Organization Science informs ®

Vol. 19, No. 3, May–June 2008, pp. 381–385 doi 10.1287/orsc.1080.0361

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0381 © 2008 INFORMS

New Directions in Corporate Governance Research

Donald C. Hambrick
Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802, dch14@psu.edu

Axel v. Werder
Technische Universität Berlin, D-10585 Berlin, Germany, a.werder@ww.tu-berlin.de

Edward J. Zajac
Kellogg School of Management, Northwestern University, Evanston, Illinois 60208, e-zajac@kellogg.northwestern.edu

I n this essay, we seek to identify the contributions that strategy and organizational researchers have made, and continue
to make, in enhancing our understanding of a wide variety of important corporate governance questions. We begin by
discussing how these research contributions stem from a willingness to draw from and contribute to different streams of
intellectual thought, and we provide an orienting framework to situate this work.
Key words: corporate governance; boards of directors; top executives

Over the last few decades, the topic of corporate gov-
ernance has attracted substantial interest from scholars
in a wide array of academic fields. Attention to gov-
ernance can be found in departments of accounting,
finance, management, organization behavior, and strat-
egy, as well as departments of economics, sociology,
psychology, and law. Some of this interest is undoubt-
edly due to the widely noted corporate scandals of the
past decade (e.g., Harris and Bromiley 2007), but there
are also more enduring reasons why corporate gover-
nance has been and will remain a central research topic
for those seeking to understand the basic purposes and
functioning of contemporary organizations. Specifically,
there are a number of fundamental organizational ques-
tions that, while not unique to corporate governance,
reveal themselves particularly well in the governance
context. In this essay, we discuss some of these ques-
tions. Moreover, the domain of corporate governance is
itself in flux; as corporations and societal norms evolve,
so do the boundaries of what constitutes governance. In
this essay, we also discuss this evolution of the corporate
governance terrain.
The vast contributions of scores of governance schol-
ars cannot be easily summarized, and this is not our
intent here. Rather, we wish to briefly introduce an ori-
enting framework to highlight where strategy and orga-
nizational researchers have made key contributions to
our understanding of corporate governance and to distin-
guish these contributions from those in other fields, most
notably economics and law. Such was also our purpose
for proposing this Organization Science Special Issue on
Corporate Governance; therefore, we will note how the
articles appearing in the special issue fit within our ori-
enting framework. Throughout our essay, we highlight
381
additional research questions that we believe will be
fruitful for governance scholars.
We see corporate governance as referring to the for-
mal structures, informal structures, and processes that
exist in oversight roles and responsibilities in the corpo-
rate context. Given this focus, the central unit of anal-
ysis in governance research is typically the corporation,
or organization; but governance themes, and research
on those themes, can span levels of analysis in both
the micro direction (from the organization inward) and
the macro direction (from the organization outward). We
offer the orienting framework shown in Figure 1 to help
organize our discussion of these research themes. The
framework considers corporate governance work along
a micro/macro dimension, as noted, and a dimension
that considers formal structures, informal structures, and
processes.
Formal Structure—And Beyond
When one considers these two dimensions jointly in
a 2 × 3 matrix, it becomes clear that certain streams
of research tend to be clustered into certain cells. For
example, as Figure 1 shows, the law and the economics
literatures tend to focus on the roles of formal struc-
tures in governance (note that we are attempting to
be illustrative, not comprehensive, in our characteriza-
tion of tendencies found in certain streams of research).
Legal scholars, who are interested in socially desirable
governance arrangements, have long assessed the pros
and cons of alternative formal systems (both within
country contexts and across them). These debates are
often rooted in alternative philosophical conceptualiza-
tions of what constitutes a public corporation (Bradley
et al. 2000).
 Hambrick, v. Werder, and Zajac: New Directions in Corporate Governance Research
382
Figure 1 Perspectives on Corporate Governance
Formal structure
Economics
Organization
Designing optimal
incentive and
monitoring structures
Inward
Legal
Organization
Creating and enforcing
governance rules and
regulations for societal
benefits
Outward
Note. Adapted from Zajac and Westphal (1998).
Economists typically have focused their intellectual
efforts on a similar search for structuring optimality in
governance, but usually with a more resolutely organi-
zational focus—looking inward to managerial behavior.
In particular, the rise of agency theory, with its emphasis
on optimal incentive contracting and monitoring struc-
tures, has provided a ubiquitous intellectual apparatus
for addressing a variety of questions related to manage-
rial behavior and the need for its oversight.
While we recognize and accept the value of research
on formal structure, Figure 1 also highlights that there
are other important avenues of inquiry in the corporate
governance domain. In fact, the remaining four cells of
