-
search governance mechanisms are conceptual-
ized as deterrents to managerial self-interest.
Corporate governance mechanisms provide
shareholders some assurance that managers
will strive to achieve outcomes that are in the
shareholders' interests (Shleifer & Vishny, 1997).
Shareholders have available both internal and
external governance mechanisms to help bring
the interests of managers in line with their own
(Walsh & Seward, 1990). Internal mechanisms
include an effectively structured board, compen-
sation contracts that encourage a shareholder
orientation, and concentrated ownership hold-
ings that lead to active monitoring of executives.
The market for corporate control serves as an
external mechanism that is typically activated
when internal mechanisms for controlling man-
agerial opportunism have failed.
While agency theory dominates corporate
governance research (Dalton, Daily, Certo, &
Roengpitya, 2003), parts of the governance liter-
July
ature stem from a wider range of theoretical
perspectives. 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 for
recognizing the many mechanisms and struc-
tures that might reasonably enhance organiza-
tional functioning. For example, the board of
directors is perhaps the most central internal
governance mechanism. Whereas agency the-
ory is appropriate for conceptualizing the con-
trol/monitoring role of directors, additional (and
perhaps contrasting) theoretical perspectives
are 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 the
organization 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 the
firm. For example, outside directors who are
also executives of financial institutions may as-
sist in securing favorable lines of credit (e.g.,
Stearns & Mizruchi, 1993); outside directors who
are partners in a law firm provide legal advice,
either in board meetings or in private communi-
cation with firm executives, that may otherwise
be more costly for the firm to secure. The provi-
sion of these resources enhances organizational
functioning, firm performance, and survival.
Stewardship theory has also garnered re-
searchers' attention, both as a complement and
a contrast to agency theory (see, for example,
Davis, Schoorman, & Donaldson, 1997, for an ex-
cellent overview). Whereas agency theorists
view executives and directors as self-serving
and opportunistic, stewardship theorists de-
scribe them as frequently having interests that
are 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 and
directors as altruistic; rather, they recognize that
there are many situations in which executives
conclude that serving shareholders' interests
also serves their own interests (Lane, Cannella,
& Lubatkin, 1998).
Executives have reputations that are interwo-
ven with the financial performance of their firms
2003 Daily, DaJton, and Cannella
(e.g., Baysinger & Hoskisson, 1990). In order to
protect their reputations as expert decision mak-
ers, executives and directors are inclined to
operate the firm in a manner that maximizes
financial performance indicators, including
shareholder 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 their
individual 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 CEOs
and boards of directors has been of particular
interest in corporate governance research (e.g..
Daily & Johnson, 1997; Finkelstein & D'Aveni,
1994; Mizruchi, 1983). In CEO succession studies,
for example, researchers often incorporate
power theories to help explain the succession
process (e.g., Shen & Cannella, 2002).
Although the board legally is the more pow-
erful entity in the CEO/board relationship, there
are a number of factors that operate to reduce
board power vis-d-vis the CEO. For example,
CEOs can exercise influence over the succes-
sion process by dismissing viable successor
candidates (Cannella & Shen, 2001). The timing
of a director's appointment to the board might
also impact the power relationship between
board members and CEOs, because directors
appointed during the tenures of current CEOs
may feel beholden to them and may be less
likely to challenge them (Monks & Minow, 1991;
Wade, O'Reilly, & Chandratat, 1990).
Our intent is not to provide a comprehensive
list of the many theoretical perspectives appar-
ent in the corporate governance literature. There
are several additional perspectives that we
have elected not to develop, for the sake of par-
simony. For example, Zahra and Pearce (1989)
have noted the applicability of class hegemony
theory and the legalistic perspective in the
treatment of boards of directors. Other research-
ers have applied signaling theory to governance
in initial public offering (IPO) firms (e.g., Certo,
Covin, Daily, & Dalton, 2001). Social comparison
theorists have examined the CEO compensation
373
process (O'Reilly, Main, & Crystal, 1988). The
theoretical perspectives we have identified—
and those we have not mentioned—suggest that
researchers face a considerable challenge in
determining those settings that best fit the as-
sumptions in a given theory.
PRACTICE
As with scholarly research, agency theoretic
principles also dominate corporate practice.
