Aguilera Jackson Amr 2003

THE CROSS-NATIONAL DIVERSITY OFCORPORATE GOVERNANCE: DIMENSIONS

AND DETERMINANTS

RUTH V. AGUILERAUniversity of Illinois at Urbana-Champaign

GREGORY JACKSONResearch Institute of Economy, Trade and Industry

We develop a theoretical model to describe and explain variation in corporate gov-ernance among advanced capitalist economies, identifying the social relations andinstitutional arrangements that shape who controls corporations, what interests cor-porations serve, and the allocation of rights and responsibilities among corporatestakeholders. Our “actor-centered” institutional approach explains firm-level corpo-rate governance practices in terms of institutional factors that shape how actors’interests are defined (“socially constructed”) and represented. Our model has strongimplications for studying issues of international convergence.

Corporate governance concerns “the structureof rights and responsibilities among the partieswith a stake in the firm” (Aoki, 2000: 11). Yet thediversity of practices around the world nearlydefies a common definition. Internationalizationhas sparked policy debates over the transport-ability of best practices and has fueled aca-demic studies on the prospects of internationalconvergence (Guillen, 2000; Rubach & Sebora,1998; Thomas & Waring, 1999). What the salientnational differences in corporate governanceare and how they should best be conceptualizedremain hotly debated (Gedajlovic & Shapiro,1998; O’Sullivan, 2000; Pedersen & Thomsen,1997; Prowse, 1995; Shleifer & Vishny, 1997;Thomsen & Pedersen, 2000).

In most comparisons researchers contrast twodichotomous models of Anglo-American andContinental European corporate governance(Becht & Roel, 1999; Berglof, 1991; Hall & Soskice,2001; La Porta, Lopez-de-Silanes, Shleifer, &

Vishny, 1998).1 They stylize the former in terms offinancing through equity, dispersed ownership,active markets for corporate control, and flexiblelabor markets, and the latter in terms of long-term debt finance, ownership by large block-holders, weak markets for corporate control, andrigid labor markets. Yet this classification onlypartially fits Japan and other East Asian coun-tries (Dore, 2000; Gerlach, 1992; Khan, 2001; Orru,Biggart, & Hamilton, 1997; Whitley, 1992), thevariations within Continental Europe (Barca &Becht, 2001; Rhodes & van Apeldoorn, 1998;Weimer & Pape, 1999; Whittington & Mayer,2000), Eastern Europe (Martin, 1999; Wright, Fila-totchev, & Buck, 1997), and multinational firms(Fukao, 1995). Despite the rich description foundin this research literature, the challenge re-mains to conceptualize cross-national diversityand identify the key factors explaining thesedifferences.

In this article we develop a theoretical modelto identify and explain the diversity of corporategovernance across advanced capitalist econo-mies.2 We examine corporate governance in terms

Authors are listed alphabetically. We are grateful forcomments at various stages from Christina Ahmadjian, Jo-seph Broschak, Albert Cannella, John Dencker, MauroGuillen, Ryoko Hatomoto, Martin Hoepner, Matthew Kraatz,John Lawler, Huseyin Leblebici, Joseph Mahoney, DavidStark, Wolfgang Streeck, Charles Tilly, Kotaro Tsuru, YukikoYamazaki, three anonymous reviewers, and seminar partic-ipants at the University of Illinois.

1 The Anglo-American model is also labeled the outsider,common law, market-oriented, shareholder-centered, or lib-eral model, and the Continental model the insider, civil law,blockholder, bank-oriented, stakeholder-centered, coordi-nated, or “Rhineland” model.

2 Our model presumes moderate economic developmentand an established “rule of law.”

� Academy of Management Review2003, Vol. 28, No. 3, 447–465.

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of three stakeholder groups: capital, labor, andmanagement. In our model we first identify keydimensions that describe the variations in theidentities and interests of each stakeholder to-ward the firm. Subsequently, we explain cross-national diversity in terms of institutional config-urations that shape how each stakeholder grouprelates to firm decision making and control overresources. We offer propositions that describe (1)how a country’s property rights, financial system,and interfirm networks shape the role of capital;(2) how a country’s representation rights, unionorganization, and skill formation influence therole of labor; and (3) how a country’s managementideology and career patterns affect the role ofmanagement. In the Discussion section we exam-ine how different configurations of institutionssupport different sorts of interactions amongstakeholders in corporate governance.

Our sociological approach is inspired byactor-centered institutionalism (Scharpf, 1997)in stressing the interplay of institutions andfirm-level actors. This model bridges the gapbetween undersocialized agency theory ap-proaches and oversocialized views of institu-tional theory. We argue that agency theory failsto sufficiently explore how corporate gover-nance is shaped by its institutional embedded-ness. Conversely, by stressing how national“models” embody a coherent institutional logic,institutional theory leans toward an oversocial-ized perspective too abstract from the conflictsand coalitions between stakeholders at the firmlevel. Consequently, we explain cross-nationaldiversity in corporate governance by specifyingand integrating the various institutional mech-anisms shaping stakeholders’ roles at the firmlevel.

Thus, we make several contributions to com-parative research. First, unlike bipolar typolo-gies, our model more accurately maps nationaldiversity, because it disaggregates various di-mensions of corporate governance. Second,rather than posit one institutional domain as the“prime mover,” we argue that multiple institu-tions exert interdependent effects on firm-leveloutcomes. Third, we suggest several implica-tions for comparative research regarding insti-tutional interdependencies, stakeholder interac-tions, and convergence debates.

SHIFTING PARADIGMS: FROM AGENCYTO EMBEDDEDNESS

Researchers traditionally study corporategovernance within the framework of agency the-ory, viewing the modern corporation as a nexusof contracts between principals (risk-bearingshareholders) and agents (managers with spe-cialized expertise). Given the potential separa-tion of ownership and control (Berle & Means,1932), various mechanisms are needed to alignthe interests of principals and agents (Fama,1980; Fama & Jensen, 1983; Jensen & Meckling,1976). Shareholders assumably maximize re-turns at reasonable risk, focusing on high divi-dends and rising stock prices. Conversely, man-agers may prefer growth to profits (empirebuilding may bring prestige or higher salaries),may be lazy or fraudulent (“shirk”), and maymaintain costly labor or product standardsabove the necessary competitive minimum.Agency costs arise because shareholders faceproblems in monitoring management: they haveimperfect information to make qualified deci-sions; contractual limits to management discre-tion may be difficult to enforce; and sharehold-ers confront free-rider problems where portfoliosare diversified, thereby reducing individual in-centives to exercise rights and creating prefer-ence for exit (Eisenhardt, 1989).

