Competing institutional pressures in corporate governance reform: the role of board interlocks and industry peers

Abstract

PurposeThis study aims to examine the effects of competing influences emanating from firms’ social structural context (i.e. sent and received board of director interlocks and industry peers) on the adoption of an institutionally contested corporate governance code provision.Design/methodology/approachThe corporate governance code provision of interest in this research recommends that German firms listed on German stock exchanges should disclose the individual remuneration arrangements for their board members. This paper uses 945 firm year observations from 2002 to 2006, the time period during which the adoption of this provision was voluntary for firms, to examine the role of firms’ social structural context in the legitimization process of this provision.FindingsThe results show that sent board interlocks to firms that defy pressures to adopt this practice have an equally pronounced but opposing effect on its institutionalization process. Received interlocks are inconsequential in this process. The results also provide evidence for the existence of competing influences emanating from firms’ industry peers. In contrast to the effects associated with sent board interlocks, at the industry level, peer acquiescence has a more pronounced effect than peer defiance. Furthermore, the practice’s legitimacy among firms’ peers moderates the effects of sent board interlocks.Originality/valueThe results of this paper suggest that a balanced approach to studying institutional change in corporate governance needs to acknowledge the co-existence of conflicting signals regarding the spread of new institutional models. The findings suggest that firms’ social structural context plays a central role in processes of contested institutional change. Board interlocks and industry peers carry the potential to facilitate institutional change and facilitate institutional continuity and resistance to change. However, not all board interlocks are of equal importance, and industry peers constitute a source of legitimacy to which directors forming the interlocks attend.