Shareholder activism is instructive on this
count. By considering the governance reforms
sought by shareholder activists, we can gain
insight 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 and
directors to adopt practices that insulate share-
holders from managerial self-interest by provid-
ing incentives for executives to manage firms in
shareholders' 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 and
chief executive officer; imposing age and term
limits for directors; and providing executive
compensation packages that include contingent
forms of pay (e.g., Business Roundtable, 1997;
Dalton et al., 1999; National Association of Cor-
porate Directors, 1996; Teachers Insurance and
Annuity 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 on
Corporate 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 seeking
greater director independence by requesting
that firms in which the fund invests (1) compose
their boards predominantly of independent di-
rectors, (2) identify a lead director to assist the
board chair, and (3) impose age limits on direc-
tors (Lublin, 1997; van Heeckeren, 1997). Simi-
larly, the CREF arm of the Teachers Insurance
and Annuity Association-College Retirement
Equities Fund (TIAA-CREF) has targeted firms
374 Academy of Management Review
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 directors
had no ties to firm management (Orwall, 1998;
Orwall & Lublin, 1998).
A variety of organizations have also issued
guidelines designed to create independent
boards and ensure that boards are composed of
individuals able to effectively discharge their
duties. An early exemplar of such efforts is The
Financial Aspects of Corporate Governance re-
port (aka the Cadbury Report). This report is the
outcome of a committee, chaired by Sir Adrian
Cadbury, in the United Kingdom. The committee
was formed "to address the financial aspects of
corporate governance" (The Financial Aspects of
Corporate Governance, 1992: 15). Central to this
report is The Code of Best Practice that outlines
guidelines for board and director independence.
All U.K.-listed organizations are expected to
conform to the report's guidelines.
Similarly, in 1996 the National Association of
Corporate Directors (NACD) constituted a Com-
mission on Director Professionalism that in-
cluded guidelines for enhanced director perfor-
mance. Included among these guidelines are
limits 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 and
practitioners 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 than
less. Independent governance structures (e.g.,
outsider-dominated boards, separation of the
CEO and board chair positions) are both pre-
scribed in agency theory and sought by share-
holder activists. Were independent governance
structures clearly of superior benefit to share-
holders, we would expect to see these results
reflected in the results of scholarly research.
Such results, however, are not evident (Shleifer
& Vishny, 1997).
July
Two meta-analyses provide some context and
illustrate the general state of corporate gover-
nance research relying on agency theory (Dalton
et al., 2003; Dalton et al., 1998). While agency
theorists clearly would prescribe boards com-
posed of outside, independent directors and the
separation of CEO and board chair positions,
neither of these board configurations is associ-
ated with firm financial performance (Dalton
et al., 1998). Importantly, this conclusion holds
across 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 agency
theory-prescribed relationship between equity
ownership and firm performance. Neither inside
nor outside equity ownership is related to firm
financial 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, also
dominated by agency theory, is that addressing
executive compensation. Two important changes
in the early 1990s altered the means by which
executive compensation packages are struc-
tured. One change was in executive compensa-
tion reporting guidelines, specified by the Secu-
rities and Exchange Commission (SEC). In 1992
the SEC adopted the Executive Compensation
Disclosure Rules (Executive Compensation Dis-
closure, 1992). These rules require that ex-
change-listed firms report executive compensa-
tion in a manner that clearly and concisely
identifies the compensation packages for the five
most highly paid officers, including the CEO.
Moreover, these rules require that firms provide
(1) comparative performance graphs relying on
industry benchmarks, (2) estimates of the value
of executive stock options granted, and (3) the
criteria by which executives are evaluated.
The second change in the regulatory land-
scape involves a change in the way executive
compensation is taxed. The enactment of Inter-
nal Revenue Code 162(m) limits deductions for
nonperformance-based compensation to one
million dollars annually for those executives
whose compensation must be reported in SEC
proxy filings (i.e., the CEO and the four addi-
tional most highly paid firm officers). These
changes, in concert with shareholder activism
aimed at better aligning executive pay with
shareholder performance, encouraged executive
2003 Daily, Dalton, and Cannella
compensation practice to move toward stock op-
tions and other incentives.