Comparative corporate governance is usuallyconceived of in terms of the mechanisms avail-able to minimize agency problems (Shleifer &Vishny, 1997). For example, the United Kingdomand United States are characterized by dis-persed ownership where markets for corporatecontrol, legal regulation, and contractual incen-tives are key governance mechanisms. In conti-nental Europe and Japan, blockholders such asbanks and families retain greater capacity toexercise direct control and, thus, operate in acontext with fewer market-oriented rules for dis-closure, weaker managerial incentives, andgreater supply of debt. But why are agency prob-lems addressed in such different ways? Left un-qualified, agency theory fails to account for keydifferences across countries. We argue that thisdeficit reflects an undersocialized view of corpo-rate governance that leaves three interrelatedgaps in comparative research.

First, the theoretical assumptions withinagency theory overlook the diverse identities ofstakeholders within the principal-agent rela-

448 JulyAcademy of Management Review

tionship. Different types of investors (such asbanks, institutional investors, families, etc.) pur-sue different interests, particularly when inves-tors are themselves organizations governed byinstitutionally defined rules. Moreover, scholarsgive no serious attention to the varied interestsof managers across countries. Comparative re-search must address this “social construction”of interests (Maurice, Sellier, & Silvestre, 1986).

Second, agency theory overlooks important in-terdependencies among other stakeholders inthe firm (Freeman, 1984) because of its exclusivefocus on the bilateral contracts between princi-pals and agents—a type of dyadic reductionism(Emirbayer & Goodwin, 1994). Agency theoriststreat employment relations as exogenously de-termined by labor markets, despite the em-ployee voice within corporate boards of manyEuropean firms.3 Similarly, interfirm ownershipmay create networks that condition businesscompetition, cooperation, and innovation (Whit-ley, 1999). Hence, corporate governance is ulti-mately the outcome of interactions among mul-tiple stakeholders. For instance, markets forcorporate control may serve shareholders by re-ducing unprofitable investments, but they mayalso face resistance from employees who fearbreaches of trust concerning their firm-specificinvestments.

Finally, agency theory retains a thin view ofthe institutional environment influencing corpo-rate governance (Lubatkin, Lane, Collin, & Very,2001). Despite recent debates over shareholderrights, researchers define institutions narrowly(Roe, 2000). Shareholder rights do not capture theentire complexity of institutional domains bylimiting actors’ financial behavior to the effectsof law (La Porta, Lopez de Silanes, & Shleifer,1999). Firms must adapt to multiple features oftheir environment (Fligstein & Freeland, 1995),and their behavior is unlikely to be explained bya single force such as agency costs. Thus, cor-porate governance needs to be understood inthe context of a wider range of institutional do-mains (Aoki, 2001).

Hence, the unmet theoretical challenge, incomparative studies, remains to conceptualizecorporate governance in terms of its embedded-

ness in different social contexts (Dacin, Ven-tresca, & Beal, 1999; Granovetter, 1985). Embed-dedness stresses that economic action is alsosocial action oriented toward others (Weber,1978) and may be constrained by noneconomicobjectives or supported by noneconomic socialties (Streeck, 2002). Social relations are the fun-damental unit of analysis, rather than ontologi-cal actors, frozen in space and time and isolatedfrom social and cultural context.

COMPARATIVE INSTITUTIONAL ANALYSIS

Institutional theory complements undersocial-ized views of corporate governance by address-ing the embeddedness of corporations in anexus of formal and informal rules (North, 1990).4

Institutional researchers have critiqued agencytheory by showing how politics shape corporategovernance (Fligstein, 1990; Roe, 1994; Roy, 1997),and in much comparative work researchers nowassert that national diversity reflects variousinstitutional constraints stemming from coercivepolitical regulation (Roe, 1994), imitation of cog-nitive models in response to uncertainty (Dob-bin, 1994), or other normative pressures to estab-lish legitimacy (Biggart, 1991; Hamilton &Biggart, 1988). Institutions may also createopportunities for specialization around di-verse economic “logics” and thereby yieldcomparative institutional advantages for differentbusiness systems (Whitley, 1999) or varieties ofcapitalism (Hall & Soskice, 2001). Where institu-tional environments are nationally distinct, iso-morphic processes drive corporate governancepractices to become more similar within countriesand to differ across countries.

Despite a growing consensus that “institu-tions matter,” comparative institutional analy-sis remains in its infancy. Comparing and ex-plaining cross-national diversity requiresystematic specification of what institutionsmatter and how they shape corporate gover-nance. For example, Orru et al. (1997) describecountries in terms of a single overarching insti-tutional logic, such as the emphasis on “commu-nity” in Japanese firms, and neglect to specifyinstitutional-organizational linkages. Other au-

3 Organizational theories “made in the USA” often as-sume universality, despite having only limited applicationin non-U.S. institutional contexts (Doktor, Tung, & von Gli-now, 1991).

4 For a discussion of different institutionalisms, seePowell and DiMaggio (1991), Thelen (1999), Scott (2001), andAcademy of Management Journal (2002).

2003 449Aguilera and Jackson

thors argue that various institutional elementsmay tend to reinforce each other and lead coun-tries to cluster along a few coherent types ofcorporate governance (Hall & Soskice, 2001).

We claim that these comparisons run the dan-ger of presenting an implicitly oversocializedperspective that views institutional effects toobroadly. The interactions among stakeholders atthe firm level largely recede, and the coherenceof national models is overstylized. Hence, wepropose that comparative analysis must be ableto better integrate the study of different institu-tional domains and how, in turn, these domainsshape stakeholder interests and their interac-tions within corporate governance. In this spirit,Aoki states that “in order to really understandwhy a particular institution emerges in a do-main of one economy but not in a similar do-main of another economy, we need to make ex-plicit the mechanism of interdependenciesamong institutions across domains in eacheconomy” (2001: 18). This oversight results in def-icits in explaining why different countries de-velop distinct patterns of corporate governance.

Our approach to institutional analysis istherefore consciously “actor centered” (Scharpf,1997). We view institutions as influencing therange of effects but not determining outcomeswithin organizations. Institutions shape the so-cial and political processes of how stakeholders’interests are defined (“socially constructed”),aggregated, and represented with respect to thefirm. However, institutions themselves are theresult of strategic interactions in different do-mains, generating shared beliefs that, in turn,impact those interactions in a self-sustainingmanner (Aoki, 2001). The task for our actor-centered model, thus, is to specify how the roleof each stakeholder toward the firm is shapedby different institutional domains and therebygenerates different types of conflicts and coali-tions in corporate governance.