our framework have more of a behavioral science ori-
entation, entailing the expertise of researchers in strate-
gic management and organizational theory. For example,
whereas the economics literature tends to view formal
contracting as entered into voluntarily by transacting
partners, research on what we characterize as “behav-
ioral structure” (i.e., informal structure) tends to focus on
power issues between and among key corporate actors.
Oversight is not simply a task but instead is an activity
that implies the loss of autonomy for those who are over-
seen; and such corporate actors as CEOs and other top
managers are often loath to give up the discretion they
feel they deserve, given their significant responsibilities
as senior executives. In fact, whereas prior behavioral
science research has focused considerable attention on
power struggles between managers and their overseers,
similar attention could be devoted to intraboard power
issues, to which we now turn.
Behavioral Structure
Who has the most power and influence within the board-
room, and who has the least? Most current research
tends to treat the board as a homogeneous unit, taking
actions as a group on the basis of some sort of statisti-
cal mean of the characteristics, backgrounds, and expe-
riences of those involved. But logic, anecdotal evidence,
Organization Science 19(3), pp. 381–385, © 2008 INFORMS
Behavioral structure Behavioral process
Power Social psychology
Showing how positions Revealing how decision-
affect power/politics making processes
within organizations may be biased
Social networks Symbolic management
Showing how power Understanding how
and information flow symbols and language
in interorganizational can address normative
networks compliance with societal
norms and values
and a considerable body of research on group processes
all tend to suggest that some directors have far more
influence than others. Indeed, one of the likely reasons
that research on board composition has failed to gener-
ate interesting results is that it has not incorporated an
awareness of power differentials within boards.
We can readily anticipate that boards are like other
social entities in that they possess status and power gra-
dations. Obviously, the chairman (who in most U.S.
firms is also CEO) will have a great deal of power. But
what about the pecking order among the other directors?
Directors come from various groups, including current
executives of other firms, retired executives, represen-
tatives of major shareholders, representatives of labor
(e.g., in Germany), and academics. Who has the most
say? Is it the directors who hold (or represent) the most
shares? Or is it those with the longest tenures, or those
who hold the most prestigious jobs elsewhere, or those
who have the closest social ties to the chairman? Just
as Finkelstein (1992) found that accounting for power
differentials within top management teams helped to
explain variance in firm outcomes, we can similarly
expect that a greater awareness of power differentials
within boards will yield an increase in our understanding
of board actions (and inaction). One of the next fron-
tiers for governance researchers is to generate theories
and evidence regarding how power differentials within
boardrooms affect board processes and outcomes.
Similarly, a more macro perspective on informal struc-
tures (and their potential nonoptimality) opens up new
questions regarding the roles of key institutional actors
in influencing the public corporation. Who are these
actors, how are they linked, and with what conse-
quences for firms and for society? Corporate governance
does not begin and end with principals, agents, and
the (in)completeness of contracts. There is considerable
opportunity and need to explore the extensive web of
institutional actors that influence governance practices
in contemporary societies. Beyond the obvious roles
of regulatory authorities and stock exchanges, we are
Hambrick, v. Werder, and Zajac: New Directions in Corporate Governance Research
Organization Science 19(3), pp. 381–385, © 2008 INFORMS
witnessing an increasing influence from the press, gov-
ernance watchdog groups, institutional investors, exec-
utive search firms, and executive compensation firms
(Wiesenfeld et al. 2008). These various entities may have
both symbiotic and antagonistic relationships among
each other, and of course they have a substantial effect
on the behaviors of executives and boards of public com-
panies. Moreover, the influence of institutional actors is
often complemented, or multiplied, by the influence of
peer firms. This is essentially what the paper by Pfarrer
et al. (2008) in this special issue reports; they find that
corporate earnings restatements occur largely because
of informal peer pressure rather than because of formal
sanctions.
In fact, the idea of heterogeneity within stakeholder
categories, including diversity among equity sharehold-
ers, will almost certainly take stronger root in future gov-
ernance research. In contrast to the typical portrayal of a
divergence between interests of the shareholders and the
managers, it is likely that both managers and sharehold-
ers, as well as other stakeholders, have wide variations
of preferences within their presumed categories. For
instance, there are long-term- and short-term-oriented
shareholders, majority and minority shareholders, and
active and passive shareholders. In addition, the rise of
private equity funds has created a whole new shareholder
category, which is becoming more and more influential.
Although researchers have long been aware of dif-
ferent shareholder types, there has been little consider-
