Internal and External Corporate Governance: An Interface between an Organization and its Environment

Abstract

Most corporate governance research focuses on a universal link between corporate governance practices (e.g. shareholder activism, board independence) and performance outcomes, but neglects how interdependences between the organization and diverse environments lead to variations in the effectiveness of different corporate governance practices. This paper develops an organizational approach to corporate governance and focuses on two dominant streams that analyse internal and external governance mechanisms. First, we explore governance practices aimed at dealing with a complex set of problems internal to an organization, such as conflicts of interest between managers and shareholders, different types of shareholders, and block‐holder opportunism. Second, we discuss the importance of formal and informal governance arrangements that organizations use in managing their relationships with external parties, such as alliance partners, overseas subsidiaries and network members. We argue that an integrated approach bringing these two streams together helps to develop a more holistic view on the effectiveness and efficiency of various corporate governance mechanisms, and suggests a number of avenues for future research. This paper also sets the scene for this thematic issue on corporate governance, scopes the field and introduces 11 papers which make significant contributions towards our understanding of corporate governance.