We conceptualize corporate governance asthe relationships among stakeholders in theprocess of decision making and control over firmresources.5 At the firm level our model focuseson three critical stakeholders—capital, labor,and management—as shown in Figure 1. We do

not include the state as a stakeholder, despitecases where states have a direct influence inparticular firms or industries. The state is none-theless present in our model at the institutionallevel, by virtue of asserting public interest agen-das and mediating conflicts among stakehold-ers. National diversity has its origins in suchpolitics of institutional development (Jackson,2001; Roe, 1994).

In the next three sections we define in detailthe various dimensions of how each stakeholdergroup relates to the firm. We then develop anactor-centered institutional model that specifiesthe institutional mechanisms shaping cross-national variation in corporate governance. Werely on the existing empirical research literatureto identify the most critical institutional do-mains and develop a series of propositions de-scribing their direct impact on capital, labor,and management. These institutional domainsare analytically separable but have ultimatelyinterdependent effects on stakeholders, asshown in Figure 2. We aim to integrate a varietyof different institutional domains and stake-holder dimensions into a synthetic model.

Capital in the Corporate Governance Equation

Capital is the stakeholder group that holdsproperty rights, such as shareholders, or thatotherwise makes financial investments in thefirm, such as creditors. Agency theorists largelyview capital as shareholders (principals) whoseinterests are homogeneous functions of risk andreturns. Comparisons focus on the degree ofownership concentration (La Porta et al., 1999),where concentrated ownership leads to strongerexternal influence on management while frag-mentation tends to pacify shareholder voice.Less attention has been given to the fact thatvarious types of capital (e.g., banks, pensionfunds, individuals, industrial companies, fami-lies, and so forth) possess different identities,interests, time horizons, and strategies. To mapthis diversity, we define three dimensions alongwhich the relation of capital to the firm varies:(1) whether capital pursues financial or strategicinterests, (2) the degree of commitment or liquid-ity of capital’s stakes, and (3) the exercise ofcontrol through debt or equity.

A first distinction can be made between cap-ital’s financial interests and strategic interests.Financial interests are predominant when in-

5 The firm itself may be defined as a collection of re-sources embedded in a network of relationships amongstakeholders.


vestment is motivated by the prospect of finan-cial return on investment. Individuals and insti-tutional investors generally follow investmentstrategies attempting to maximize the marketvalue of their shares, as well as their dividendpayouts (Dore, 2000; O’Sullivan, 2000). In con-trast, strategic interests are prevalent when in-vestment is motivated by nonfinancial goals,such as control rights. When shareholders areother firms rather than individuals, salariedmanagers exercise property rights on the basisof their bureaucratic authority. Thus, banks andcorporations typically use ownership stakes asa means to pursue the strategic interests of theirorganizations: regulating competition betweenfirms, underwriting relational contracts, secur-ing markets, managing technological depen-dence, and protecting managerial autonomyfrom outside shareholders.

A second dimension of capital concerns thedegree of liquidity or commitment. Both credi-tors and owners face an underlying trade-offbetween the capacity for control through voiceand the ability to exit (Becht & Roel, 1997;

Hirschman, 1970). Liquidity refers to the abilityof owners to exit by selling their stakes withouta loss of price. For shareholders, liquidity re-flects fragmented ownership, diversified portfo-lios, and deep security markets. Liquid share-holders prefer strategies of exit rather thanvoice to monitor management. In contrast, com-mitment involves dependence on firm-specificassets to generate returns, as well as the abilityto control appropriation of those returns (La-zonick & O’Sullivan, 1996). Commitment is oftenrelated to increasing ownership concentration,since disposal of larger stakes becomes moredifficult and may lock in investors. A similarlogic can be applied to debt contracts when con-trasting relationships between banking and se-curitized forms of debt.

A last dimension of capital involves the famil-iar distinction between debt and equity. Equityownership and debt involve divergent risks andmechanisms of control (Blair, 1995; Jensen &Meckling, 1976), leading to different interests inthe relative mix of debt and equity. Creditorshave few rights of control until the point of in-

FIGURE 1Dimensions of Corporate Governance


solvency, but receive a fixed income from inter-est. Thus, creditors tend to be risk averse andfavor stable corporate growth over maximumprofits. Conversely, owners face larger residualrisks and possess greater control rights, but losecontrol during bankruptcy. Owners often preferdebt to equity as a way to maintain the value oftheir shares by leveraging higher earnings andnot diluting their rights through issues of newstock. Different sorts of contingencies triggercontrol of the firm. Debt and equity claims aresometimes commingled, such as by universalbanks that use securities to underwrite debt orto swap during company reorganizations.

These three dimensions defining how capitalrelates to the firm go beyond bipolar typologiesof corporate governance. For example, we candistinguish between two “Rhineland” countrieswith high ownership concentration but differentstrategic interests, such as Italy and Japan.Family ownership in Italy is less motivated bystrategic interests than owners/investors in Ja-pan (Best, 1990). We now introduce three institu-tional domains of capital (property rights, typeof financial system, and interfirm networks) andspecify the institutional mechanisms that influ-ence the described characteristics of capitalacross countries.

FIGURE 2Institutional Domains Shaping Corporate Governance


Property rights. Property rights constitutecomplex legal and economic constructions (Al-chian & Demsetz, 1973) established through cor-porate law, bankruptcy law, and contractual ar-ticles of incorporation. Property rights definemechanisms through which shareholders (capi-tal) exert control, such as information exchangeand voting rights, and how control is balancedwith managerial discretion. While countries areoften distinguished as having strong or weakshareholder rights (La Porta et al., 1998), propertyrights shape capital specifically by establishingrights that favor different types of shareholders.

For example, veto rights may allow smallstakes to achieve disproportional influence, orvoting caps may curtail the power of largestakes. Likewise, mandatory information disclo-sure favors small investors, whereas larger andmore committed investors may enjoy advan-tages of private information. We illustrate suchdifferences by contrasting how property rightsin Germany, Japan, and the United States shapethe means of capital’s control in the firm.

Japanese law follows a shareholder sover-eignty model, where shareholders’ generalmeetings retain broad powers and voting rightsreflect a majority principle. Yet Japan has fewprotections for minority shareholders and weakinformation disclosure requirements to addresscollective action problems in corporate control.These features reduce the liquidity of capitaland weaken the position of financial interestswithin Japanese corporations.

In Germany, protection of minority sharehold-ers is similarly weak. But, unlike Japan, Germa-ny’s constitutional model legally mandates two-tier board structures wherein substantial controlrights are delegated from general shareholdermeetings to a supervisory board (Aufsichtsrat).Separating the supervisory function from bothmanagement and shareholders strengthens ex-ternal monitoring. The supervisory board tendsto give disproportionate power to large block-holders and facilitate their commitment. By an-choring this capacity for blockholder control,property rights favor strategic interests withincorporate governance.