ation of the implications of shareholder heterogeneity
for the design and implementation of governance prac-
tices. Growing shareholder activism raises questions that
have been overlooked in the past: Who runs, and who
should run, the company—the board or the shareholders
with the loudest voices? What types of conflicts arise
between short-term-oriented, often very vocal, share-
holders and more long-term-oriented, but less vocal,
shareholders? How should these conflicts be solved,
taking into account that activist shareholders often exert
influence through the press and other social intermedi-
aries? How can, and how should, managers deal with
dilemmas created by contradictory requirements, such
as fair disclosure on one hand and insistent informa-
tion requests from institutional investors on the other
hand? What types of standards and regulations should be
imposed on activist shareholders (such as hedge funds)?
In sum, beyond the well known principal–agent prob-
lem, principal–principal problems also exist, and they
need to be addressed much more intensively by future
research. In this vein, the paper by Kim et al. (2008) in
this special issue addresses how different types of own-
ers give rise to different profiles of R&D spending by
firms; as such, the paper is a nice example of research
on heterogeneous shareholder orientations. Similarly, the
paper by Dharwadkar et al. (2008) in this special issue
383
adds to our knowledge about owner profiles by demon-
strating that an institutional investor’s mix of holdings
affects how vigilantly the investor monitors a given firm
in its portfolio.
Although the stakeholder approach to corporate gov-
ernance has already pushed the field beyond the nar-
row perspective of the equity shareholder, much more
research needs to be done to address the issue of stake-
holder diversity. A corporation can be seen as a nexus of
incomplete contracts with diverse transaction partners,
including shareholders, creditors, employees, suppliers,
and customers. Because of the inevitable incomplete-
ness of contracts, the company and the other trans-
action partners may try to increase their benefits by
opportunistic behavior, depending on the power distri-
bution between them. By the same token, all actors
of the nexus bear the risk of opportunistic behavior
by the other partners. Because corporate governance
mechanisms basically aim to regulate opportunism risks,
central questions to be dealt with include the follow-
ing: Which stakeholder groups (and subgroups within
heterogeneous groups) have the greatest potential to
behave opportunistically or, conversely, to be damaged
the most by others’ opportunism? Can the likelihood
of opportunism, or the actual exercise of opportunism,
be measured? How efficient are different governance
mechanisms for regulating opportunism risks? Answer-
ing such questions not only will be ultimately useful for
managers and boards, but can inform policy makers as
well. For instance, concepts for evaluating opportunism
might facilitate more profound comparisons of rules for
shareholder protection, employee protection, and con-
sumer protection.
Behavioral Process
Returning to Figure 1, we now move from a focus on
formal and informal structures to a focus on behav-
ioral processes—at both the micro and macro levels. At
the micro level, there is the question of decisions made
by overseers and the rationality of such decisions. Ide-
ally, the members of a board of directors are highly
qualified to provide professional advice to the managers
of the firm. Exploiting this expertise requires that the
managers inform the board about their strategic inten-
tions and invite the board to critique and comment on
these plans. In other words, the corporation’s course of
action for the future, which has been developed by the
managers, should be thoroughly discussed in the board-
room before implementation. During this discussion, the
board should ask critical questions about the risks of the
planned measures to determine their pros and cons.
In practice, however, according to abundant anecdotic
evidence, controversial or candid discussions seldom
occur in boardrooms. Instead, a class of group pro-
cesses, including groupthink (Janis 1972), undiscussabil-
ity (Argyris 1985), and pluralistic ignorance (Westphal
 Hambrick, v. Werder, and Zajac: New Directions in Corporate Governance Research
384
and Bednar 2005) often prevail, preventing board mem-
bers from asking tough questions. Although such bar-
riers to open discussion are known to occur, there is a
lack of insight as to how these barriers can be over-
come and how open discussion cultures can be fostered.
Research questions arising in this context include the
following: How can the intensity and openness of a
board’s discussion style be measured? How can directors
raise questions about possible drawbacks of managerial
plans without seeming to criticize the managers, espe-
cially the CEO? How can a productive balance between
controversial discussions and a constructive working cli-
mate be ensured? How should controversies between the
board and the managers, as well as within the board,
be handled and communicated? Should boards strive for
unanimous decisions? Can board members who persis-
tently disagree with the CEO, or with fellow board mem-
bers, remain effective—and for how long? The paper
by Hillman et al. (2008) in this special issue raises the
intriguing question of how directors’ “identities,” or how
they conceive of themselves as directors, can influence
their behaviors in the boardroom. As such, the paper is
an excellent contribution toward advancing our under-