The increased reliance on equity-based forms
of executive compensation has resulted in a
stronger alignment between executives and
shareholders, 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 the
early 1990s. Despite the increase in equity-
based compensation during the past decade,
extant research has not provided compelling
evidence of a strong relationship between exec-
utive compensation and shareholder wealth at
the firm level. A recent meta-analysis of pay
studies, for example, showed that firm size ac-
counted for eight times more variance in CEO
pay than did firm performance (e.g., Tosi,
Werner, Katz, & Gomez-Mejia, 2000; see also
Dalton et al., 2003).
In sum, while issues of control over executives
and independence of oversight have dominated
research and practice, there is scant evidence
that these approaches have been productive
from a shareholder-oriented perspective. These
results suggest that alternative theories and
models are needed to effectively uncover the
promise and potential of corporate governance.
In the following section we identify three
themes within this stream of research that we
believe carry such promise.
PROMISING THEMES
A variety of themes are relevant to corporate
governance research. As we have noted, many
of these themes are also apparent in organiza-
tional practice. Below we develop three
themes—board oversight, shareholder activism,
and governing firms in crisis—that we envision
as central to moving corporate governance re-
search forward.
Board Oversight
The role of monitoring (i.e., board oversight of
executives) is a central element of agency the-
ory and fully consistent with the view that the
separation of ownership from control creates a
situation conducive to managerial opportunism
(e.g., Jensen & Meckling, 1976). Importantly, as
we have noted, this theme dominates both cor-
porate governance research and practice. Inde-
375
pendent boards of directors are widely believed
to result in improved firm financial perfor-
mance, whether measured as accounting re-
turns or market returns (see, for example, Dalton
et al., 1998, for an overview). Extant empirical
research, however, provides virtually no support
for this belief. As a result, the monitoring model
of corporate governance has been characterized
as largely deficient (Langevoort, 2001).
The current state of corporate governance re-
search suggests a reconceptualization of the
oversight 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 internal
control 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, and
compensating CEOs. Directors are also ulti-
mately responsible for effective organizational
functioning (Blair & Stout, 2001; Jensen, 1993;
Johnson et al., 1996).
Given the importance of boards of directors in
corporate governance research, it is intriguing
that extant studies have failed to reveal a sys-
tematic significant relationship between board
independence and firm financial performance
(Dalton et al., 1998). While the reasons are un-
doubtedly complex, we propose two potential
explanations as a starting point for future
discussion and research. First, too much empha-
sis may be placed on directors' oversight role, to
the exclusion of alternative roles. Second, there
may be intervening processes that arise be-
tween board independence and firm financial
performance.
The current state of corporate governance
suggests that researchers and practitioners
must reconsider the relative weight placed on
directors' oversight function. In addition to the
monitoring 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 ability
to control executives, in future research scholars
may yield more productive results by focusing
on the assistance directors provide in bringing
valued resources to the firm and in serving as a
source of advice and counsel for CEOs.
The contrast of oversight and support poses
an important concern for directors and chal-
lenges them to maintain what can become a
376 Academy of Management Review
rather delicate balance. Many functional organ-
izational attributes, like the commitment of and
consensus 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 for
directors is to build and maintain trust in their
relationships with executives, but also to main-
tain some distance so that effective monitoring
can be achieved.
An important aspect of broadening the focus
beyond directors' monitoring role is considering
theoretical foundations other than agency the-
ory. In recent research scholars have discussed
the limitations of agency theory, particularly as
applied 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 corporate
governance research is its near universal focus
on a direct relationship between corporate gov-
ernance mechanisms and firm financial perfor-
mance. Approximately a decade ago Pettigrew
observed, "Great inferential leaps are made
from input variables such as board composition
to output variables such as board performance
with no direct evidence on the processes and
mechanisms which presumably link the inputs
to the outputs" (1992: 171). This criticism is cer-
tainly not unique to corporate governance stud-
ies; however, the strong reliance on proxies for
processes and dispositions has undoubtedly re-
sulted in limitations in researchers' abilities to
uncover optimal governance mechanisms and
configurations. In an excellent synthesis of
boards of directors research, Forbes and Mil-
liken note:
The influence of board demography on firm per-
formance may not be simple and direct, as many
past studies presume, but, rather, complex and
indirect. To account for this possibility, research-
ers must begin to explore more precise ways of
studying board demography that account for the
role of intervening processes (1999: 490).