Finally, the United States exemplifies a lib-eral market approach facilitating market-oriented mechanisms of control. Liberal prop-erty rights provide strong minority shareholderprotection owing to relatively high disclosurerequirements and norms of one-share-one-vote.

Property rights thus create incentives to pursuegreater capital liquidity and gravitate againststrategic interests by discouraging dispropor-tionate control through blocks. Hence, propertyrights shape the degree of capital’s control inthe firm, thereby favoring different dominant in-terests within corporate governance.

Proposition C1a: In countries withproperty rights predominantly favor-ing large shareholders, capital tendsto pursue strategic interests towardthe firm and exercise control viacommitment.

Proposition C1b: In countries withproperty rights predominantly protect-ing minority shareholders, capitaltends to pursue financial interests to-ward the firm and exercise control vialiquidity.

Financial system. Financial systems influ-ence the relation of capital to the firm by shap-ing the supply-side capacity to provide diversesources of finance and thereby generate differ-ent patterns of control. The two major alterna-tives for financial mediation between house-holds and enterprises are bank based or marketbased (Berglof, 1991; Zysman, 1983). In bank-based financial systems, banks are the key fi-nancial institutions, mediating deposits fromhouseholds and channeling them into loansmade directly to firms (e.g., Germany and Ja-pan). Besides the close relationships betweenbanks and industrial corporations, these sys-tems tend to have small and underdevelopedcapital markets that reinforce higher firm de-pendence on debt. Financing through bankloans entails close capital monitoring and con-tingent control of the firm, thus inducing capi-tal’s long-term commitment.

In market-based financial systems, house-holds invest in companies’ publicly issued eq-uity (stocks and bonds), thereby expanding thesize and liquidity of capital markets and leavingthe primary monitoring role to institutional in-vestors and other shareholders (e.g., UnitedStates and United Kingdom; Steinherr & Huve-neers, 1994). Market-based systems encourageequity finance through active capital markets inwhich shareholders invest chiefly to pursue fi-nancial interests. They hold control over the firm


by having the option to exit (via liquidity) if thefirm no longer fulfills their interests.

Financial systems’ characteristics are closelylinked to the forms of regulation over financialinstitutions. For example, banks’ capacity to en-gage in business lending developed histori-cally, through a variety of institutions favoringcertain forms of savings (on the household side)and supporting the extension of long-term lia-bilities (on the bank side). Also, pension assetsconstitute a large portion of household financialclaims, and, thus, the mix of public versus pri-vate pensions is another key feature differenti-ating countries (Jackson & Vitols, 2001). In sum,financial systems influence corporate gover-nance through their capacity to provide differentsources of capital and to affect the relationshipwith the firm.

Proposition C2a: In countries with pre-dominantly bank-based financial sys-tems, capital tends to exercise controlover the firm via debt and commitment.

Proposition C2b: In countries with pre-dominantly market-based financialsystems, capital tends to exercisecontrol over the firm via equity andliquidity.

Interfirm networks. The relationship of capitalto the firm is also shaped by the structure ofinterfirm networks, which influences firm be-havior through access to critical resources andinformation (Burt, 1983; Davis & Mizruchi, 1999;Windolf, 2002). While firms may establish manytypes of ties, an intriguing aspect for capital isdifferences in the overlap of networks of capitalties (ownership and credit) with other businessties—a property known as network multiplexity.

In countries with multiplex networks, such asGermany, Japan, and Spain, ownership stakesoften overlap with supplier relations, board rep-resentation, and the commingling of debt andequity claims (Aguilera, 1998; Windolf & Beyer,1996). Multiplex ties reinforce the commitment ofcapital by making exit more costly, particularlygiven a high degree density of relationshipsbetween firms. In Japan, reciprocal cross-shareholding creates “mutual hostages” that re-inforce commitments within the group anddampen external influence (Lincoln, Gerlach, &Takahashi, 1992). Moreover, multiplex networksoften give stronger voice to strategic interests of

business partners within corporate governance.Dense interlocks of board directorates may in-crease the propensity to cooperate (Mizruchi &Stearns, 1988) and to discover common strategicinterests.

In contrast, U.S. or British firms form muchlooser networks and tend not to build as manymultiplex relationships, in part because of anti-trust regulation (Davis & Greve, 1997; Fligstein,1990). Given the institutional separation of dif-ferent types of markets, capital ties tend to bedominated by purely financial interests. Like-wise, the lower density of these networks allowscapital to exit the relationship through liquidity.Multiplexity thus influences capital interests bybuilding linkages that bundle or segregate dis-tinct domains of business relations.

Proposition C3a: In countries with ahigh degree of multiplexity in inter-firm networks, capital tends to pursuestrategic interests toward the firm andexercise control via commitment.

Proposition C3b: In countries withlower degrees of multiplexity in inter-firm networks, capital tends to pursuefinancial interests toward the firm andexercise control via liquidity.

Labor in the Corporate Governance Equation

The corporate governance literature largelyneglects employees (Blair & Roe, 1999; Parkinson& Kelly, 2001). This omission partly reflects weakemployee participation in the United States rel-ative to that in economies such as Germany orJapan, where labor participation is politicallyimportant and often a source of competitive ad-vantage (Brown, Nakata, Reich, & Ulman, 1997).In addition, a major assumption of agency the-orists is that shareholders are the only bearersof ex post residual risk, and, thus, employeeinterests are treated only as an exogenousparameter.

Alternatively, corporate property rights cannot only be seen as a basis for control overmaterial assets but also as establishing an au-thority relationship with employees. As Bendixobserves, “Those in command cannot fully con-trol those who obey” (1956: 45). Given the contin-gencies of the labor contract, effective authorityrequires legitimacy to promote the goodwill ofemployees and to supplement their “zone of ac-


ceptance” (Simon, 1976). Despite the formal legalequality of employers and employees in the la-bor contract, the substantive asymmetries inpower have led to persistent conflicts over legit-imate managerial authority.

We therefore conceptualize employees’ role incorporate governance in terms of their ability toinfluence corporate decision making and to con-trol firms’ resources. Rules limiting managerialauthority can be created through many sets offunctionally equivalent mechanisms (Marsden,1999; Tilly & Tilly, 1998): shop floor–level job con-trol, collective bargaining, multiemployer col-lective bargaining, and labor law. Our modelfocuses on two critical dimensions defining em-ployees’ relationship to corporate decision mak-ing: (1) strategies of internal participation ver-sus external control and (2) portable versus firm-specific skills.

Comparative industrial relations distin-guishes between employee strategies of exter-nal control versus internal participation (Bam-ber & Lansbury, 1998). This dimension describeshow employees define their interests in relationto corporate decision making. External controlrefers to situations where decision making re-mains the prerogative of management (Hon-drich, 1970). Here employees seek to controlfirms’ decisions externally, with the threat ofcollective action (e.g., strikes). Labor stresses theseparation of responsibility, and clear “fronts”are maintained. Employee representation is “in-dependent” of management and preserved instrict separation from cooperative institutionsthat engage labor in firms’ decision making.