standing of boardroom processes.
Equally fundamental at the micro level is the basic
question of director motivation. One of the most widely
studied corporate governance topics is the relationship
between the CEO and the board. Our understanding of
this relationship, though, is increasingly one-sided. Our
knowledge of top executives’ beliefs, goals, and behav-
iors continues to grow, as evidenced by the paper by
Graffin et al. (2008) in this special issue, which demon-
strates how executives benefit from the celebrity status
of their CEOs. But we know little about nonexecutive,
or outside, directors. A particularly intriguing question
concerns directors’ motivations to even be on corporate
boards in the first place. Top executives have several
very clear motivations to rise to a firm’s highest eche-
lons (wealth, power, and prestige being most obvious),
but it is largely unclear why outside directors serve on
boards. Until we understand directors’ motives, we will
have great difficulty in comprehending board processes
or effectiveness.
The question of directors’ motives is especially inter-
esting because, at first glance, there appear to be far
more reasons to avoid corporate directorships than to
pursue them. For most eligible candidates, the pay is not
highly attractive. Board activities include a great deal of
repetition and perfunctory ritual. In times of corporate
success, little credit accrues to directors; and, in times
of difficulty, directors are faced with the unpalatable and
onerous task of replacing the CEO. Finally, there is the
increasing risk of lawsuits, attacks from the press, and
stigma (Wiesenfeld et al. 2008).
So, why do busy and talented people do it? Is it to
learn about how other companies and boards operate? Is
Organization Science 19(3), pp. 381–385, © 2008 INFORMS
it because of the money? Is it a matter of social recip-
rocation? Or is it a desire to be part of an elite group,
as validation of one’s status in the world of affairs? For
each director, we can expect that a mix of these (and
other motives) is at work, and the exact mix will differ
between directors. As is true for all humans, a director’s
attention, effort, and choices will follow from his or her
underlying preferences, which are often influenced by
other drives. A better understanding of these preferences
and their influences is essential for governance theorists
to consider.
Lastly, we can consider how a focus on social pro-
cesses is relevant at the more macro-societal level.
How do societal values regarding corporate governance
change over time, and how do firms keep up with
such changes? How do companies try to communi-
cate that they are well governed? Are such communi-
cations accurate? Work by Westphal and Zajac (1994,
2001) on symbolic management processes is relevant
here. They suggest that corporations seek not only to
be in legal compliance with governance statutes, but
also to be in normative compliance with institutional
norms and values regarding what constitutes good cor-
porate governance. Their findings highlight that “good
governance” is often a moving target, subject to alter-
native interpretations by different institutional actors,
as well as to changing interpretations over time. The
authors suggest that an astute understanding of corpo-
rate governance requires recognition that an individual
firm’s governance arrangements are situated in a particu-
lar historical, social, and organizational context. As more
national economies expand, and as public firms prolif-
erate around the world, we can envision an increased
awareness among scholars and policy makers that there
is no single optimal governance system. Then attention
can turn to understanding how institutional differences
give rise to governance arrangements that are suitable,
not in a universal sense, but rather specifically for the
individual firm and the context in which it is situated
(e.g., Yoshikawa et al. 2007). The paper by Aguilera
et al. (2008) in this special issue, for instance, provides
a comprehensive framework for assessing how institu-
tional context affects the appropriateness of alternative
governance practices.
Summary
Corporate governance, which refers to the structures and
processes by which an organization’s assets and activi-
ties are overseen, is of profound significance in modern
economies. Not only do the constituents of firms stand to
gain or lose greatly, depending on the quality and nature
of corporate governance, but entire national systems can
be propelled or stymied as well. As such, the topic of
corporate governance is of substantial interest to corpo-
rate executives, labor leaders, investors, politicians, and
regulatory bodies.
Hambrick, v. Werder, and Zajac: New Directions in Corporate Governance Research
Organization Science 19(3), pp. 381–385, © 2008 INFORMS
The extant literature has typically viewed governance
as a principal–agent problem between shareholders
and management. But useful insights about governance
must inevitably have a broader scope, encompassing
such quite complex matters as multiple stakeholders,
boardroom dynamics, managerial processes, managerial
values and motives, and national systems (including cul-
ture, legal legacies, and so on). We hope that this spe-
cial issue of Organization Science will promote new
avenues for research that will advance our understanding
of both the antecedents of governance practices (Why
do governance arrangements look the way the do?) and
their consequences (How do governance arrangements
affect managerial and corporate outcomes? And how can
changes in governance lead to better outcomes?).
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