daily et al - 2003 - corporate governance decades of dialogue and data

®
Academy
oí
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
of
corporate governance
is at a

crossroads. Our knowledge
of
what
we
know
about
the
efficacy
of
corporate governance mechanisms
is
rivaled
by
what
we do not
know. This special topic fonim
is
dedicated to continuing the rich tradition
of
research
in this area, with
the
hope that
the
models
and
theories offered will propel corporate
governance research
to the
next level, enhancing

our
understanding
of
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
noi io
look
for relationships attendant with corporate

gov-
ernance structures
and
mechanisms, perhaps
even more
so
than
we
know where
io
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
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-
371
372 Academy
of
Management Review
July
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 á
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-
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
373
(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-à-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
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 oí
Management
Review
July
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 oí Coipoiate 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 oí
Coipoiate 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).
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-
ciosure. 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
375
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-
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
July
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,
1976;
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).
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 CanneUa
377
1988;
David, Kochhar,
&
Levitas, 1998; Kochhar
&
David, 1996). 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 pressure-resistant 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, 1996). 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
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
July
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
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
379
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
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
empiiical 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 cliché, individual re-
search efforts that do not genuinely embrace the
380
Academy oí Management Review
July
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.
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