Alternatively, employees might participate infirms’ decisions through internal channels of de-cision making to codetermine management ac-tions (Nagels & Sorge, 1977; Streeck, 2001). Par-ticipation does not end managerial authoritybut aims at democratizing decisions. Internalparticipation tends to have strong integrativefunctions, fostering consensus and cooperationin the implementation of decisions (Rogers &Streeck, 1994).

Labor also differs in the degree to which itmay easily exit the firm without penalty in thelabor market. When employee skills are porta-ble across firms or investments in skills are low,employees may favor exit over voice in responseto grievances. Conversely, when employeeskills are firm specific, their greater dependenceon the firm makes the option to exit more diffi-

cult (Williamson, Watcher, & Harris, 1975). In-vestments in firm-specific skills thus create in-centives to exercise voice in how those skills areformed and deployed. In particular, employeesmay have a long-term vested interest in safe-guarding the organization and their job security.Therefore, similar to the liquidity or commitmentof capital, skills influence the degree to whichemployees have a “stake” in the firm.

We argue that the degree of internal partici-pation/external control and portable/firm-specific skills within the firm is shaped by threesets of institutions: (1) the representation rightsgiven to workers, (2) the organization of unions,and (3) the institutions of skill formation.

Firm-level representation rights. Unlike prop-erty rights that granted shareholders individualrights in firm decisions, labor historically strug-gled to gain collective rights to representationin firm decisions. The recognition of the “rightto organize” is perhaps the most fundamentalof these, giving employees individual rights tovoluntarily elect their own representation andcompelling management to bargain over a pre-scribed range of issues. However, representa-tion rights vary greatly in their strength andscope (Locke, Kochan, & Piore, 1995), rangingfrom rights to information, consultation, and co-determination. Such rights also differ accordingto the type of decision at hand and the sourceenacting the rights.

Representation rights may rest upon diversedegrees of coercion, such as unilateral employeraction, collective bargaining, or law. First, uni-lateral decisions made by the employer to grantrepresentation describe the “paternalistic” pat-terns historically common in many countries—patterns that often led to conflicts with indepen-dent labor unions seeking worker loyalty.Second, representation rights can also be estab-lished contractually through collective bargain-ing, such as in Japan, where extensive joint con-sultation practices are written into collectiveagreements as a basis for firms’ decision mak-ing. Finally, statutory law or direct state inter-vention may establish employee representation,as with German codetermination.

Representation rights influence labor’s rela-tion to corporate governance. In terms of repre-sentation rights’ strength, industrial relationsresearchers use a conventional gradation, fromweak to strong forms of intervention: rights ofinformation, consultation, codetermination, and


unilateral worker control (Knudsen, 1995: 8–13).An institutional setting with weak representa-tion rights, such as in the United States, does notprovide internal channels to represent employ-ees within firms’ decision making. Managerialprerogative remains strong, and organized labormust respond largely ex post to mitigate anynegative consequences of managerial decisionsor mobilize collective action to halt manage-ment action. Institutional settings characterizedby strong representation rights, such as in Ger-many, provide formal internal channels to givelabor a voice in the firm’s decision making byproviding legal rights to information, consulta-tion, and codetermination in key decisions.

Employee ownership is a further means of es-tablishing representation rights, but through thealternate channel of property rights. Increas-ingly, unions have pursued such strategies byusing voting rights attached to pension funds orstock options to exercise voice.

In sum, representation rights will influencelabor’s control over the firm’s decisions.

Proposition L1a: In countries with pre-dominantly strong representationrights, labor tends to pursue strategiesof internal participation.

Proposition L1b: In countries with pre-dominantly weak representationrights, labor tends to pursue strategiesof external control.

Union organization. Researchers define em-ployee interests in relation to their individualand collective identities, as well as according tohow their interests are organized and institu-tionalized. Union organization generally can bedifferentiated along three ideal types: (1) class,(2) occupation, and (3) enterprise models (Dore,1973; Streeck, 1993). These models often get com-bined within countries or coexist with large, un-organized segments of the economy. For exam-ple, the U.S. case is internally heterogeneous,having craft union, industrial union, and unor-ganized sectors. Regarding corporate gover-nance, we examine how unions influence em-ployee orientation toward internal participationin corporate decisions or external control.

Strategies of external control are commonamong craft unions or industrial unions, whereemployee solidarity is not restricted to workerswithin a particular enterprise and union mem-

bers may find employee identification with aparticular firm a threat to their own interests.Class-based unions, such as political unionsand industrial unions, tend to favor strategies ofexternal control. Industrial unions generallyhave been skeptical toward participatory insti-tutions that blur the boundaries of managementand labor. These unions are likely to favor cen-tralized collective bargaining that restricts thediscretion of individual firms through externalcontrol. Participation appears only as a remotepolitical agenda related to state ownership.

Similarly, craft-based unions organizedaround particular sets of qualifications tend toendorse external strategies of control, becausetheir interests are linked to adequate and uni-form compensation of their particular skill/professional qualifications across enterprises.Organizationally, craft unions may fragmentrepresentation within firms and may followtheir members’ collective interests, regardless ofthe fate of individual firms.

In contrast, enterprise-based unions recruitmembers among employees within a particularfirm and tend to support internal participation.Enterprise unions aim primarily at the preserva-tion of long-term employment contracts and theregulation of internal promotion prospects. Theyare likely to have a strong, common interest inimproving their own firm competitiveness, in or-der to guarantee prospects of growth and stableemployment. Japan’s large firm sector comesclose to this ideal type. Japanese enterpriseunions seek to participate in firm decisions, be-cause these unions represent a relatively homo-geneous group of core employees within thefirm, whose primary interest is preserving jobsecurity within the firm’s internal promotionsystem (Brown et al., 1997). Hence, union organi-zation will shape the relation of labor to the firm.

Proposition L2a: In countries with pre-dominantly class-based and craft-based unionism, labor tends to pursuestrategies of external control.

Proposition L2b: In countries with pre-dominantly enterprise-based forms ofunionism, labor tends to pursue strat-egies of internal participation.