July
Shareholder Activism
Shareholder activism has emerged as an im-
portant factor in corporate governance. Share-
holders with significant ownership positions
have both the incentive to monitor executives
and the influence to bring about changes they
feel will be beneficial (Bethel & Liebeskind,
1993). Recent legislative and regulatory changes
have facilitated shareholders' ability to engage
in 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 concentrated
ownership 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 SEC
made 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 corporate
matters with more than ten shareholders or
shareholder groups without prior SEC approval
(Jensen, 1993). This rule was relaxed, permitting
shareholders holding less than 5 percent of out-
standing shares—with no vested interest in the
issue being discussed and not seeking proxy
voting authority—to freely communicate with
other 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 monitor
executives. Unlike most board members who
hold modest, if any, ownership positions in the
firms they serve, institutions tend to hold much
larger stakes (Blair, 1995; Conference Board,
2000). Moreover, institutions account for the vast
majority of U.S. stock exchange transactions
(Zahra, Neubaum, & Huse, 2000). While the hold-
ings of a given institutional investor fund might
seem modest at an average of between 1 and 2
percent of a given firm's outstanding shares, the
dollar value of these holdings can be substan-
tial (Blair, 1995).
Jensen (1993) has recently questioned the
promise 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,
2003 Daily, Dalton, and Cannella
1988; David, Kochhar, & Levitas, 1998; Kochhar &
David, 1998). Only those institutional investors
not subject to actual or potential influence from
corporate management are likely to engage in
activism (Brickley et al., 1988; Coffee, 1991; Davis
& Thompson, 1994). Brickley et al. (1988) have
termed these piessuie-iesistant institutional in-
vestors. An additional concern is that while
pressure-resistant institutional investors have
been effective in persuading officers and direc-
tors to institute governance changes, these
changes have not necessarily led to improved
firm performance (Wahal, 1998). This lack of
evidence again calls into question the share-
holder-centered models of corporate governance.
Institutional investors' increasing reliance on
indexing investment strategies is also a factor
in funds' propensity to engage in activism. In-
dexing is a passive investment strategy that
involves buying a specified number of shares
from a delineated set of firms, such as the S&P
500 (Coffee, 1991; Cox, 1993; Rock, 1991). The di-
rection of the anticipated impact on institutional
investor activism is uncertain, however. Index-
ing may result in fund managers' adopting the
position that activism is largely unnecessary, if
not also ineffective. Fund managers may be-
lieve that, on average, their portfolio of firms
will yield returns comparable to those for the
market as a whole, regardless of the governance
structure of any given firm in the overall port-
folio. Additionally, because fund managers re-
lying on indexing strategies have a predefined
set of firms from which to select, they may per-
ceive their ability to divest the shares of firms
with which they are dissatisfied as largely un-
tenable over the long term.
Alternatively, fund managers, as a function of
the boundaries around the set of firms in which
they might invest, may elect to actively monitor
officers and directors, given the constraints in
altering the portfolio of firms in which the fund
invests. This is consistent with fund managers'
having a choice between exit—divesting a
firm's stock—and voice—shareholder activism
(Black, 1992). This strategy is not costless, how-
ever. Institutional investor activism can be nine
times as costly as pure reliance on indexing
strategies (Makin, 1993).
Jensen (1993) has also commented on the lim-
itations in shareholder activism. He has noted
that shareholders' influence is largely grounded
in the legal system. In his opinion, the legal
377
system "is far too blunt an instrument to handle
the problems of wasteful managerial behavior
effectively" (Jensen, 1993: 850). This reasoning,
however, may have less to do with the legal
system than with the need to further refine re-
search approaches with regard to shareholder
activism efficacy. As with board of director re-
search, this stream of research likely would ben-
efit from greater consideration of the processes
by which shareholders seek to institute gover-
nance changes, as well as consideration of the
anticipated outcomes of their activist efforts. Ad-
ditionally, these approaches will require ex-
panded theoretical foundations on which to
build future research.