Skill formation. Skill formation directly affectscorporate governance, because the portability orfirm-specific nature of skill investments influ-


ences the relation of employees to the firm. Skillformation institutions are subject to consider-able national variation (Brandsma, Kessler, &Munch, 1996; Finegold & Soskice, 1988; Locke etal., 1995; Sorge, 1990). A landmark comparativestudy identifies five main skill formation insti-tutions that provide skills: (1) state provision, (2)free markets, (3) institutional companies, (4) firmnetworks, and (5) corporatist associations(Crouch, Finegold, & Sako, 1999). Firms may be-come free riders in appropriating skills that theyhave not helped generate, thus leading to a highpotential for market failure (Huselid, 1995).Meanwhile, direct state provision may helpovercome this dilemma, yet leave a consider-able gap between training provided and skillsdemanded from firms (Boyer, 1988).

In the United States, a mix of on-the-job train-ing and markets is used to generate employeeskills (Brown et al., 1997). The undersupply inskills, particularly among production workers, isclosely related to high employee turnover andstrategies of control in representing employeeinterests (Freeman, 1994). In high-skill segmentsof the U.S. economy, firms also draw on the por-table skills of professional employees whoseskills were acquired outside the firm. Skill for-mation outside the firm will make the firm lessdependent on employees, and, hence, employ-ees will have less capacity to influence firmdecisions through internal channels. However,one caveat is that high-tech venture capitalfirms tend to experiment with various forms ofinternal participation for professional employ-ees to minimize their external mobility.

Germany and Japan both have strengths ingenerating highly skilled production workers,although they have undertaken quite distinctsolutions in setting up employer incentives toinvest in employee training (Culpepper & Fine-gold, 1999; Thelen & Kume, 2002). In Japan, train-ing is segmented in firms investing in firm-specific skills, which reward employees withelaborate internal promotion systems. Here,skill formation reinforces employee strategies ofinternal participation in firm’s decisions (Dore,2000). Germany is an interesting intermediatecase, where a solidaristic training system isrooted in corporatist arrangements among em-ployer associations, industrial unions, and thestate. Firms participate in occupational trainingto create publicly certified skills that are port-able across firms. Firms’ involvement in skill

creation assures high levels of training. Skillformation outside the firm will make the firmless dependent on employees, and, hence, em-ployees will have less capacity to influence firmdecisions through internal participation.

Proposition L3a: In countries with pre-dominantly market- and state-basedskill formation institutions, labortends to acquire portable skills and topursue strategies of external control.

Proposition L3b: In countries with pre-dominantly firm-based skill formationinstitutions, labor tends to acquirefirm-specific skills and to pursue strat-egies of internal participation.

Management in the Corporate GovernanceEquation

Managers are the stakeholders occupying po-sitions of strategic leadership in the firm andexercising control over business activities(Chandler & Daems, 1980). Given the complexityof managerial hierarchies in different countries(Lane, 1989), we limit our discussion to topmanagement.

Heated debates revolve around whether man-agers deserve to be vilified—agency theory—orglorified—strategic leadership (Cannella &Monroe, 1997). Finkelstein and Hambrick (1996)point out that managerial control is contingenton the amount of managerial discretion present,given the existence of environmental con-straints. Even in the case where self-interest isthe primary goal behind managerial behavior,there might be other contextual motivationsdriving self-serving tendencies (Ghoshal &Moran, 1996). Thus, it is important to revisit andaccount for the diverse roles of management(Barnard, 1938; Guillen, 1994; Jackell, 1990).

In this section we examine two dimensions ofmanagers’ identities and interests in relation tothe firm. First, borrowing from stewardship the-ory (Davis, Schoorman, & Donaldson, 1997), wedifferentiate between the autonomy versus com-mitment of managers toward the firm. Autono-mous managers experience a large degree ofindependence from specific relationships withinthe firm. These managers may find it easier to“make tough decisions” or to impose hierarchi-cal control in the firm. In contrast, committed


managers are dependent on firm-specific rela-tionships to pursue their interests.

The second dimension refers to the financialversus functional orientation of managers. Fi-nancial conceptions of managerial control referto a strong separation of strategic and opera-tional management and the execution of firmcontrol via financial mechanisms. Functionalconceptions of managerial control refer, rather,to a greater integration of operational functions,either through technical specialization or throughstrong personal involvement and leadership.

These dimensions of management in corpo-rate governance are influenced by a variety ofinstitutions constituting the complex “socialworld” of management. We bundle these insti-tutions in terms of the ideologies of managerialcontrol and managerial career patterns.

Ideology. Goll and Zeitz describe managerialideology as “the major beliefs and values ex-pressed by top managers that provide organiza-tional members with a frame of reference foraction” (1991: 191). We use this construct to showhow managers legitimate their authority, per-ceive organizational problems, and justify theiractions (Bendix, 1956). Ideologies may diffusethrough mimetic processes, such as managerialeducation; normative processes emerging fromcollective experience, such as the establishmentof professional groups; or coercion from outsideagencies, such as the state (Guillen, 1994;Powell & DiMaggio, 1991).

Ideology is an institutional variable that in-fluences management both by imposing con-straints as taken-for-granted world views andby creating normative expectations that become“focal points” for firm decision making. We donot provide a typology to encompass the diver-sity of managerial ideologies, such as Germancorporatism, the French cadre system, or Britishlaissez-faire (Egan, 1997), or national cultures(Hofstede, 1997). We limit our discussion to theireffects in providing value-based legitimation tomanagerial authority. Specifically, we arguethat ideologies impact the financial or func-tional orientation of managers by legitimatingdifferent ways of viewing and reconciling firminterests. Furthermore, ideologies impact theautonomy or commitment of managers by shap-ing the degree of hierarchy or consensus in rou-tine decision making.

The legitimacy of managerial goals dependson managers’ different world views, influenced

by their educational backgrounds and the diffu-sion of cognitive models of control among them.For example, U.S. managers typically receiveeducation in “general” management, with astrong emphasis on finance. The diffusion ofshareholder value as management ideology inthe last decade reinforces the power of financialorientations within the firm (O’Sullivan, 2000). Incontrast, German managers typically hold Ph.D.degrees in technical fields such as engineeringor chemistry. German management ideologyhas traditionally stressed Technik—achievingtechnical excellence as managers’ central goal(Lawrence, 1980). German managers thus tendto adopt a corporatist or pluralistic view of thefirm as serving multiple constituents. Thesefactors lean away from pursuing merely finan-cial interests and toward strengthening func-tional orientations.

Another element of ideology is the informalroutines and norms that shape the autonomy orcommitment of management. Despite their dif-ferent emphasis on financial versus functionalmanagement, the United States and France aresimilar in that decision making tends to be hi-erarchically structured, thereby reinforcingmanagerial autonomy. Conversely, the legalprinciple of collegiality in German boards grav-itates against strong individual dominance toprinciples of consensus that foster managerialcommitment to organizational relationships andconstituencies. These variations in managerialideology across countries suggest the following.

Proposition M1a: In countries wheremanagerial ideologies legitimategeneralist knowledge and/or hierar-chical decision making, managementtends to have greater autonomy inrelation to the firm and a financialorientation.

Proposition M1b: In countries wheremanagerial ideologies legitimate sci-entific specializations and/or consen-sual decision making, managementtends to have greater commitment tothe firm and a functional orientation.

Career patterns. Career patterns reflect thecomplex incentives and opportunities for topmanagers’ mobility. We bundle a number of fac-tors under the concept of careers by distinguish-ing between closed and open labor markets


(Sørensen, 1977), wherein careers are determinedlargely by the nature and stability of organiza-tional opportunity structures (Rosenfeld, 1992).

In a closed labor market, such as in Japan,vacancies tend to be filled through internal pro-motion of existing managerial staff within thefirm (Dore, 2000). For example, Japanese boardsare often very large so that they can integrate alarge number of division managers in the inter-nal promotion system. Having risen through theranks of the internal labor market, with its ex-tensive job rotation system, Japanese managersare generalists with extensive firm knowledgerather than specialists in particular fields. Jap-anese managers cultivate long-term firm rela-tionships and foster a high degree of loyalty andinvestment in firm-specific expertise (Waka-bayashi, 1980). In terms of remuneration, inter-nal promotion systems use elaborate civil ser-vice–like incentives based on seniority. Theegalitarian aspect of closed labor markets isreflected in the low salary differentials betweenmanagers and employees.

In open labor markets, such as in the UnitedStates, the relationship between managementand the firm involves higher risks of termina-tion, and vacancies are more likely to be filledthrough external labor markets (hiring from out-side the firm). Managers tend to develop porta-ble skills, reflecting a culture of generalist man-agement and strong financial orientation.Remuneration schemes must therefore incorpo-rate performance-based incentives to recruitoutside managers or retain them. A conse-quence of open labor markets is the high pro-portion of variable pay in the form of bonusesand stock options, as demonstrated in severalstudies of management compensation (Baker,Jensen, & Murphy, 1988; Stroh, Brett, Baumann, &Reilly, 1996).

In sum, managers in closed managerial labormarkets see their careers taking place in onefirm or network of firms, thereby developing astrong attachment to the firm. In contrast, inopen managerial labor markets, managers ex-pect to be employed by several firms over thecourse of their careers and, consequently, tendto be more autonomous.

Proposition M2a: In countries with pre-dominantly closed managerial labormarkets, management tends to have

greater commitment to the firm and afunctional orientation.

Proposition M2b: In countries with pre-dominantly open managerial labormarkets, management tends to havegreater autonomy in relation to thefirm and a financial orientation.

DISCUSSION: NATIONAL INSTITUTIONS ANDSTAKEHOLDER COALITIONS

In this article we have examined how andwhy corporate governance differs across coun-tries by identifying significant dimensions ofvariation in three key stakeholders’ relation-ships to the firm and the institutional domainsshaping these relationships. In presenting ourmodel, we have used “forward-looking” propo-sitions to analyze the isolated effects of eachinstitutional domain on each stakeholder. Wehave defined stakeholder dimensions as a con-tinuum, as opposed to a bipolar construct, whereinstitutional effects are stronger at the extremesof each dimension and weaker when countriesoccupy intermediate positions; furthermore, wehave discussed how the impact of any of theparticular institutional domains on a stake-holder group may be reinforced by the existenceof other institutions or may be modified in acountervailing fashion (Whitley, 1999). Explain-ing cross-national diversity of corporate gover-nance requires turning to “backward-looking”propositions that capture the cumulative andinterdependent effects of different institutionaldomains within countries (Scharpf, 1997: 22–27).Such conjunctural causation is common in com-parative research where diversity emanatesfrom multiple factors (Ragin, 2000).

In applying our model to explain diversity, wemust ask how the combination of institutionaldomains—so-called institutional configura-tions—in a particular country shape corporategovernance at the firm level. Institutional differ-ences matter through their capacity to supportdifferent modes of interaction among stakehold-ers at the firm level (dotted lines in Figure 2).Conversely, different modes of interaction be-tween stakeholders will place distinct demandson the national institutional setting (Scharpf,1997: 47). Our concluding discussion elaborateson these two themes of institutional configura-tions and stakeholder interactions.


National Institutional Configurations

Institutional configurations have various link-ages, complementarities, and tensions (Aoki,2001; Maurice et al., 1986). The impact of anysingle institution on stakeholders, such as prop-erty rights on capital, is contingent on the influ-ence of other institutional domains (financialsystems and interfirm networks) on capital. Con-sequently, countries with identical institutionsin one domain will not necessarily have identi-cal corporate governance to the extent that otherinstitutions will yield countervailing effects.

Institutional complementarities refer to situa-tions in which the viability of a certain institu-tion increases in the presence of another insti-tution. For example, liberal property rights, amarket-based financial system, and weak inter-corporate networks produce effects that rein-force the financial orientation of capital at thefirm level, as opposed to strategic orientation.Moreover, complementary institutions may sta-bilize one another, such as liberal propertyrights that support a market-based financialsystem and establish relatively low degrees ofmultiplexity in interfirm networks. Complemen-tarities may help generate comparative institu-tional advantages (Hall & Soskice, 2001) but mayalso lead to inefficient lock-in effects for change(Bebchuck & Roe, 1999).

Weberian sociology also highlights how inter-dependence may create institutional tensionsrelated to conflicting principles of rationality(Lepsius, 1990). For example, while propertyrights may favor liquidity by protecting minorityshareholders, high network multiplexity may re-inforce commitment as opposed to liquidity.Such institutional tensions may weaken institu-tional isomorphism within countries and allowgreater heterogeneity within a national case.Such heterogeneity may serve as a beneficialsource of requisite variety and facilitate a flex-ible combination and recombination of organi-zational practices (Stark, 2001).

For example, Germany is characterized by in-stitutional tensions between multiemployer in-dustrial unions and enterprise-based workscouncils. Despite persistent conflicts, thesemechanisms for labor to control firm decisionssometimes complement each other, as whenworks councils help implement industry-wideagreements and unions provide training and ex-pertise that protect the independence of works

councils (Thelen, 1991). But when institutionalconflicts grow, institutional change may occurthrough the erosion or crisis of existing institu-tional arrangements (Academy of ManagementJournal, 2002; Scott, 2001).

Stakeholder Interactions

While our model focuses primarily on howinstitutions influence each stakeholder respec-tively (Figure 2), institutions also shape corpo-rate governance by structuring stakeholder in-teractions (dotted lines in Figure 2), triggeringdifferent conflicts, and supporting differenttypes of coalitions among the three stakehold-ers. Institutions do not determine the outcomesof such interactions, but they do influence therange of firm-level variation in different coun-tries. We illustrate the diversity of such institu-tionally structured interactions around threeaxes: (1) class conflicts, (2) insider-outsider con-flicts, and (3) accountability conflicts. These in-teractions enhance our understanding of cross-national differences in corporate governance.