Governing Firms in Crisis
The vast majority of organizational literature
addresses the stable or growing firm—that is,
the focus is on effectively managing the suc-
cessful organization (e.g., Jensen, 1993; Summer
et 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 firms
worldwide have been subjected in recent years
suggests that the relative inattention to firms in
crisis is unfortunate. As a result, this inattention
presents an opportunity for governance re-
searchers to augment our understanding of the
effectiveness 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 likelihood
that a firm will file for bankruptcy. Specifically,
in contrast to the general body of governance
research, a series of studies has shown that
board 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 mixed
support for board independence, however.
A central task of effectively functioning
boards 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 be
more willing to remove ineffective executives
prior to a crisis reaching the point of corporate
bankruptcy. This action may prove critical in
378 Academy of Management Review
reversing a financial decline, since deficiencies
within the top management team are related to
firm failure (e.g., Hambrick & D'Aveni, 1992).
Moreover, key organizational stakeholders may
lose 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 tight
governance prescribed by agency theory may
actually be harmful to firm survival and share-
holder interests. As described by Hambrick and
D'Aveni (1988, 1992), corporate failures fre-
quently unfold as downward spirals in which
executive teams are replaced so quickly and
frequently that they have no time to devise and
implement strategies that might, in fact, save
the organization. Further, agency theory's pre-
scription to replace poorly performing managers
assumes there are willing and able replace-
ments ready to step in for those who are re-
moved. If (as agency theory implies) the only
good managers are those associated with high-
performing firms, it is unclear why any of those
good managers would willingly leave a high-
performing firm to take over one threatened by
bankruptcy.
Finally, when a firm spirals toward bank-
ruptcy, another of its key constituencies may
preempt shareholders. That is, banks and other
lending agencies may displace shareholders as
the key stakeholders to be satisfied. While the
firm may fail in' shareholders' eyes, the resolu-
tion of the bankruptcy may well resolve most or
all of the lenders' problems (Gilson, 2001). This is
a situation in which the legal rights of some
corporate participants (lenders) come to out-
weigh those of shareholders.
Research investigating the presence of insti-
tutional investors in the financially declining
firm has yielded less consistent results than re-
search addressing boards of directors in crisis
firms. 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 the
actual 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 positively
and significantly associated with the length of
July
time spent in bankruptcy reorganization and
negatively associated with a prepackaged
bankruptcy filing. These findings suggest the
need for a greater understanding of the role of
institutional 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 either
immediately prior to or at the point of crisis
(Daily, 1994). There remains much to learn about
governance mechanisms that enable firms to
avoid a crisis such as financial decline. There is
also an opportunity to significantly augment re-
searchers' understanding of the period follow-
ing a crisis. For example, the postbankruptcy
period 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 of
success 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 governance
plays in organizational effectiveness. There are
also a number of potential barriers to moving
corporate governance research forward that de-
serve attention. While some barriers are largely
out of researchers' control, others are more
directly under the discretion of the research
community.
One of the more challenging barriers re-
searchers face is gaining access to the types of
process-oriented data that, we have suggested,
will enhance our understanding of the effective-
ness of governance mechanisms. The potential
value of process data is considerable. As noted
by Forbes and Milliken, process-oriented gover-
nance research "will enable researchers to bet-
ter explain inconsistencies in past research on
boards, to disentangle the contributions that
multiple theoretical perspectives have to offer in
explaining board dynamics, and to clarify the
tradeoffs inherent in board design" (1999: 502).
2003 Daily, Dalton, and Cannella
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 provide
such access.
Directors' reticence to invite researchers into
the "black box" of boardroom deliberations is
understandable. The increase in shareholder
activism has been accompanied by an increase
in shareholder lawsuits in recent years (e.g.,
Kesner & Johnson, 1990). Directors fear that
opening up boardroom activity to external scru-
tiny may also increase their risk of being subject
to a shareholder lawsuit. These fears are not
necessarily misplaced. Recent efforts at gover-
nance reform have included "increasing the li-
ability exposure for directors who fall down on
the job and fail to prevent some form of misbe-
havior by insiders" (Langevoort, 2001: 800). The
prospects of boardroom access for firms experi-
encing crisis are even lower. Leaders in
these firms are especially unlikely to expose
themselves to unnecessary scrutiny (Weitzel &
Jonsson, 1989).