Class conflict. Class conflict may arise whenthe interests of capital and management opposethe interests of labor, particularly regarding dis-tributional issues (e.g., wages). Where capitaland management pursue financial interests,such as in the United States, conflict is likely toarise around trade-offs between wages andprofits, capital reinvestments and paying outdividends, or levels of employment and share-holder returns. Management may often use em-ployee ownership or contingent pay as a meansto align employee interests with capital and tominimize governance conflicts (Pierce, Ruben-feld, & Morgan, 1991). In Japan, class conflict islessened because cross-shareholding and themain banking relationships tend to be comple-mentary with “lifetime employment” (Aoki,1994). Here the strategic interests and long-term commitment of capital support manage-rial alignment with employees and facilitateinvestments in firm-specific skills and stableemployment.

Management may also play different roles inmediating class conflict. For instance, whereasthe dominance of functional orientations amongGerman managers helps balance financial andstrategic interests, U.S. managers are mostlyaligned with shareholders’ financial interests


because of the prevalence of external careersand contingent pay incentives.

Insider-outsider conflicts. Insider-outsiderconflicts may arise when the interests of laborand management (insiders) oppose the interestsof capital (outsiders). Insiders may favor inter-nal diversification (“empire building”), block ef-forts at restructuring, or erect takeover defensesto reduce the threat of external takeovers. Insider-outsider conflicts are often acute in Japan,owing to the intense commitment of capital tospecific firms, strong internal participation ofcore employees, and strong commitment of man-agement. Insiders’ interests conflict with minor-ity shareholders’ interests in greater liquidityand financial returns, as well as the interests ofcertain employees—for example, mobile profes-sionals and noncore employees (Okumura,2000). In the U.S. context of portable employeeskills and liquid capital, such conflicts may beless severe. The introduction of more autono-mous independent directors over the last fewdecades has helped insiders to further alignmanagement with outside interests and to favormore severe methods of corporate reorganiza-tion (Kaplan & Minton, 1994; Walsh & Seward,1990; Westphal, 1998).

Accountability conflicts. Finally, accountabil-ity conflicts concern the common interests ofcapital and labor vis-a-vis management. Share-holders and employees may form coalitions toremove poorly performing managers or to demandhigher corporate transparency. Here, manage-rial accountability to different stakeholders isnot a zero-sum relationship. In Germany, stronglabor participation in the supervisory boardcomplements committed blockholders in ac-tively monitoring management (Streeck, 2001).But where the interests of capital and labor di-verge too sharply, such coalitions may breakdown and give management increasing auton-omy to pursue its own agenda, and therebydamage accountability.

Implications for Comparative Research

First, our model helps explain the differencesin corporate governance practices across na-tional boundaries and why certain practices aremore widely spread in some countries than inothers. For example, why does the high disper-sion of ownership found in the United Statesremain exceptional? Dispersion is often ex-

plained by the development of property rightswithin common and civil law traditions (LaPorta et al., 1999). We suggest a more subtleexplanation, wherein multiple institutional do-mains contributed to a conjunctural cause.Namely, financial systems developed differentlyacross countries, particularly following the “reg-ulatory divide” of the 1930s. The gap betweenfinancial systems was magnified by the postwardevelopment of welfare states, where the U.S.pension regime favored market liquidity. Fi-nally, intercorporate networks restricted strate-gic interfirm cooperation in the context of U.S.antitrust law, thereby encouraging large-scalemerger waves that further diluted ownership. Incontrast, in countries such as Germany or Italy,concentrated ownership was sustained becauseof a combination of factors: property rights fa-voring blockholders, the availability of bank-based finance, and the dense cooperative net-works preventing rapid dilution throughmergers.

Second, our theoretical model also has impli-cations for studies of internationalization. Inmost agency theory literature, internationaliza-tion is seen as increasing competition over “bestpractices,” thereby leading to a convergence onan Anglo-American model, whereas institution-alists suggest countries will continue to divergealong stable, path-dependent trajectories. Weclaim that examining internationalization interms of national models is becoming institu-tionally “incomplete” because of the multilevelinteractions spanning from international to na-tional and subnational policies, most strikinglythrough the European Union. Furthermore, inter-actions between stakeholders are increasinglytaking a cross-border dimension, exemplified bythe pressures of U.S. institutional investors inContinental Europe. Convergence and path de-pendence, thus, may be false theoretical alter-natives in trying to understand simultaneousprocesses of continuity and change across na-tional boundaries.

Institutional change tends to occur in a slow,piecemeal fashion, rather than as a big bang.Where international pressures may lead to sim-ilar changes in one institutional domain, theseeffects may be mediated by the wider configu-ration of national institutions. This explainswhy internationalization has not led to quickconvergence on national corporate governancemodels. The result is often a hybridization of


corporate governance models, where practicesdeveloped in one national setting are trans-ferred to another, and they undergo adaptationthrough their recombination with other gover-nance practices (Pieterse, 1994: 165).

For example, “importing” U.S. institutions topostwar Germany and Japan did not result inconvergence but, rather, in the modification andadaptation of U.S. practices to develop new hy-brid forms of corporate organization, with vary-ing degrees of success (Djelic, 1998; Zeitlin, 2000).Today, Germany and Japan are attempting tointroduce “shareholder value” managementstyle to their past institutions of strong laborparticipation. It remains to be seen whether astable and distinct corporate governance hybridwill emerge, or whether institutional tensionswill cause institutional erosion.

Hybridization also highlights the growing het-erogeneity of organizational practices withinnational boundaries (Herrigel, 1995; Locke et al.,1995). While nations presently retain distinct“profiles” of corporate governance, the range ofinternal variation among firms is growing, par-ticularly between large internationalized corpo-rations and protected domestically oriented orprivate corporations. Understanding the newmultilevel configuration of institutions and theircomplementary and conflictual effects on corpo-rate governance remains an important researchagenda.

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Ruth V. Aguilera is an assistant professor of management at the College of Commerceand Business Administration and the Institute of Labor and Industrial Relations, theUniversity of Illinois at Urbana-Champaign. She received her Ph.D. in sociology fromHarvard University. Her current research interests include economic sociology, insti-tutional theory, and comparative corporate governance.

Gregory Jackson is fellow at the Research Institute of Economy, Trade and Industry inTokyo, Japan. He received his Ph.D. in sociology from Columbia University and was afellow at the Max-Planck-Institute for the Study of Societies in Cologne, Germany. Hisinterests include corporate governance, economic sociology, and comparative andhistorical methods.


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