It is true that the vast majority of corporate
governance research relies on archival data-
gathering techniques. We would, however, be
remiss in not recognizing that there exists a
small subset of corporate governance studies
that rely, at least in part, on primary data (e.g..
Daily, 1995b; Pearce & Zahra, 1991; Westphal,
1999; Zahra, 1996; Zahra et al., 2000). Also, many
corporate governance researchers will, at some
point, have attempted to access primary gover-
nance data. Many studies incorporating primary
data provide a limited view of corporate gover-
nance processes and outcomes. It is typical, for
example, for these studies to be based on a
single organizational respondent, typically the
CEO (e.g.. Daily, 1995b; Pearce & Zahra, 1991;
Zahra, 1996; Zahra et al., 2000).
Another limitation to advancing the field of
corporate governance is the near exclusive reli-
ance on agency theory in extant research. While.
we certainly do not mean to beat the proverbial
dead horse, we feel compelled to reiterate the
importance of considering alternative theoreti-
cal perspectives. Blair and Stout (2001) recently
provided an interesting analysis of why agency
theory may be largely ineffective at demonstrat-
ing significant relationships between boards of
directors and firm performance. They suggest a
reconceptualization of the traditional treatment
379
of boards of directors within the agency theory
framework.
Agency theorists present the board of direc-
tors as a mechanism to protect shareholders
from managerial self-interest. In previous re-
search scholars have even conceptualized
boards of directors as a second level of agency
(see, for example. Black, 1992). Within this
framework, directors' primary role is maximiz-
ing shareholder value. Blair and Stout summa-
rize this view as follows: "Provided the firm does
not violate the law, directors ought to serve and
be accountable only to the shareholders" (2001:
407). In contrast to this conceptualization, Blair
and Stout note that directors' responsibility is
not 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 that
directors need a high degree of discretion in
allocating corporate resources. This is as anal-
ogous to resource dependence theory as it is to
the principal-agent model. This reconceptual-
ization of directors' responsibilities and roles
further highlights the importance of incorporat-
ing alternative theoretical perspectives in future
corporate governance research.
One of the greatest barriers to advancing the
field of corporate governance will perhaps be
one of the more controversial and difficult to
address. It is, however, one that is directly in
researchers' control. We refer to this barrier as
empirical dogmatism. That is, researchers too
often embrace a research paradigm that fits a
rather narrow conceptualization of the entirety
of corporate governance to the exclusion of al-
ternative paradigms. Researchers are, on occa-
sion, disinclined to embrace research that con-
traindicates dominant governance models and
theories (i.e., a preference for independent gov-
ernance structures) or research that is critical of
past research methodologies or findings. This
will not help move the field of governance
forward.
To advance the study of corporate gover-
nance, researchers will need to advance beyond
establishing—and protecting—our own for-
tresses of research. The battle to advance re-
search and practice must be a collective one. To
borrow from a military cliche, individual re-
search efforts that do not genuinely embrace the
380 Academy of Management Review
full scope of tools available to us as researchers
will result in continued won battles, with little
progress toward ending the war.
CONCLUSION
We recognize that our introduction to this spe-
cial topic forum has likely raised many more
issues than it has addressed. This is, however,
consistent with our primary goal. Our intent was
to provide a forum for raising issues that might
move corporate governance research forward,
while at the same time providing a venue to
showcase cutting-edge research models and
theories. We hope the readers of this special
topic forum find that we have accomplished
both goals, at least in part.
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Catherine M. Daily is the David H. Jacobs Chair of Strategic Management in the Kelley
School 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, and
managerial ethics.
Dan R. Dalton is the dean and Harold A. Poling Chair of Strategic Management in the
Kelley School of Business, Indiana University. He received his Ph.D. from the Univer-
sity of California, Irvine. His work focuses on corporate governance, particularly
option 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&M
University. He received his Ph.D. from Columbia University. He currently serves as
past president of the Business Policy and Strategy Division of the Academy of Man-
agement and teaches entrepreneurship, strategic management, research methods,
and project management.